Saturday, February 21, 2009

UBS Tax Fraud Makes Lee Kuan Yew Look Like a Dufus Dumbo

In April 2008, this blogger took note of Lee Kuan Yew's comments in an interview with Bloomberg. The octogenarian Minister Mentor was defending GIC, the Singaporean sovereign weath fund of which he is Chairman, which had made investments in UBS and Citigroup just months before. I have previously dealt with Citigroup and the prospect of its equity investors being wiped out due to nationalisation. But for this post, the subject of my analysis is UBS.

The Minister Mentor went on the record complimenting the private banking franchise of UBS, citing this as the reason why GIC made a significant investment in the famous Swiss bank:
"The franchise of the banks, the expertise that they have, under proper leadership, they will be able to recover and rise again ... Will there be another Swiss bank like UBS for wealth management? I doubt it, we doubt it, that is why we invested in it." -MM Lee, in a Bloomberg Interview, Apr 08

In an expression of his support for UBS, the Minister Mentor's GIC duly bet US$10 Billion of Singapore's hard-earned reserves that UBS would recover, with its revival driven by the world-renowned reputation of UBS' private banking business. Nevermind the huge investment banking losses that UBS had sustained - at least its private banking business was still intact and relatively untarnished.

Well, this week, that reputation for integrity has all but evaporated. UBS has admitted to defrauding the US government by helping some of its US clients conceal their assets. It is also paying US$780 million in fines and compensation to the US govt as a result.
UBS to Pay $780 Million Over U.S. Tax Charges
Swiss Bank to Name Some U.S. Clients

By David S. Hilzenrath and Zachary A. Goldfarb
Washington Post Staff Writers
Thursday, February 19, 2009; D01

UBS, Switzerland's largest bank, agreed yesterday to pay $780 million to settle civil and criminal charges by the U.S. government that it helped thousands of American clients use Swiss accounts to evade U.S. taxes.

UBS also agreed to turn over the names of some of those clients.

The settlement ended a legal battle that pitted Switzerland's legendary tradition of bank secrecy against the U.S. government's determination to crack down on tax cheats.

But how the U.S. government resolved perhaps the central issue in its dispute with UBS was not disclosed, making it hard to assess how much the government gained in its battle against tax evasion.

The Justice Department charged that over several years UBS provided Swiss bank accounts to approximately 20,000 U.S. clients with assets of about $20 billion. About 17,000 of those clients concealed their identities and the existence of their UBS accounts from the IRS, the Justice Department alleged.

A key question in the investigation was whether the bank and the Swiss authorities would divulge information about all of the thousands of clients the U.S. government suspected of using UBS accounts to evade taxes or only those clients who met the much narrower Swiss legal conditions for parting the curtain of bank secrecy.


"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," Scott W. Friestad, deputy director of enforcement at the SEC, said in a statement.


"It is apparent that as an organization we made mistakes and that our control systems were inadequate," UBS chief executive Marcel Rohner said.

You might think $780 million is enough to settle the case. But the real damage has only just begun. The true fallout will be seen when UBS is finally forced to disclose the names of the US citizens who have secret bank accounts with UBS. This will truly shake the foundations of the private banking industry in Switzerland and set a new precedent for the private banking industry all over the world - including in Singapore. The prospective disclosure is now part of a civil lawsuit that US government is filing against UBS.
U.S. Sues UBS Seeking Swiss Account Customer Names
By David Voreacos and Carlyn Kolker

Feb. 19 (Bloomberg) -- The U.S. government sued UBS AG, Switzerland’s largest bank, to try to force disclosure of the identities of as many as 52,000 American customers who allegedly hid their secret Swiss accounts from U.S. tax authorities.

U.S. customers had 32,940 secret accounts containing cash and 20,877 accounts holding securities, according to the Justice Department lawsuit filed today in federal court in Miami. U.S. customers failed to report and pay U.S. taxes on income earned in those accounts, which held about $14.8 billion in assets during the middle of this decade, according to the court filing.

“At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes,” John A. DiCicco, acting assistant attorney general in the Justice Department’s tax division, said in a statement.


Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs Group Inc. partner, said a UBS loss in the case would be “very bad news” for Swiss banks.

