Wealthy Americans Under Scrutiny in UBS Case NYTimes.com

Correction Appended

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.

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Related UBS Plans to Close Its Municipal Bond Business (June 6, 2008)

The host of the exclusive gathering was the Swiss bank UBS, whose elite private bankers built a lucrative business in recent years by discreetly tending the fortunes of American millionaires and billionaires. As the wine flowed and Mr. 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 billion in assets from the Internal Revenue Service. Doing so may have enabled these people to dodge at least 0 million 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 like Switzerland and Liechtenstein, other names are surfacing, according to the authorities.

New revelations are likely to come Monday, when a former UBS banker is expected to testify in a court in Florida about how he helped Mr. Olenicoff and other clients evade taxes. The former banker, Bradley Birkenfeld, is set to plead guilty to helping Mr. Olenicoff conceal 0 million.

“He’s going to sing like a parakeet,” one of Mr. Birkenfeld’s former clients said.

UBS said that it was cooperating with investigators and that it was against its policy to help Americans evade taxes. Officials at the bank declined to comment for this article.

Using offshore accounts is not illegal for United States taxpayers, but hiding income in so-called undeclared accounts is. At issue is whether the UBS clients filed W-9 tax forms with the bank, disclosing their names, addresses and taxpayer identification numbers, 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 billion in bad investments, many of them linked to risky American mortgages.

The federal investigation, which is part of a broad, international crackdown on tax cheats, suggests that United States authorities are shifting their focus to Liechtenstein and Switzerland from Caribbean havens like 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.

At the center of the UBS investigation is Mr. Birkenfeld, 43, who grew up in the Boston area and went on to live what might seem like a charmed life as a private banker in Switzerland. Through his lawyer, Danny Onorato, Mr. Birkenfeld declined to comment.

Mr. 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 United States cities, among them Boston, Chicago and Houston, to cater to people who are worth at least million.

Many UBS customers are worth far more than that. To lure them, UBS bankers canvassed cultural and sports events like Art Basel, the America’s Cup and Boston Symphony Orchestra concerts.

“It’s not a question of finding wealthy people; it’s a question of how do you develop a network,” said Purvez Siddiqi, who recruits private bankers like Mr. Birkenfeld for big banks. But Mr. Siddiqi said he was “astonished” by how aggressively UBS marketed its offshore accounts to Americans.

Mr. Birkenfeld took care of important clients for UBS’s private bank catering to United States citizens with offshore accounts, and was central to UBS’s effort to lure them.

Before joining UBS in 2001, he worked at Barclays Bank in Geneva, where brought in Mr. Olenicoff, the billionaire owner of Olen Properties. When Mr. Birkenfeld joined UBS, he brought Mr. Olenicoff along, and later helped him move hundreds of millions of dollars from the Bahamas to Switzerland, according to a financial executive briefed on the matter.

Shortly after Mr. Olenicoff left UBS for LGT, the Liechtenstein bank, in 2005, Mr. Birkenfeld resigned. The banker formally left UBS in March 2006.

Mr. Birkenfeld later claimed in a Swiss legal proceeding that UBS had not paid him a bonus he was owed. A former associate said Mr. Birkenfeld had become angry over what he considered the bank’s wink-and-nod standard regarding tax evasion. UBS typically rewarded private bankers for attracting new clients in the United States, rather than for the fees the bankers generated for UBS from existing customers.

Mr. Birkenfeld also was angered when UBS asked bankers to sign papers saying that they, not the bank, would be responsible if they broke non-Swiss tax laws, according to a European financial executive briefed on the matter.

About a year ago, concerned by a tax investigation into Mr. Olenicoff, Mr. Birkenfeld contacted the Justice Department and California authorities and offered to cooperate with prosecutors in the hope of securing immunity for himself, according to a person close to the case. His deal fell through, however, and Mr. Birkenfeld was charged, along with a financial executive from Liechtenstein, in an indictment unsealed May 13.

As the authorities focused on UBS last January, the bank abruptly shut its three Swiss offices that had sold undeclared offshore banking services to United States clients. Those offices catered to thousands of wealthy Americans, some of whom may now have their tax secrets put on public display.

This article has been revised to reflect the following correction:

Correction: June 19, 2008 An article on June 6 about federal inquiries into accounts held by Americans in the Swiss bank UBS and other foreign banks that maintain a high level of secrecy referred incorrectly to a tax form required of American clients of such banks. While the client must fill out a W-9 tax form, it is submitted to the bank, not to the Internal Revenue Service, and it discloses name, address and taxpayer identification number, not securities and assets held abroad.

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