Saturday, July 16, 2011

Swiss Court OKs UBS Initial Turnover of 255 U.S. Depositor Information (7/16/11)

The Swiss Federal Supreme Court has approved the initial turnover of 255 UBS depositor information approved by FINMA, thus overturning a prior holding of a lower court. The Swiss press release is here (in German on pp. 1&2 and in English on pp. 3&4.  I quote the English translation of the press releave in full:
Press Release of the Swiss Federal Supreme Court

Judgment of 15 July 2011 (2C_127/2010)

Disclosure of UBS customer data by FINMA to the US Department of Justice ruled lawful

On February 18, 2009, FINMA, the Swiss Financial Market Supervisory Authority, ordered that the data of 255 UBS customers be disclosed to the US Department of Justice. In its public deliberation of July 15, 2011, the Swiss Federal Supreme Court ruled that FINMA’s actions were lawful. In doing so, it reversed the ruling handed down by the Swiss Federal Administrative Court and upheld FINMA’s order.
FINMA ordered that the data of 255 UBS customers be disclosed to the US Department of Justice as a protective measure pursuant to articles 25 and 26 of the Banking Act. In doing so, it proceeded on the assumption that if this data hadn’t been disclosed, the US Department of Justice would have filed an indictment against UBS, which would arguably have caused the bank’s ruin and consequently have had serious repercussions for the Swiss economy.
The Swiss Federal Administrative Court, with which the UBS customers had filed a claim in the first instance, ruled their appeal admissible on January 5, 2010 and declared FINMA’s decision to be unlawful. FINMA in turn appealed this ruling at the Swiss Federal Supreme Court. In its public deliberation of July 15, 2011, the Swiss Federal Supreme Court’s Second Public Law Division ruled the appeal admissible.

The Swiss Federal Supreme Court first confirmed the legal opinion of the Swiss Federal Administrative Court according to which articles 25 and 26 of the Swiss Banking Act do not provide sufficient legal grounds for encroaching on banking secrecy. These provisions enable interference in the management of a bank in order to protect it against heavy debt overload or liquidity problems, but they do not allow banking secrecy to be suspended at the expense of customers.

FINMA had good reason to suppose that an indictment against UBS was imminent in February 2009 due to serious violations of US laws. FINMA could also assume without violating the law that such an indictment would have led to the bankruptcy of the bank which in turn would have caused serious and virtually uncontrollable economic repercussions for Switzerland.

To avert serious imminent risks to fundamental legally protected interests, government authorities may, in the absence of a specific legal foundation, act on the basis of the “general police powers clause”. According to today’s ruling of the Swiss Federal Supreme Court, this also applies to FINMA, as far as the authority acts in agreement and with the consent of the Swiss Federal Council. Since FINMA had compelling reasons to believe that not relinquishing the customer data to the US Department of Justice would have seriously impaired Switzerland’s financial markets and have led to serious repercussions for the Swiss economy, the action taken by it was shown to be lawful.

Contact: Sabina Motta, Deputy of the General Secretary
Tel. 021 318 97 16; Fax 021 323 37 00
NB: The judgment will be published on our website as soon as the legal considerations have been redacted: / "Rechtsprechung gratis" / "Weitere Urteile ab 2000" (Insert the reference of the judgment into the search field 2C_127/2010). When exactly the legal considerations will be available is not yet known.
Swiss Court Says Right to Give U.S. Bank Data (Reuters 7/15/11).


  1. Wow... So essentially, since the IRS has the power to force a Foreign Bank into bankruptcy through judicial proceeding, and have disastrous impacts on the Swiss economy, they have to give in to what the IRS wants. That is the assertion of raw power that only the Empire can bring to bear. Wonder what the Swiss citizen thinks of this? Also, along with FATCA rules, now delayed, why would you want to do banking in America in the future? Wonder when foreign banks will say, it is just not worth it!

  2. Even if the Swiss high court had held the opposite way, i.e., that provision of account information to the IRS was improper, the incriminating information has already been in the possession of the IRS and US prosecutors for months, and has formed the basis for multiple prosecutions. Had the Swiss high court ruled the other way, it would have had no practical effect on these prosecutions or given the US defendants any relief. It might have, however, given the US account holders a cause of action to sue UBS in Swiss courts. But now, it appears that even that road is dead.

    Further, this ruling should be scary to US taxpayers with accounts at Credit Suisse, Julius Baer, Wegelin, the Kantonal banks and other Swiss banks, because essentially, the Swiss high court has given its blessing to the end of Swiss banking secrecy.

  3. Asher, from what I know, which is admittedly little, I think you analysis may be right. These power plays are fascinating to watch, without regard to the moral, ethical or lawful aspects of the IRS reaching into other countries sovereignty and essentially threatening to do severe damage to their economy via bankrupting a very large bank(s).

    It seems like these actions by the IRS are almost the equivalent of a naval blockaide.(alright, that is stretching an analogy a bit!) Like I said, I wonder if at some point these tactics are going to back fire and have unintended impacts back on the US economy, especially when you consider what the US is trying to do with FATCA in addition to these IRS actions.

    It seems to me, that at some point, some banks are going to arrive at a business decision and conclude it is too expensive to do business in the US, or have US depositors.

    Very interesting. Glad I am not a client of any of those banks, and for Swiss Expats, they may have to move to a cash economy if banks start deciding, we don't want you any more.

    Thinking ahead, I have to wonder what happens to the Swiss economy without bank secrecy. What do they left to sell? Banking and foreign investment is the core of their economy which since before World War II has created the most stable economy in Europe. Is the US about to upset this with it's actions along with the meek compliance of the Swiss Supreme Court? How does your economy survive in the long run? By selling the milk of a few pampered cows in those lovely meadows and increasing ski resort vacations during a time of global warming?

