The Swiss investment bank and financial services company, UBS Group AG, has been at the center of numerous tax evasion and avoidance investigations undertaken by U.S., French, German, Israeli, and Belgian tax authorities as a consequence of their strict banking secrecy practices.
The first major tax evasion controversy the bank was involved in occurred in 2007. Bradley Birkenfeld, an American banker stationed at UBS Switzerland AG, broke Swiss banking secrecy laws to disclose client information to the U.S. Department of Justice (DOJ) alleging suspected tax evasion. After the DOJ opened an investigation, UBS was fined US$780 million and reached a limited deferred prosecution agreement that was seen as a historically significant event in the banking industry of Switzerland. Despite the brief lapse in banking secrecy, the country has strengthened its banking secrecy laws and UBS adopted an international "Client Privacy Code" to protect client information from disclosure.
Since the initial "Birkenfeld Disclosure", UBS has been at the center of various other tax evasion investigations undertaken by multiple international governments and tax authorities. It has been investigated by U.S. authorities since 2015, Belgian authorities since 2014, French authorities since 2013, German authorities since 2012 and Israeli authorities since 2011.
Birkenfeld disclosure, 2007 In 2005, UBS private banker Bradley Birkenfeld claimed that he learned that UBS's dealings with American clients violated an agreement between the bank and the U.S. Internal Revenue Service. He resigned from UBS on 5 October 2005 after reading an internal document prepared by UBS's legal department that delineated prohibited cross-border banking activities in the United States. The prohibitions were antithetical to the job description of wealth managers servicing American clients in the United States. Birkenfeld believes that the memorandum was prepared to give UBS legal cover should bank-sanctioned illegal activities be uncovered. The bank could then shift the blame to its employees. He subsequently complained to UBS compliance about the bank's "unfair and deceptive business practices". According to Birkenfeld, when he received no response, three months later he wrote to Peter Kurer, then General Counsel for UBS, about the illegal practices. He became a partner at Union Charter Ltd., where he specialized in wealth management, resigning from the position on 3 June 2008.
DOJ informant In 2007, Bradley Birkenfeld decided to tell the DOJ what he knew about UBS's practices. At the same time, he wanted to take advantage of a new federal whistleblower law, the Tax Relief and Health Care Act of 2006, that could pay him up to 30% of any tax revenue recouped by the IRS as a result of Birkenfeld's information. Birkenfeld also wanted immunity from prosecution for his part in UBS's transactions. In April 2007, Birkenfeld's counsel sent the DOJ a summary of Birkenfeld's information. The DOJ responded that it was not part of the IRS's whistleblower program and that it would not grant Birkenfeld immunity. Nonetheless, Birkenfeld met with the DOJ. When communications between Birkenfeld and the DOJ stalled, Birkenfeld contacted the Securities and Exchange Commission, the IRS, and the U.S. Senate.
In June 2008, the U.S. Federal Bureau of Investigation made a formal request to travel to Switzerland to probe a multi-million-dollar tax evasion case involving UBS. That same month, a United States Senate panel accused Swiss banks, including UBS and LGT Group, of helping wealthy Americans evade taxes through offshore accounts, and calculated the total cost of this practice as being in excess of US$100 billion annually. The report specifically accused UBS AG and Liechtenstein's LGT Group of allegedly marketing tax-evasion strategies to wealthy Americans. U.S. clients held about 19,000 accounts at UBS, with an estimated US$18 billion to US$20 billion in assets, in Switzerland, according to the findings.
Arrest and award Ironically, the DOJ decided to charge Birkenfeld with a felony count of conspiring to abet tax evasion by one of his clients, Igor Olenicoff. In 2008, Birkenfeld pleaded guilty and, in 2009, was sentenced to 40 months in prison. Many advocacy groups from around the world criticized Birkenfeld's prosecution and sentence on the grounds that it would discourage financial industry whistleblowers. Birkenfeld was released from prison on 1 August 2012. On 11 September 2012, the IRS Whistleblower Office paid Birkenfeld a $104 million award for acting as a corporate whistleblower. The Swiss media credit Birkenfeld's act with affecting a sea change in Swiss banking.
After Birkenfeld's award, the Swiss newspaper claimed, "Birkenfeld was a blessing for the Swiss financial industry", in that his revelations helped accelerate the industry's transition away from its reliance on "dirty" money by dooming the bank secrecy laws that enabled tax evasion.
Birkenfeld has compared the Swiss banking industry with gangsters. "In essence, bank secrecy is analogous to criminal racketeering – and the Swiss government, along with every Swiss private banker, is a co-conspirator."
U.S. settlement In response to the report and the FBI investigation, UBS announced that it would cease providing cross-border private banking services to US-domiciled clients through its non-US regulated units as of July 2008. In November 2008, a U.S. federal grand jury indicted Raoul Weil, chairman and CEO of UBS Global Wealth Management and Business Banking and member of UBS's Group Executive Board, in connection with the ongoing investigation of UBS's US cross-border business. UBS would eventually cut ties to Raoul Weil in May 2009 and he would face charges after UBS had settled its criminal case with the government. Raoul Weil would later be acquitted of all charges by a U.S. federal jury in November 2014.
