US tax investigators win fight to force UBS to disclose accounts worth $18bn

• Three-year battle brought Swiss bank to its knees
• Fears in Zurich that many lawyers will be extradited

• Nick Mathiason
• guardian.co.uk, Wednesday 19 August 2009 20.55 BST
• Article history

UBS, the world's biggest wealth manager, has been forced to hand over 4,450 accounts that contain a staggering $18bn (£10.9bn) to American tax investigators.

The information haul represents a triumph for the US Internal Revenue Service. It ends a three-year investigation that brought Europe's most powerful bank to its knees, opening up a deep diplomatic rift between the United States and Switzerland.

A final legal settlement in the acutely damaging investigation for UBS means Switzerland has to co-operate with the US in ensuring account details are handed over to American investigators within 12 months. Fears are growing in Switzerland that US investigators will turn their attention to Credit Suisse and other Swiss banks. There are also concerns in Zurich that Swiss lawyers will be extradited to America to face charges for aiding and abetting tax evasion.

The 4,450 accounts soon to be in the possession of US investigators are expected to reveal the secretive world of international wealth management in which complicated webs of sham trusts and shell companies are created in tax havens to protect the assets of the super-rich. Switzerland shields nearly a third of the world's $7tn of privately held wealth. Under US law, the IRS must be notified of offshore accounts holding more than $10,000.

"This settlement will reverberate throughout the globe," said Tom Cardamone, managing director of the influential Washington-based thinktank, Global Financial Integrity. "We are going to see patterns of behaviour that will lay bare the entire infrastructure constructed by attorneys and accountants which will also provide an opportunity for Germany and France to attack this problem."

Jay Krause, partner at international law firm Withers, said: "The IRS scored a major victory in the ever-expanding international campaign against tax avoidance. The decision will provide a useful roadmap for obtaining US taxpayer information from other Swiss financial institutions and will likely be tailored to target institutions in other jurisdictions.

"But it is not just financial institutions that should be concerned. The information obtained by the IRS will inevitably lead to audits of law and accountancy firms and other tax advisers."

Earlier this year UBS paid a $788m fine and handed details of 250 private accounts to US investigators after court documents revealed that its wealth managers had smuggled diamonds in toothpaste tubes, deliberately destroyed offshore bank records on behalf of clients and assisted wealthy Americans to conceal ownership of their assets by creating "sham" offshore trusts using misleading and false documentation.

Initially the US authorities demanded details of all 52,000 UBS accounts held by American citizens. It is now clear that the 4,450 accounts Switzerland has agreed to hand over represent the bulk of UBS's $20bn US wealth management business which earned the firm $200m in fees. Since the investigation, UBS has seen a rapid withdrawal of funds from its wealth management arm.

Doug Shulman, IRS commissioner, said: "I believe this agreement gives us what we wanted – access to information about those UBS account holders most likely to have been involved in offshore tax evasion."

Dr Andreas Missbach from the Swiss economic justice campaign group, Berne Declaration, said: "This is the nail in the coffin of total protection of tax evaders by Swiss banks and we must now hope that the level of Swiss co-operation will not be limited just to powerful industrial countries, but will extend to poorer nations to help them reclaim the vast wealth that has been stashed here."

International pressure on Switzerland has seen it excluded from G20 talks aimed at restoring the world's financial system in what is regarded as a humiliation for the country. Switzerland's pariah status means it is on an OECD grey list of countries considered to have harmful tax jurisdictions. The issue has split Switzerland between those who accept the country has to change its secretive ways and others who believe the UK and the US are hypocritical because they oversee the Channel Islands and Delaware.

Bank raid

The UBS case was blown open when former UBS executive Bradley Birkenfeld confessed in May 2007 to helping a Florida-based property tycoon escape taxes. Birkenfeld provided documentation that proved tax fraud was endemic within UBS. The US authorities are now trying to get Birkenfeld's five-year prison sentence halved. The settlement is the most serious challenge to Swiss banking secrecy and ends an awkward diplomatic spat. Switzerland is an important strategic ally for the US and runs its interests in Iran, North Korea and Cuba. But the war against tax abuse that became a centrepiece of the Obama presidential election campaign appears to have overridden diplomatic considerations.