    I wonder when we will begin to hear from the Swiss Citizens on what is happening.

  4. Anonymous at 3:02pm, two comments to your post:

    1. I agree with you on the negative effects. Many Swiss banks have already told US depositors to find another bank for their funds. In many cases, even if an American client is tax-compliant and provides a W-9 to the foreign bank, the foreign bank still does not want the headache of a US account holder. And FATCA will result in less foreign investment into the US, at a time when the US badly needs investment from abroad.

    2. Even if Swiss banking is no longer "secret" vis-a-vis governmental tax authorities, Switzerland still offers a very sophisticated banking infrastructure, plus social, political and economic stability, and for these reasons Switzerland will continue to attract investment from around the world. Also keep in mind that Swiss banking is still confidential vis-a-vis civil creditors and other non-governmental adversaries. In other words, so long as the Swiss account is tax compliant, it may offer asset protection, confidentiality and investment benefits, among others. While I think that the nature of Swiss banking has changed in terms of "tax secrecy", Swiss banking is still attractive to many people for other reasons.

  5. My understanding is that UBS is turning over 4500 names of 52,000 US depositors based on size of account. Does that mean that the balance are now safe (assuming that they've closed their accounts)?

  6. The Swiss could always go back to focusing on selling high end watches, high end chocolate and Coo Coo clocks.
    Seriously though, this is just another clear indication as to the death of bank secrecy as a tool for tax evasion. For Americans, the game is up. For Germans the game is up too. Those who decide not to make their holdings compliant will find themselves in a jamb. It will be just a matter of time before other juridictions such as Singapore or Hong Kong face this type of pressure. I have said a number of times that the disclosure process is tough on individuals. I still think its the best choice to resolve the issue and come out of it with some skin intact. A previous post asked if the remainder of of UBS account holders(other than the unlucky 4500) are safe if they closed their accounts. I would say definately no. They probably face a very uncertain future and if caught, severe penalties.
    We can see a pattern whereby banks and governments throw account holders under the bus when it will minimize damage to themselves. The best indication of the future is what has happened in the past. If you are still out there with one of these albatros accounts, you should seriously consider clearing it up.


  7. Anonymous @July 17, 2011 3:02 PM

    "without regard to the moral, ethical or lawful aspects of the IRS reaching into other countries sovereignty and essentially threatening to do severe damage to their economy via bankrupting a very large bank(s). "

    Well, perhaps UBS or Credit Suisse or indeed the Swiss government should have wondered about the "moral, ethical or lawful" aspects of actively encouraging tax evasion, sending bankers to the US to seek out clients and suggesting methods to smuggle money out of the US. Or before acting as active participants in fraudulent schemes like setting up entities.

    But not to worry about the Swiss. I'm sure they have other clients to serve:
    1) Middle Eastern Dictators -- oops
    2) Corrupt (is that redundant) Indian politicians -- OK, even those are under some pressure.

  8. Asher.... Good point 2. I wonder if that will be enough for most depositors. Perhaps it will. It will certainly effect business models. Anyway, fascinating struggle to watch.

  9. Question to Asher:

    You write that the incriminating information is already in the possession of The US authorities. If that is true what would have been the point of the appeals?

  10. Question for Asher

    You write that the incriminating information has been in the possession of the US authorities. Then I do not understand the reason why those 250 people filed the appeal.

  11. I hope Asher will respond, but I'll throw in my quick thoughts:

    Maybe U.S. depositors appealed to obtain a ruling that the DOJ / IRS obtained the information and documents illegally. With that foundation, they may then argue there is sufficient taint (i) to justify dismissal of an indictment if charged or (ii), perhaps in the context of other factors, to justify foregoing an indictment in the first instance. Not sure either of those arguments would work, but you don't know whether you can get the straw until you grab for it.

    Jack Townsend

  12. The legal issue in question was not whether FINMA had a right to release data on those 250. There is no argument that they could release the data as they were responding to initial MLAT request and those 250 met Swiss definition of fraud.
    The issue was if FINMA had the right to release the data without giving those 250 chance to appeal (as required by Swiss law).
    That’s it

  13. I agree with Jack and the post immediately above.

    The data on the initial 250 accounts was released, as I recall, because there was clear evidence of tax fraud and, as such, was disclosable under the US-Swiss treaty. Some of those account holders then brought suit within Switzerland even though the data had already been provided to US authorities. The question is why did they do so, if the data had already been disclosed? As Jack answered, because a favorable decision by the Swiss courts might have resulted in a dismissal of the indictment in the US. Another reason might have been to pursue damages against UBS if the Swiss court had held that the release of the data was unlawful under Swiss law (although, in that case, UBS would likely have argued that it merely provided the date to FINMA and it was FINMA that released the data in violation of Swiss law).

  14. Are ever going to know the identity of the 4450 UBS clients whose data has been transferred to the US authorities?

  15. To Anonymous on 7/22/6:18pm:

    No. Those people received letters advising them in advance of transfer that they could join the IRS voluntary disclosure program. I suspect that most joined or did something else to mitigate the damage (few choices but some are conceivable). There were some who buried their heads in the sands and will have to pay the price of that conduct, whether criminal or civil. So, if the DOJ pursues them criminally or civilly to enforce the FBAR penalty, there might be some public information about these taxpayers.

    For persons among the data set transferred who joined the voluntary disclosure program, the information is within the bowels of the IRS -- if that is the right concept -- and subject to Section 6103's privacy mandate, so that information will not become public. Conceivably, the taxpayer and the relationship to UBS's disclosures might become known for those taxpayers who opt out of the voluntary disclosure program for civil penalty purposes and then choose to litigate the penalty.

    Jack Townsend


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