Swiss bank UBS, in a significant departure from Switzerland's tradition of banking secrecy, has agreed to turn over to the US government the names of about 250 depositors who are US citizens and pay a $780 million fine as part of a deal to settle a US criminal probe. UBS facilitated the account holders to evade US tax.

A former UBS executive, Bradley Birkenfeld, told US investigators that the bank allegedly began telling American customers in 2002 it wasn't required to disclose their identities to the Internal Revenue Service.

US prosecutors have estimated that UBS holds an estimated $20 billion in assets for US clients in secret accounts, generated about $200 million a year in revenues for the bank.

The US alleged that UBS managers and employees used encrypted laptops and other counter-surveillance techniques to help prevent the detection of their marketing efforts and the identities and offshore assets of their US clients. Clients of the cross-border business in turn filed false tax returns which omitted the income earned on their Swiss bank accounts and failed to disclose the existence of those accounts to the Internal revenue Service (IRS).

In November 2008, UBS executive Raoul Weil was indicted by a federal grand jury in Fort Lauderdale, Florida and charged with conspiring to defraud the United States for his alleged role in overseeing the United States cross-border business. The district court recently declared him to be a fugitive.

In June 2008, Bradley Birkenfeld pleaded guilty to a charge of conspiring to defraud the United States for similar conduct. Birkenfeld is scheduled to be sentenced on May 1, 2009.

The Swiss Federal Banking Commission (SFBC) has concluded that UBS violated the requirements for proper business conduct, and it barred UBS from providing services to US resident private clients out of non-SEC registered entities. Further, the SFBC ordered UBS to enhance its control framework around its cross-border businesses and announced that the effectiveness of such a framework will be audited.

A complaint filed by the US Securities and Exchange Commission (SEC) complaint, filed in the US District Court for the District of Columbia, alleges that UBS's conduct facilitated the ability of certain U.S. clients to maintain undisclosed accounts in Switzerland and other foreign countries, which enabled those clients to avoid paying taxes related to the assets in those accounts. UBS agreed to settle the SEC's charges by consenting to the issuance of a final judgment that permanently enjoins UBS and orders it to disgorge $200 million. In connection with a related criminal investigation, UBS has entered into a deferred prosecution agreement with the Department of Justice pursuant to which UBS will pay an additional $180 million in disgorgement, as well as $400 million in tax-related payments.

"The broker-dealer and investment adviser registration provisions provide important protections for investors. UBS avoided compliance with U.S. securities laws for many years, at the same time they were engaged in other illegal conduct, which makes this one of the most egregious cases of its kind," said Scott W. Friestad, Deputy Director of the SEC's Division of Enforcement.

As alleged in the SEC's complaint, from at least 1999 through 2008, UBS acted as an unregistered broker-dealer and investment adviser to thousands of U.S. persons and offshore entities with United States citizens as beneficial owners. UBS had at least 11,000 to 14,000 of such clients and held billions of dollars of assets for them. The U.S. cross-border business provided UBS with revenues of $120 million to $140 million per year.

The SEC also alleged that UBS conducted that cross-border business largely through client advisers located primarily in Switzerland, who were not associated with a registered broker-dealer or investment adviser. These client advisers traveled to the U.S, on average, two to three times per year on trips that generally varied in duration from one to three weeks.In many instances, the client advisers attended exclusive events such as art shows, yachting events, and sporting events that were often sponsored by UBS, for the purpose of soliciting and communicating with United States cross-border clients.

"UBS sincerely regrets the compliance failures in its US cross-border business that have been identified by the various government investigations in Switzerland and the US, as well as our own internal review,” stated Peter Kurer, Chairman of UBS AG. "We accept full responsibility for these improper activities. We are firmly committed to the terms of the settlement agreements we have reached with the DOJ and the SEC. We are determined to fully comply with the terms of these agreements and will complete the process without delay.

"Client confidentiality, to which UBS remains committed, was never designed to protect fraudulent acts or the identity of those clients, who, with the active assistance of bank personnel, misused the confidentiality protections embedded in the QI Agreement with US authorities by providing false declarations regarding their tax status," Peter Kurer commented.

"It is apparent that as an organisation we made mistakes and that our control systems were inadequate," said Marcel Rohner, Group CEO of UBS. "We will strengthen our compliance programs. UBS seeks to achieve the highest standards of compliance throughout its organization and is committed to fulfilling its obligations under the laws and regulations in every country in which it operates."