UBS Settlement: What It Really Means

On August 19 the US and the Swiss government disclosed some (but not all) details of their agreement regarding the case IRS vs. UBS. It required only six pages for the US and the Swiss authorities to determine how the private financial data of thousands of US citizens will be swiftly handed over by the UBS to the Swiss government and thereafter to the waiting hands of the US authorities.

The process has been determined more or less clear:

• The US government expects the handover of the data of about 4,450 accounts within one year. The first 500 decisions are expected within 90 days.
  

• The disclosure of these accounts is based on the existing double taxation treaty and its criteria regarding “tax fraud or the like”. The specific criteria are detailed in an annex to the agreement which will not be published and kept confidential for another 90 days.
  

• It is explicitly stated that the contracting parties will be signing the new protocol amending Article 26 no later than September 30, 2009.
  

• Overall, the IRS expects the disclosure of information regarding 10,000 UBS accounts before the IRS will withdraw their “John Doe Summons” seeking information on approximately 52,000 UBS accounts.
  

What does all this mean to the private wealth clients in general and the Swiss banking secret specifically?

Firstly, it is correct that formally the Swiss laws will not be violated. The account holders still have the right to go to the Swiss Federal Court to seek an injunction. We doubt that more than a few account holders will be successful in keeping their account information from being disclosed.

Secondly, on a closer look, the agreement materially destroys the spirit of banking privacy and secrecy. The US tax authority will receive the names and financial information of thousands of private citizens whom they do not know yet by name. These are most likely not specific case-by-case decisions based on prior clear evidence of tax fraud of known individuals. It seems to be much closer to a fishing expedition of the IRS which eventually will net them more than 10,000 big (or small) fish.

Thirdly, there was clearly no other choice available for the Swiss government than to agree to this process unless it risked the melt-down of the biggest financial corporation most likely causing a huge catastrophe for the Swiss economy.

Fourthly, on a five to ten year outlook, the offshore banking business will vanish. In June we wrote in the MyPrivateBanking brief with the title No Future for Offshore Banking:

“The offshore banking model as we know it has no future. Banking secrecy, financial privacy and numbered bank accounts are – to a large degree - a thing of the past. These pillars of the offshore model will fall and consequently wealthy clients will shift their focus. With the benefit of tax evasion gone neither fat wealth management fees nor bad investment strategies will be tolerated anymore. Of course, there will always remain some offshore activities in some parts of the world. Investors may shift their assets from country to country but the costs and risk in doing so will become substantial.”

Today, this prediction has come much closer to being a reality.