Internal Memo Shows UBS Ignored Baker & McKenzie’s Warnings

A memo released by a Senate panel suggests Swiss banking giant UBS ignored warnings from Baker & McKenzie that diverting U.S. clients into offshore entities could run afoul of its commitment to report taxes under an Internal Revenue Service program.

The New York Times has the details. UBS was participating in an IRS program designed to allow foreign banks to attract investors in U.S. securities without revealing their names to tax authorities, its story says. The program calls for foreign banks to withhold taxes due on securities held by American clients.

The law firm warned that placing clients in offshore entities and insurance plans would violate the bank’s tax reporting commitment under the program, but the writers of the memo—two officials in the bank’s financial planning and wealth management unit—thought the advice could be circumvented, according to the Times. USA Today also published the memo.

The document, written in 2000, explained how to get around advice by the law firm, the Times story says. It read: “We have been advised by Baker & McKenzie that we cannot recommend products (such as the use of offshore companies, annuity or insurance products) to our clients as an ‘alternative’ to filing a Form W-9. This could be viewed as actively helping our clients to evade U.S. tax, which is a U.S. criminal offense. What we can do is suggest that clients seek external professional advice and offer them a choice of approved service providers if they request it."

The writers said UBS considered the offshore companies and other products to be exempt from the IRS program, and using them to mask trusts and foundations would be permissible if done before 2001, when the tax program's rules took effect.

While the New York Times interpreted the memo as evidence that officials ignored the warnings by Baker & McKenzie, USA Today quoted an expert who believed it showed the law firm was helping UBS avoid tax disclosures.

"You have a U.S. law firm working with a Swiss bank to simply get totally around or giving a plan they thought would totally get around the U.S. regulations," Jack Blum, an offshore tax law expert, told USA Today. "I think it raises serious questions."