Swiss Secrecy

“If you get to the point where you’re able to get information on 52,000 accounts just because they exist, not because of evidence of a crime, you’ve gotten rid of Swiss banking secrecy forever,” Smith said. “If the European Union follows suit, it’ll virtually be the end of secret accounts in Switzerland.”

Swiss banks would still get business from Asia, Russia, eastern Europe and Africa, he noted.

The Justice Department accused UBS of conspiring to defraud the U.S. by helping 17,000 Americans hide accounts from the Internal Revenue Service. The U.S. will drop the charge in 18 months if the bank reforms its practices, helps prosecutors and makes payments.

In entering a deferred-prosecution agreement, UBS agreed to a statement of facts that said from 2000 to 2007, it actively helped “U.S. individual taxpayers in establishing accounts at UBS in a manner designed to conceal the U.S. taxpayers’ ownership or beneficial interest in said accounts.”

Evading Requirements

UBS bankers “facilitated the creation of such accounts in the names of offshore companies, allowing such U.S. taxpayers to evade reporting requirements,” according to the statement of facts. Prosecutors filed a complaint, unsealed yesterday, accusing UBS of conspiring to defraud the U.S. by helping Americans hide accounts from the IRS.

UBS and its U.S. clients knew that it violated U.S. law for U.S. taxpayers to maintain undeclared accounts with UBS in Switzerland -- whether the accounts held cash or securities,” IRS agent Daniel Reeves said in a declaration filed with today’s lawsuit.


Private bankers went to great lengths to hide their clients’ identities and assure them of Swiss customs of secrecy, prosecutors said in the criminal complaint filed against UBS. In January 2003, after UBS signed an agreement to share tax information with the IRS, bank managers sent U.S. clients letters saying they had kept client identities secret since 1939.

Some bankers went so far as to develop written codes to hide their communications about U.S. clients’ assets, according to court documents filed in today’s lawsuit.

In June, U.S. prosecutors secured the guilty plea of a former UBS private banker, Bradley Birkenfeld, who is cooperating with investigators. Another Switzerland-based UBS banker, Raoul Weil, was indicted on a charge that he helped rich Americans evade taxes.

Private banks take pride in providing their clients with secrecy and privacy. Because many of their clients are exceptionally wealthy and do not wish for the composition or magnitude of their assets to be known to the public. But in this case, UBS clearly went too far. It abused the bank secrecy laws for its clients and helped to facilitate tax fraud - and the worst thing is that UBS has admitted doing so knowingly and for several years. Is this what Lee Kuan Yew and his son, Prime Minister Lee Hsien Loong, are trying to model Singapore after?

Singapore in recent years has made massive efforts to enter into the integrated resort (gambling) and private banking industries. Both are heavily interrelated in that they both attract money inflows from the rich and wealthy. But which rich and wealthy are we trying to attract?

Some of you might remember that in October 2006, a certain Andy Xie, who was then Asia Chief Economist of Morgan Stanley, was fired after making certain comments about Singapore's Economy. Amongst the derisive comments he made about Singapore's economy, the following were the most cutting:
"Actually, Singapore’s success came mainly from being the money laundering center for corrupt Indonesian businessmen and government officials. Indonesia has no money. So Singapore isn’t doing well. To sustain its economy, Singapore is building casinos to attract corrupt money from China." - Andy Xie, ex Morgan Stanley Asia Chief Economist

Is this what Singapore is turning into, a full fledged money laundering center? Is this the plan, with two massive integrated resorts flying high-rollers from the region in to gamble with their millions, and many more private banks to stash their cash away in secret accounts, while gambling even bigger sums in the global financial markets?

As a Singaporean, the latest unraveling of tax fraud charges against UBS, the largest private bank in the world, truly makes me shudder. Switzerland, at least, has other things to fall back upon when it faces a setback of such magnitude. But can Singapore's reputation and economy survive such a hit if something similar happens to us in the future? Our government has not had many ideas in recent years to drive Singapore's growth - and if our push into IRs and private banking fails, Singapore's economic growth could be set back several long years.

GIC's bet on UBS is a mistake that Singapore can ultimately recover from. But the PAP's bet on private banking and gambling may someday prove to be catastrophic for our nation.

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