Anxious times for super rich amid offshore assets probe

Published on Saturday 7 June 2008 14:29

ONE afternoon in April, six dozen wealthy Americans were entertained at a luncheon party in midtown Manhattan, along with a special guest from Paris: Henri Loyrette, the director of the Louvre.

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

But now, as the federal authorities intensify an 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 up to 20,000 of its well-heeled American clients, according to people close to the inquiry, a step that would have once been unthinkable to Swiss bankers, whose traditions of secrecy date to the Middle Ages.

Federal investigators believe some of the clients may have used offshore accounts at UBS to hide as much as $20bn in assets from the Internal Revenue Service (IRS). Doing so may have enabled these people to dodge at least $300m in federal taxes on income from those assets, according to a government official connected with the investigation.

One prominent UBS client, a wealthy property developer in California 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 such as Switzerland and Liechtenstein, other names are surfacing.

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

"He's going to sing like a parakeet," said one of Birkenfeld's former clients.

UBS said it was cooperating with investigators and that it was against its policy to help Americans evade taxes.

Using offshore accounts is not illegal for US taxpayers, but hiding income in so-called undeclared accounts is. At issue is whether the UBS clients filed W-9 tax forms with the IRS, disclosing securities and assets held offshore, as required by law. Switzerland does not consider tax evasion a crime, and using undeclared accounts is legal there.

The case could turn into an embarrassment for Marcel Rohner, the chief executive of 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 $37bn in bad investments, many of them linked to risky American mortgages.

The federal investigation, which is part of an international crackdown on tax cheats, suggests that US authorities are shifting their focus to Liechtenstein and Switzerland from Caribbean havens such as 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 by the LGT Group, the bank owned by Liechtenstein's royal family.

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 US cities to cater to people who are worth at least $10m.