A key government informant and former UBS banker in the U.S. tax evasion case against Swiss bank (UBS AG) was sentenced to more than three years in prison for helping a billionaire hide assets from U.S. tax authorities.

The sentence of Bradley Birkenfeld, by federal Judge William Zloch Bradley Birkenfeld, was tougher than his attorneys and prosecutors anticipated.

Birkenfeld cooperated in the U.S. government tax evasion investigation of UBS, serving as an informant in 2007 for US authorities.  UBS AG has since admitted that its employees helped American clients evade billions of dollars in U.S. taxes.

Prosecutors asked that Birkenfeld’s sentence be reduced to 2 1/2 years from the 5 years he originally faced. His lawyers pleaded  for 5 years probation.

The ex-UBS employee was sentenced for conspiring to defraud the United States by helping a billionaire U.S. real estate developer create sham corporations and entities to hide over $200 million in assets from U.S. tax authorities.

However, he was credited with providing damning information on UBS’s illegal business practices of helping wealthy Americans use their Swiss bank accounts to hide money overseas to evade U.S. taxes.

The sentencing comes just two days after U.S. and Swiss authorities signed a pact in which Switzerland agreed to reveal the names of about 4,450 wealthy American clients of UBS to U.S. tax investigators.

U.S. officials said Birkenfeld’s sentencing would send a powerful message to U.S. tax offenders hiding undisclosed assets in Swiss bank accounts to give themselves up under a voluntary disclosure program.

“To those taxpayers who have illegally hidden their income in foreign bank accounts and to those who have illegally helped clients hide income and assets, today’s sentencing serves as notice: come in and completely come clean,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division.

source: Reuters

According to the NY Times, Switzerland recently announced it would help global authorities pursue tax cheats.

The surprise announcement came after a similar shift by two other European tax havens, Liechtenstein and Andorra, on Thursday.

The moves deal the biggest blow yet to European traditions of banking secrecy and come amid a global crackdown on tax evasion. The three governments agreed to cooperate with authorities in the United States and elsewhere in investigating tax evasion and, under certain circumstances, to turn over data on accounts at banks headquartered within their jurisdictions.

“The adoption of the O.E.C.D standards is a significant signal that bank secrecy as it has existed for generations is coming to an end,” said Scott D. Michel, a tax lawyer at Caplin & Drysdale in Washington, D.C.

Switzerland is not abandoning its banking secrecy laws, but rather adopting the definition of tax evasion used by the 30-nation Organization for Economic Cooperation and Development.

Switzerland was placed this week on the O.E.C.D.’s list of uncooperative tax havens, which also includes Andorra, Austria, Hong Kong, Liechtenstein, Luxembourg, Monaco and Singapore. It has also come under pressure from the British prime minister, Gordon Brown, who last month threatened to disinvite Switzerland to a meeting in London next month of the Group of 20 leading nations. Austria and Luxembourg have also agreed to adopt the organization’s definition of tax haven.

Switzerland is home to a third of the estimated $7 trillion hidden offshore globally.

Switzerland, unlike the United States and many other countries, distinguishes between tax fraud and tax evasion, and does not consider tax evasion to be a crime. But by adopting the O.E.C.D. definition, it will now cooperate with countries with which it has information-sharing treaties in pursuing tax evasion.

Those countries must already possess names of clients suspected of tax evasion, and then ask Switzerland for assistance.

“The privacy of foreign clients not under suspicion will continue to be protected by Swiss bank-client confidentiality,” the Swiss Bankers Association said on Friday. “An automatic exchange of information is excluded.”

UBS, the Swiss bank, averted indictment last month and agreed to pay $780 million to the Justice Department to settle charges that it helped scores of wealthy Americans evade taxes through secret offshore accounts.

UBS declined to comment.

Here are some key facts about Switzerland’s bank secrecy:

BANK SECRECY:

- Sharing information about bank client data is a criminal offence in Switzerland. Banks are forbidden from handing over bank client data directly to foreign authorities even if requested to do so. Switzerland’s protection of banking secrecy goes back to 1934 when it passed a law imposing heavy penalties, up to and including prison sentences, for breaches of banking secrecy.
TAX FRAUD/TAX EVASION:

- Unlike most other countries in the world, Swiss law distinguishes between tax fraud and tax evasion. Tax fraud is a criminal offence that involves actively forging documents to hide income from the tax man. Tax evasion, which is defined as not fully declaring one’s income to the Swiss tax authorities, is an administrative offence, punishable with a fine as the law accepts that citizens can sometimes innocently forget data or make mistakes when filing their tax returns.

Tax evasion is distinct from tax avoidance, which is the legal exploitation of tax loopholes to minimise tax payments.

TAX INFORMATION SHARING

- Switzerland can share tax information under a so-called administrative process enshrined in tax treaties signed with the United States and other countries. Up until now, it has mainly shared information on tax fraud.

Banks supply information requested by foreign governments pursuing criminal investigations of individuals, but this does not automatically extend to tax matters.

Swiss law requires the other jurisdiction demanding the information to come forward with a detailed claim about a precise individual. Berne does not offer cooperation in the case of blanket requests for data.

THE UBS TAX FRAUD CASE

- UBS (UBSN.VX)(UBS.N), Switzerland’s largest bank, became the target of a U.S. investigation alleging the bank had helped thousands of Americans to hide money from its tax authorities in Swiss bank accounts. In a landmark settlement, UBS agreed to pay a $780 million fine in February. Berne also agreed to the transfer to the U.S. of a few hundred UBS client names even before a Swiss court had ruled on whether tax fraud had been committed.

EU SAVINGS DIRECTIVE

- Switzerland allows European Union account holders to keep their affairs secret by paying withholding tax on the interest of savings from their income instead.

Switzerland shares the bulk of the revenues collected in this way with relevant EU governments without revealing the identity of the EU bank account holders. The matter is regulated by the so-called EU savings tax directive.

It seems the reason Switzerland is now agreeing to bend on it’s bank secrecy policies is to gain some leverage in the U.S. investigation of it’s largest bank, UBS, which is alleged to have helped thousands of Americans hide money from the IRS in Swiss bank accounts.  With a new president and a need for more cash, the Swiss know the U.S. government is serious about pursuing this lost tax revenue.

source: Reuters, NY Times