Some rich UBS clients risk tax fraud exposure

By Lynnley Browning

Published: June 5, 2008

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NEW YORK: One afternoon in April, six dozen wealthy Americans were feted at a luncheon party in central Manhattan, along with a special guest from Paris: Henri Loyrette, director of the Louvre.

The host of the exclusive gathering was the Swiss bank UBS, whose elite private bankers built a lucrative business in recent years by discreetly tending the fortunes of U.S. millionaires and billionaires. As the wine flowed and Loyrette spoke of the glories of France, UBS bankers courted their affluent visitors.

But now, as U.S. authorities intensify a sweeping investigation into offshore bank accounts, the secrets of this rarefied world are being dragged into the open and UBS's privileged clients are running scared.

Under pressure from the authorities, UBS is considering whether to divulge the names of 20,000 of its well-heeled U.S. clients, according to people close to the probe, a step that would have once been unthinkable to Swiss bankers, whose practice of secrecy dates back to the Middle Ages.

U.S. investigators believe some of these clients may have used offshore accounts at UBS to illegally hide as much as $20 billion from the Internal Revenue Service. Doing so may have enabled these people to dodge $300 million or more in U.S. taxes, according to a government official connected with the investigation.

One prominent UBS client, a wealthy California property developer named Igor Olenicoff, has already pleaded guilty to filing a false 2002 tax return. But as the investigation tears holes in the veil of secrecy surrounding tax havens like Switzerland and Liechtenstein, other names are surfacing, according to the authorities.

New revelations are likely to come Monday, when a former UBS banker is expected to testify in a Florida court about how he helped Olenicoff and other clients evade taxes. The former banker, Bradley Birkenfeld, is set to plead guilty to helping Olenicoff conceal $200 million.

UBS said it was cooperating with investigators and that it was against policy to help Americans evade taxes. Officials at the bank declined to comment for this story.

Using offshore accounts is not illegal for U.S. taxpayers, but hiding income in so-called "undeclared" accounts is. At issue is whether the UBS clients disclosed securities and assets held offshore to the IRS, as required by law. Switzerland does not consider tax evasion a crime, and using undeclared accounts is perfectly legal there.

The case could turn into an embarrassment for Marcel Rohner, the chief executive at UBS and the former head of its private bank, as well as for Phil Gramm, the former Republican senator from Texas who is now the vice chairman of UBS Securities, the Swiss bank's investment-banking arm. It also comes at a difficult time for UBS, which is reeling from $37 billion in soured investments, many of them linked to risky U.S. subprime mortgages.

The U.S. investigation, which is part of a broad, international crackdown on tax cheats, suggests that United States authorities are shifting their focus to Liechtenstein and Switzerland from Caribbean havens like the Bahamas and the Cayman Islands.

The Senate Permanent Subcommittee on Investigations is scheduled to hold hearings as early as this month on offshore products sold by UBS and the LGT Group, the Liechtenstein bank owned by the Alpine principality's royal family.

At the center of the UBS inquiry is Birkenfeld, 43, who grew up in the Boston area and went on to live what might seem like a charmed life as a private banker Switzerland. Through his lawyer, Danny Onorato, Birkenfeld declined to comment for this story.

Birkenfeld's testimony could deal a stinging blow to UBS, the world's largest money manager for people whom bankers politely call "high-net-worth individuals." Since 2006, the bank has opened plush offices in New York and six other United States cities - among them Boston, Chicago and Houston - to cater to people who are worth at least $10 million.

Many UBS customers are worth far more than that. To lure them, UBS bankers canvassed cultural and sports events like Art Basel, the America's Cup and Boston Symphony Orchestra concerts.

"It's not a question of finding wealthy people," said Purvez Siddiqi, who recruits private bankers like Birkenfeld for big banks. "It's a question of how do you develop a network." But Siddiqi said he was "astonished" by how aggressively UBS had marketed its offshore accounts to Americans.

Birkenfeld, who oversaw key clients for UBS's private bank catering to U.S. citizens with offshore accounts, was central to that effort. Before joining UBS in 2001, he worked at Barclays Bank in Geneva, where he landed as a client Olenicoff, the billionaire owner of Olen Properties.