Prosecutors in the U.S. attorney’s office in Brooklyn are weighing evidence gathered with the Federal Bureau of Investigation to determine whether employees of the bank helped facilitate tax evasion or engaged in securities fraud, people familiar with the investigation said. Authorities are also trying to determine whether anyone at the bank engaged in criminal efforts to cover up the alleged conduct once it became more widely known about within the bank.
UBS was recently served with a subpoena from authorities related to the matter, according to people familiar with the case. Prosecutors and FBI agents recently traveled to London to interview potential witnesses, the people said.
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UBS recently hired attorney John F. Savarese, [bio here] a partner at Wachtell, Lipton, Rosen & Katz, to conduct an internal investigation, according to the people familiar with the case. Such probes can cost banks millions of dollars in legal fees. Mr. Savarese didn’t respond to requests for comment.
The alleged practices under scrutiny at UBS hark back to an old-fashioned type of tax evasion. At issue is the marketing of bearer securities as an investment to American clients, a financial tool whose use U.S. authorities largely ended because of its potential for abuse. Bearer securities were once popular because they were preferable to bulk cash payments, but a 1982 law imposed a variety of sanctions and tax penalties that made it very difficult to use or deposit such a certificate at a U.S. bank.
Traditionally, bearer securities were issued in one of two ways. Bearer bonds, also known as coupon bonds, can be issued by banks as debt certificates in large denominations, sometimes millions of dollars each, that can be redeemed at certain banks by whoever possesses them. Some banks and other companies issue bearer shares, an equity share in a company, which is similarly owned by whoever holds it. Companies issuing bearer securities typically don’t register the securities’ owners or track transfers of ownership.
Bearer securities can be a risky investment, because they are easily transferable and nearly anonymous, which means they can be stolen and cashed. For that reason, they have been used to cheat on taxes. By keeping an interest-bearing account or document with no ownership trail, and no forms filed to the IRS, the holder of such a certificate can hide assets and income from tax authorities. Today, bearer bonds can also be maintained strictly as an electronic account, generating a set rate of interest.
It isn’t clear when the alleged conduct in the UBS matter is purported to have begun. Investigators believe some potential misdeeds occurred after the expiration of bank’s 2009 agreement with the Justice Department, which resolved its previous tax-evasion case and put off any related prosecution as long as the bank didn’t get into additional trouble in the following 18 months. The people familiar with the current probe said authorities don’t believe the new issues constitute a violation of the terms of that settlement.
UBS’s woes stem from more than simply potentially marketing such investments to American clients or managing them, according to people familiar with the investigation. At one point, these people said, bank employees allegedly discussed how to deal with the potential legal problems of such transactions, and how they might hide them from authorities. For that reason, investigators are trying to determine the exact nature of those alleged discussions and whether they amounted to a criminal effort to conceal what had allegedly already been done.Long-time readers of this blog know what I think of Swiss banks. Not all of them, but some of them (UBS easily fits in the category). UBS may be said to give Swiss banks a bad name. There is probably some truth in that. But, like all hyperbole, it is ... , well, hyperbole.