Political Gamesmanship may put UBS Tax Treaty in Jeopardy

The UBS is one of the world’s biggest banks and over the past few years has had an increasingly strained relationship with the U.S. government. In 2009, the U.S. government sued UBS for allegedly hiding secret Swiss bank accounts from U.S. tax authorities. In early 2010, UBS continued to contest the U.S.’s efforts to force disclosure of the American owners of nearly $20 billion assets held by the bank. The dispute became a political game with the United States on one side and UBS and Switzerland on the other. However, on June 17, 2010, the cold financial war resulted in a tax treaty.

The United States had long considered whether UBS was part of a broader scheme used by American citizens to avoid paying taxes. Stories about diamonds smuggled in toothpaste and efforts to hide billions in assets had drawn UBS into American courts. However, UBS also had to comply with Swiss law, which protected it from disclosing clients’ secrets.

With the threat of criminal prosecution and huge profit losses to its large banks, the Swiss government stepped in to protect the endangered UBS. In early June, the proposed tax treaty, which allows UBS to provide U.S. authorities the identities of nearly 4,500 American UBS clients, passed the upper house, but the measure failed to pass in the lower house. By mid-June, the lower house acquiesced.

In light of the Swiss government’s actions, the Justice Department and the IRS hope to move forward with their investigations. The tax treaty will continue to require UBS to identify clients with undisclosed bank holdings. Of the nearly 4,500 names, 500 have voluntarily come forward. The majority have not, and their tax amnesty deadline has passed. While more may still come forward, others may face the fate of people like Leonid Zatlsberg, Harry Abrahamsen and Juergen Homann, who were found guilty of federal tax-evasion charges.

Though the treaty between UBS and the United States was born of controversy, and may continue to be shrouded in controversy, it may be indicative of a lasting change in how the IRS pursues Americans with foreign assets and may open the floodgates to more banking reform and accountability.