2010 Safety, Security and International Affairs

Jeffrey A. Neiman, Michael P. Ben’ary and Kevin M. Downing

Cracked the secretive Swiss banking system, prosecuted perpetrators of fraud, and prompted thousands of wealthy Americans to report billions of dollars of hidden assets to the IRS.

The Swiss banking system has always been a willing and safe haven for wealthy Americans seeking to conceal their income and avoid paying taxes that reach into the billions of dollars.

But this longstanding international ruse was upended in 2009 by three dedicated and determined Justice Department lawyers—Kevin Downing, Jeffrey Neiman and Michael Ben’Ary—along with federal investigators from the Internal Revenue Service (IRS) and the Securities and Exchange Commission.

Their legal acumen and investigative prowess pierced the iron-clad wall of Swiss bank secrecy for the first time, resulting in a landmark legal settlement that prompted thousands of rich citizens to report billions of dollars of hidden income to the IRS.

“They showed unique judgment and were able to make all of the threads unravel,” said John DiCicco, the acting assistant attorney general for the Justice Department’s tax division. “The Swiss veil of secrecy has been pulled aside.”

Undeterred by numerous obstacles, long odds and an army of opposing lawyers, the federal prosecutors uncovered a scheme whereby employees of UBS, the largest Swiss bank, made thousands of trips to the United States to help American clients conceal assets and income so they could avoid taxes. The scheme involved setting up offshore accounts and then transferring the money to UBS in Switzerland.

As they dug deeper, the Justice Department lawyers found that the UBS scheme involved private banking services to some 20,000 U.S. clients, who concealed assets from the IRS worth more than $20 billion.

The investigation resulted in criminal charges being brought against the third-highest ranking executive at UBS, two former UBS bankers, a Liechtenstein banker, a Swiss attorney, and 16 former UBS clients by April 2010.

But more importantly, the pressure brought on UBS by the Justice Department lawyers caused the bank to sign a deferred prosecution agreement last year in which it publicly admitted to defrauding the United States by helping American clients set up and conceal those offshore accounts. Court papers revealed that UBS had gone so far as to urge some American clients to destroy records and to use Swiss safe deposit boxes to hide jewelry and art work they had bought with money concealed offshore.

For the first time in history for a Swiss bank, UBS agreed to produce the identities and account information about U.S. clients, and paid $780 million in fines, penalties, interest and restitution. This was the largest fine ever in a criminal tax investigation. About 250 clients were identified.

After the February 2009 deferred prosecution agreement, the IRS announced a six-month program to encourage Americans to voluntarily disclose the existence of their secret offshore bank accounts. In exchange for coming forward, the IRS agreed to reduce penalties and to not recommend prosecution of the taxpayer.

As a result, more than 14,000 taxpayers contacted the IRS, repatriated billions of dollars to the United States and came into tax compliance. In an average year, fewer than 100 individuals take advantage of the IRS’s voluntary disclosure program.

“I can’t recall any cases in which the government has made successful inroads with offshore banking,” said Roger Stefin, an assistant U.S. attorney in Florida. “This was a very innovative team of prosecutors.”

Neiman said the depth of the UBS conspiracy unraveled step-by-step as they caught UBS bankers creating false documents, violating immigration laws by coming to the United States as tourists and then conducting business and engaging in a series of illegal activities. The team relied on informants, and followed one lead after another until the magnitude of the scheme became apparent.

“The trio of attorneys noticed a suspicious pattern of behavior and followed up where others hadn’t in the past. The conduct was egregious,” said Jeffrey Sloman, U.S. Attorney for the Southern District of Florida.

Since the deferred prosecution agreement, a number of other important events have taken place.

The IRS filed a separate lawsuit in Florida against UBS seeking thousands of more names of clients who had secret accounts. In August 2009, UBS agreed to turn over the names of 4,450 U.S. clients with accounts larger than one million Swiss francs who had not given UBS a required W-9 tax form.

The United States and Switzerland, along with 12 other countries, entered into a treaty which enables the United States and the other governments to have greater access to previously secret Swiss bank accounts. But that agreement and the release of new client names have been slowed due to ongoing legal battles in the Swiss courts that were still pending in the spring of 2010.

Downing said the investigation marked the start of “closing a gigantic hole” that has permitted U.S. citizens to avoid paying billions of dollars a year in taxes, and has opened communication with the Swiss.

“We set up a roadmap of how to get information in the future,” he said.