Diamonds in toothpaste as bankers sought to help

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UBS’s problems with the US authorities spring from the bank’s operations in Geneva, Zurich and Lugano, where 60-70 private bankers catered to the needs of wealthy US clients with accounts in Switzerland.

Those operations have now been dissolved. As part of the bank’s settlement last week with the US Department of Justice, the closure of the accounts, already put in train by UBS last year, is being accelerated.

Such business with US holders of “offshore” accounts had been conducted for decades. As with other Swiss private banks, UBS argued it was not responsible for policing whether customers had declared their holdings to their relevant domestic tax authority – in the US case, the Internal Revenue Service.

With contacts between the bank and customers historically kept to a minimum and both sides acutely aware of the need for confidentiality, information about potential tax evasion seldom emerged.

Moreover, Swiss private bankers were steeped in the traditions of client confidentiality – and knew they faced severe penalties from their employer and Swiss law for breaching that code.

However, two recent developments made continuing such business much more difficult for UBS, especially regarding US clients.

At the bank, an intense emphasis on growth from senior managers since about 2005 may have tempted some staff to become less cautious, say well-placed insiders.

Such temptations may have been reinforced by greater use of performance-based incentives in private bankers’ total remuneration.

Any temptation to cut corners was limited to a tiny minority, the insiders say. But, in spite of elaborate compliance procedures, strict internal guidelines and, in some cases, loopholes in US legislation leaving significant “grey” areas, some bankers may have been too eager to help their clients hide income and assets from the IRS.

In published testimony, Bradley Birkenfeld, the former Geneva-based UBS private banker who has co-operated with the US Department of Justice, revealed, for example, how he squeezed diamonds into tubes of toothpaste to help a key client transfer assets without detection.

Such examples were extreme. But they came against the background of the efforts by UBS to boost its US “offshore” business. Among other tools, the bank used, for example, sponsored cultural events, such as the Art Basel Miami Beach exhibition, or sailing and tennis competitions, as platforms for its Switzerland-based private bankers to meet clients in the US and find new ones.

On the US side, improvements in information technology – and the massive crackdown on the presence and movements of foreign visitors after the September 11 terrorist attacks – gave the authorities vastly greater insight into the activities of Swiss bankers than before.

Surveillance was helped by Mr Birkenfeld’s detailed knowledge, which included not just broad data about client numbers and assets held, but also elaborate internal UBS material about business practices.

The information provided included bank training material on how to develop US client networks by focusing on ethnic groups or particular interests, and even information on the use of specially encrypted computers and tactics for evading detection.

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