Evasive Tactics: UBS trolls for tax cheats

By Lucy Komisar
Condé Nast Portfolio, July 16, 2008

Code names, secretive European royalty, encrypted computers. A spy novel? Nope. Nope. It’s how two European banks helped rich Americans duck the taxman, a Senate probe found.

The Newport regatta has always drawn America’s moneyed class, and the Art Basel show in Miami is hot on the nouveau riche circuit”making both glitzy venues ideal for financial giants to prospect for new clients.

UBSBut UBS, one of the world’s largest banks, had another goal in mind when it shelled out money for the UBS Regatta Cup in Newport or the Art Basel Art Fair in Miami, or performances in major U.S. cities by the UBS Vervier Orchestra.

The European banking behemoth, according to findings to be released on Capitol Hill Thursday, dispatched advisers to the 25 most-affluent housing areas in the United States to chat up the very rich and persuade them to deposit money in UBS accounts that could evade U.S. taxes.

American money is a big lure for global banks, but sending foreign bankers to make pitches is illegal. The report, done by the Senate Permanent Subcommittee on Investigations, said the advisers UBS sent to the U.S. were supplied with encrypted laptops and business cards that didn’t connect them to the bank’s wealth management operation. The secrecy also extended to the bank advising its troops to carry only cryptic notes and spreadsheets with no names attached.

Some even got role-playing advice: One morning you are intercepted by an F.B.I. agent. He looks for some information about one of your clients and explains to you that your client is involved in illegal activities. Question 1: What would you do in such a situation? Question 2: What are the signs indicating that something is going on?

The Senate subcommittee’s report, which probed the bank‘s operations between 2000 and 2007, was released to mark the beginning of hearings that will put on the spot several top UBS officials as well as a lineup of U.S. tax evaders.

UBS is a star witness. The co-star of the report, Liechtenstein Global Trust, owned by the royal family of that microstate tax haven, refused to participate.

UBS ran its U.S. operation through desks in Geneva, Zurich, and Lugano and managed accounts for some 19,000 American clients, collecting $18 billion to $20 billion in assets that were undeclared to the I.R.S., and that earned the bank $200 million in profits.

After a new agreement with Switzerland in 2001 required reporting of U.S. citizens’ accounts with U.S. securities to the I.R.S., UBS helped 250 Americans sell about $2 billion in U.S. securities and opened new accounts in the names of offshore corporations, and transferred assets to those accounts, treating the shell companies as non-U.S. citizens.

As tax investigators circled, the bank sought to calm its American tax-evading clients, the Senate probe found. A November 2002 letter reassured them that a Swiss bank which runs afoul of Swiss privacy laws will face sanctions by its Swiss regulator and information relative to your Swiss banking relationship is as safe as ever and that the possibility of putting pressure on our U.S. units does not change anything.

To avoid clients from being discovered by tax authorities, the bank didn’t use names when it wired funds; and when client advisers needed to speak on the telephone, they used code names, the report said.

When the European Union required banks to identify the beneficial owner of the assets involved in wire transfers, UBS restricted its Swiss bankers’ use of wires and began to require clients to fly to Switzerland to withdraw cash. Other times, the bankers advised their clients to use Swiss credit cards.

They also told clients to destroy all offshore banking records existing in the United States and to misrepresent the receipt of funds from the Swiss bank account in the United States as loans from the Swiss Bank.

A UBS spokesperson Karina Byrne said the bank wouldn’t be curtailing its global activities but declined to comment on the tax-evasion aspect. UBS is now under investigation by the I.R.S., the S.E.C., and U.S Department of Justice, according to the Senate report.

L.G.T., which operates with cloak-and-dagger secrecy, was undone by a disgruntled former employee who copied to DVDs about 1,400 names of foreign account holders, including more than 100 Americans. He sold them to German intelligence for $7 million and also talked to Senate subcommittee staff about the practices of L.G.T., whose C.E.O. is Prince Max von und zu Liechtenstein, the second son of Prince Hans-Adam II, the nation’s sovereign.

The Senate probe states that L.G.T. told U.S. clients to open accounts in the name of Liechtenstein foundations and complex offshore structures so they could hide their ownership.

It used transfer corporations as way stations to disguise asset transfers to and from L.G.T. accounts. One was at the Banca del Gottardo, the Lugano bank that was the Swiss subsidiary of Robert Calvi’s Banco Ambrosiano until that collapsed in 1982.

U.S. clients would be assigned code words to confirm the identities of banker and client, according to the Senate report. It even used transfer accounts inside the bank, moving deposits through them to erase any paper trail. It also warned bankers: CAUTION: Calls may be made only from public phone booths abroad (Switzerland, Austria, etc.)!

One satisfied client, until he was caught, was Frank Lowy, founder and majority shareholder of Westfield, the world’s largest shopping center company, whose $6.4 billion ranks him No. 222 on Forbes‘ billionaires list. Lowy had to pay $25 million in back taxes to Australia and was tired of doing so. He used complex offshore structures to hide a paltry $68 million.

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