UBS agreed on 18 February 2009 to pay a fine of US$780 million to the U.S. government and entered into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the Internal Revenue Service. Of this fine, US$380 million represents disgorgement of profits from its cross-border business; the balance represents United States taxes that UBS failed to withhold on the accounts. The figures include interest, penalties and restitution for unpaid taxes. As part of the deal, UBS also settled Securities and Exchange Commission charges of having acted as an unregistered broker/dealer and investment adviser for Americans. Additionally, UBS paid US$200 million for settlement with the U.S. Securities Exchange Commission (SEC) to avoid a trial on UBS' alleged conduct that the company facilitated the ability of certain U.S. clients to maintain undisclosed accounts in Switzerland and other foreign countries, which enabled those clients to evade paying taxes related to the assets in those accounts.
Proposed bank secrecy rollback The day after settling its criminal case on 19 February 2009, the U.S. government filed a civil suit against UBS to reveal the names of all 52,000 American customers, alleging that the bank and these customers conspired to defraud the IRS and federal government of legitimately owed tax revenue. Shortly thereafter, Hillary Clinton, having been sworn in as Secretary of State in January, traveled to Geneva on March 6, 2009, to meet with the Swiss Foreign Minister to announce a settlement of the IRS suit. Within a few months, the Internal Revenue Service and the Department of Justice had arranged a tentative settlement in which the Swiss Financial Market Supervisory Authority (FINMA) would reveal information on 4,450 of the 52,000 accounts sought by the IRS, preserving the anonymity of more than 90 percent of the United States customers of UBS's cross-border business.
On 12 August 2009, UBS announced a settlement deal that ended its litigation with the IRS. U.S. Senator Carl Levin (D-MI), who conducted Senate hearings into the UBS tax evasion scandal, described the settlement agreement (known as the "Annex") "disappointing".
However, this settlement set up a showdown between the U.S. and Swiss governments over the secrecy of Swiss bank accounts. It was not until June 2010 that Swiss lawmakers approved a deal to reveal client data and account details of U.S. clients who were suspected of tax evasion.
Renzo Gadola case Renzo Gadola, a Swiss banker and investment manager, was arrested for helping American citizens evade paying taxes via offshore financial vehicles. After working at UBS from 1995 to 2008, Gadola founded RG Investment Partners (Zurich). Fingered by UBS whistleblower Bradley Birkenfeld, federal authorities arrested Gadola in Florida in 2010. Federal prosecutors alleged that Gadola, while still employed by UBS, not only helped American taxpayers evade taxes, but actively discouraged them from joining the Internal Revenue Service (IRS) program established to provide amnesty for American tax evaders who voluntarily disclosed their accounts. The program was set up in the wake of the 2008-09 UBS tax evasion scandal. The federal government also charged 36 of his clients with tax evasion.
Gadola cooperated with the U.S. government and turned in his American clients and two other Swiss bankers involved in abetting tax evasion by Americans. His case for the first time revealed how the major international Swiss banks used smaller, regional Swiss banks to hide the undeclared assets held in offshore accounts by their American clientele. Renzo Gadola was arrested in Miami, Florida on 7 November 2010. Federal agents recorded him discussing methods of evading taxes with a client. Prosecutors said he immediately began to cooperate with the government, and was instrumental in abetting the government in pursuing cases against his clients and two other Swiss bankers involved in helping Americans hide their assets from IRS scrutiny.
Gadola wore a wire that enabled federal agents to tape his clients who continued to maintain secret Swiss bank accounts with intent to defraud the United States. Information provided by Gadola led to the arrest of Swiss bankers Christos Bagios, a Greek national resident in Switzerland who worked at both Credit Suisse Group AG and UBS, and Martin Lack, formerly of UBS. On 22 December 2010, Gadola pleaded guilty to conspiracy to defraud the United States by enabling American citizens to evade taxes. Federal prosecutors recommended leniency due to his cooperation with the Department of Justice (DOJ) and the IRS, recommending a sentence of five months imprisonment and five months home confinement. In November 2011, Gadola was sentenced to five years probation and fined $100.
Christos Bagios On 26 January 2011, Christos Bagios was arrested in New York. He had worked for UBS between 1992 and 2005 before going to work for Credit Suisse, which fired him after his arrest. The DOJ said his criminal activities occurred while he was in the employ of UBS. The DOJ charged Bagios with engaging in a conspiracy with Gadola, Martin Lack and Hansruedi Schumacher (arrested in 2009) of abetting tax evasion by American citizens. He was accused of helping 150 of his American customers conceal up to $500 million in assets from the IRS while a UBS employee. On 6 November 2012, Bagios pleaded guilty to one count of conspiracy involving defrauding the federal government in excess of $1.08 million while an employee at UBS from 1993 to 2009.