The Swiss government announced this week that it will respect a Swiss court decision last week that declared parts of a deal reached in August with the United States illegal under Swiss law and would reopen talks with the United States. The agreement, which was designed to end proceedings by the U.S. Justice Department against the Swiss bank UBS, required the Swiss government to hand over data to the Internal Revenue Service (IRS) on 4,450 UBS clients suspected of hiding bank accounts.
The Swiss government said in its statement Wednesday that the court decision means that mutual cooperation over 4,200 cases is forbidden. "An exchange of information with the U.S. authorities is only possible in about 250 cases," it said.
The five-judge Swiss panel ruled that failure by a single anonymous UBS client, known as "A" under Swiss confidentiality rules, to file a W-9 form, defined by the August agreement as indicating potential "tax fraud and the like," was a civil offense of tax evasion, not the crime of tax fraud. The Form W-9 provides a Tax Identification Number to the Bank and certifies that the account holder is exempt from backup withholding. The court's decision was extrapolated into 25 similar cases, the court said in a statement, and cannot be appealed.
The five-judge Swiss panel ruled that failure by a single anonymous UBS client, known as "A" under Swiss confidentiality rules, to file a W-9 form, defined by the August agreement as indicating potential "tax fraud and the like."was a civil offense of tax evasion, not the crime of tax fraud. That decision was extrapolated into 25 similar cases, the court said in a statement, and cannot be appealed.
The U.S. government had requested information on accounts with balances of more than $985,000. A second area of potential fraud, which was not affected by the ruling, involved U.S. persons (irrespective of their domicile) who beneficially owned "offshore company accounts."
The U.S. government has not responded to the announcement made by Swiss Justice Minister Eveline Widmer-Schlumpf.
The ruling could have serious consequences for Swiss banking if the U.S. decides to pursue a legal challenge, and for UBS, which supports the August agreement between the two governments.
So far, Switzerland has transferred data on six accounts to the U.S., Widmer-Schlumpf said, according to Bloomberg. The government will stop transferring information until the legal and political issues are resolved.
In response to the court ruling, the IRS said that it expects the Swiss to honor the agreement. "The United States and Swiss governments have an agreement to produce information on US account holders at UBS,'' the IRS said in a statement. "We understand that the Swiss courts issued a decision today, which we have not yet reviewed. We have every expectation that the Swiss government will continue to honor the terms of the agreement."
The terms of the August agreement called for Switzerland to process 4,450 accounts according to its law, and in return, the U.S. suspended a lawsuit seeking the names of 52,000 American UBS customers.
The U.S. also agreed to withdraw the claim, known as a John Doe summons, if it obtained information on 10,000 UBS account holders, from any sources and including people who volunteered information on their offshore accounts. Some of the 4,450 UBS clients whose data was to be turned over to the IRS may have been among the 14,700 who took advantage of the IRS' tax amnesty program that ended October 15.
The U.S. and Swiss governments also agreed that UBS clients could go through the Swiss legal system but that U.S. prosecutors could still pursue criminal charges if the Swiss court process dragged on indefinitely.
In a separate matter, UBS has already transferred account data on several hundred clients, after admitting to aiding tax fraud through hidden offshore accounts. The bank agreed in February of last year to pay $780 million as part of a deal to avoid criminal prosecution for helping wealthy Americans evade taxes. A whistleblower in that case, Bradley Birkenfeld, began serving a 40-month prison sentence on January 8, 2010