Wealthy American clients of UBS face criminal investigations

Hiding money in a Swiss bank account used to be the primary reason people invested with a company like UBS (UBS). Now that decision is coming back to haunt the Americans who did so. The New York Times reports that the Justice Department opened about 100 criminal investigations into wealthy Americans who were clients of UBS.

In February, UBS volunteered to pay $780 million to settle a claim involving criminal fraud and failure to collect taxes on 17,000 accounts, but it is hiding behind Swiss secrecy laws when it comes to revealing individual account information on most of those names. As part of the settlement in February, UBS turned over the names of about 285 clients, but the Justice Department wants as many as 52,000 additional client names. Under Swiss financial secrecy laws, disclosing client data is a crime in all but the most egregious cases. The Times also reported that UBS alerted some of the people involved that their account information was turned over to the authorities.

Several accounts currently under scrutiny hold more than $100 million in assets, with the single largest account holding more than $150 million, according to the Times. But, many accounts hold less than $10 million.

Federal prosecutors are working with about a dozen former private bankers to build their criminal cases. These bankers are providing account details and related internal correspondence, according to the Times report. Some of the clients are citizens of other countries who hold dual citizenship with the United States. Those with dual citizenship are considered a flight risk.

Indictments of some UBS clients could come in a matter of weeks. If clients do not come forward voluntarily, they may face federal sentencing guidelines that could result in jail time of two years or more if convicted.

The IRS announced a big break for offshore tax evaders in March. If wealthy Americans who stashed money overseas to evade taxes come forward voluntarily, they can avoid a 35 percent penalty on the money, as long as they are not drug dealers, arms merchants, or others with ill-gotten gains.

Essentially the way this plan works is that the IRS will cut the penalty for not filing a Report of Foreign Bank and Financial Account, known as an FBAR, to avoid detection by the IRS. Offshore tax evaders do not file an FBAR. The current penalty can be as high as 50 percent of the highest annual balance of each account for each of the past three years, which can quickly wipe out investors and still leave them owing taxes and interest. The number of Americans coming forward to disclose hidden assets have doubled, according to the IRS.

For those who come forward voluntarily, the IRS will reduce that penalty to 5 to 20 percent, depending on whether the wealth was inherited. Also, under the special deal the penalty will be levied just once on the highest balance in the accounts over the past six years. But, because the value in many of these accounts has dropped due to the stock market crash, even the lowered penalty will be a big hit on the remaining funds.

In addition to the penalty, taxpayers will have to pay any taxes and interest owed over the past six years. A penalty of 20 percent (accuracy-related) or 25 percent (late filing) will also be assessed on the unpaid taxes. Taxpayers seeking the "big break" must also file amended returns for the past six years.

Americans have about six months to decide whether to take the deal. For those already under criminal investigation for tax evasion, it's too late. Some Americans who enter the program may provide information about the bankers, lawyers, and accountants who assisted them. Cooperation is not a requirement of the deal, but an attorney may be able to negotiate a better deal with a promise of cooperation.

Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies.

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