U.S. readies papers v. Swiss banks on tax evasion

By Lynnley Browning

(Reuters) - The United States is drafting legal documents that seek to force nearly a dozen Swiss banks and international banks with Swiss branches to disclose the identities of American clients evading billions of dollars in taxes, sources briefed on the matter said.

The drafting of the documents -- grand jury subpoenas and broad requests known as John Doe summonses -- is a fresh U.S. shot across the bow at Switzerland and its battered tradition of bank secrecy.

The Alpine country, a noted tax haven that is the global capital of offshore private banking, has been under attack from U.S. Justice Department and Internal Revenue Service officials conducting a broad criminal investigation into private banking services that U.S. authorities say enabled wealthy Americans to evade billions of dollars in taxes.

Charles Miller, a Justice Department spokesman, declined to comment.

The legal pressure signals a new front in Washington's fight against Swiss bank secrecy, a battle that in recent years has resulted in scores of Swiss bankers and advisers being charged, dozens of American clients indicted and several large banks investigated.

The Justice Department served a target letter in July on Credit Suisse AG <CSGN.VX>, Switzerland's second-largest bank, notifying it that it was the focus of a criminal investigation. American authorities also are probing HSBC <HSBA.L> and smaller Swiss private banks and cantonal banks, including Basler Kantonalbank, Wegelin and Julius Baer <BAER.VX>.

Talks between the Swiss and U.S. governments to resolve the broad investigation broke down in June. Switzerland wants its banks to pay a multi-billion dollar fine, but the U.S. side wants client names as well.

James Cole, the deputy attorney general and the second-highest ranking law enforcement official in the United States, wrote to Switzerland's top tax negotiator, Michael Ambuehl, in a three-page letter dated August 31 that federal authorities intended to serve the documents.


But the Justice Department, in a move that gives Swiss banks another, last-minute chance to reach an agreement with U.S. authorities, also said it would hold off on enforcing them if the banks comply with the requests to turn over client data.

The Justice Department is trying to determine the total volume of unreported accounts held at Swiss banks. Officials suspect the accounts hold assets in the tens of billions of dollars and possibly more.

The existence of the confidential letter was first reported by two Swiss newspapers on September 4.

"It's a fairly major event that the deputy attorney general would fire this off," said Scott Michel, a tax lawyer at Caplin & Drysdale in Washington. U.S. officials, who have confirmed the existence of the letter, are angry that it became public.

The John Doe summonses will ask for names and account data on American clients with undeclared or unreported assets in accounts at Swiss banks. The summons is a civil, not criminal, procedure, and mirrors the one served on Swiss bank giant UBS AG <UBS.N> in 2008 by the IRS that sought to force the bank to turn over 52,000 American client names.

The UBS summons, later enforced by a federal court, was dropped only in 2010, more than one year after UBS averted indictment and reached a $780 million deferred-prosecution agreement with the Justice Department over charges it sold tax evasion services to rich Americans. UBS ultimately turned over 4,450 client names.

Like the UBS summons, the impending summonses are likely to fuel a diplomatic showdown between Washington and Bern. Switzerland, which unlike the United States does not consider tax evasion a crime, argues that Switzerland should not be subject to U.S. tax laws.

Ambuehl, who negotiated the deferred-prosecution deal for UBS, does not want a UBS-style model repeated for other banks -- even though that deal included the possibility of future summonses against other banks, persons briefed on the matter said.

Robert Katzberg, a white-collar criminal defense attorney in New York who represents American clients of Swiss banks, called the combination of subpoenas -- a criminal matter -- and the summonses -- a civil matter -- "a smart tactic that will maximize leverage over other Swiss banks."

"That U.S. taxpayer account records of 10 more banks are in imminent danger of being sent to the Justice Department is especially bad news for the thousands of U.S. taxpayers who decided not to come forward after UBS," he added. "The consequences are likely to be really painful."

(Reporting by Lynnley Browning in Hamden, Conn., editing by Howard Goller and Tim Dobbyn)