March 4, 2009 3:24 PM

Baker & McKenzie's UBS Memo Takes Center Stage at Tax Hearing

Posted by Brian Baxter

UPDATE: 5:55 p.m., Mar. 4. This story has been updated with new information after the conclusion of congressional hearings this afternoon.

Documents released as part of a Senate hearing looking into offshore tax havens on Wednesday show that Baker & McKenzie provided legal advice to embattled Swiss banking giant UBS on how to retain American clients who didn't want their overseas assets disclosed to the IRS.

UBS has been making headlines the past several weeks as federal law enforcement officials attempt to pierce strict Swiss bank secrecy laws as part of an investigation into whether the Zurich-based bank helped U.S. clients avoid paying taxes.

Two weeks ago UBS agreed to pay a $780 million fine and disclose a limited selection of client names as part of a deferred prosecution agreement that the bank reached with the Justice Department and the SEC.

But UBS still faces an IRS suit seeking to enforce a John Doe summons that would give the agency access to nearly 52,000 client names. UBS claims that divulging such information would violate Swiss law. (John Pacenti has an excellent story today in sibling publication the Daily Business Review examining the clash of cultures and legal systems in the UBS case.)

Which brings us to the hearings that took place Wednesday afternoon in Room 216 of the Hart Senate Office Building in Washington, D.C. IRS commissioner Douglas Shulman, acting assistant attorney general for the tax division John DiCicco, and UBS Global Wealth Management CFO Mark Branson testified before the subcommittee, which was chaired by Michigan Senator Carl Levin. (In a bit of Am Law trivia, Levin's cousin is former Mayer Brown and current Dykema Gossett litigation partner Fredrick Levin in Los Angeles.)

According to a 180-page list of exhibits released by the Permanent Subcommittee on Investigations, a UBS memo dated July 4, 2000, shows that the Swiss bank relied on outside legal counsel from Baker & McKenzie when setting up offshore asset vehicles and insurance plans to aid U.S. clients. (The UBS memo citing legal advice obtained from Baker & McKenzie can be seen on PDF pages 178 and 179.)

The memo, which was signed by UBS financial planning and wealth management employees Jonathan Bourne and René Sonneveld, explicitly states that the firm was consulted when setting up such schemes.

But the memo also appears to show that UBS didn't listen to their lawyers.

Bourne and Sonneveld state in their memo that "Baker & McKenzie has recommended that we give active consideration to setting a new policy, by which the bank would not accept 'flow-through' entities as account holders." (A "flow-through entity" or FTE passes income to investors or owners--most often seen in partnerships and income trusts.)

The two also state that UBS had "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."

Such entities would put UBS in violation of an IRS program called the Qualified Intermediary, which requires foreign banks to file U.S. tax forms. It's those very same entities that federal prosecutors and other investigatory agencies have accused UBS of establishing in order to obscure the identities of U.S. clients.

A Baker & McKenzie spokeswoman released the following statement to The Am Law Daily: "Consistent with our professional duty, it is our firm's practice not to identify our clients, or to discuss matters involving our clients."

Branson said in testimony before the subcommittee that while UBS deeply regretted its "breaches of U.S. law," the bank would not disclose the names of additional clients sought by the IRS. Branson testified that UBS entered into a deferred prosecution agreement as part of a "good-faith effort" to provide U.S. authorities with information without violating Swiss law.

Branson said that UBS views the John Doe summons filed by the IRS in federal court in Miami as a dispute between the IRS and the Swiss government, which can best be resolved through diplomacy rather than litigation that is neither "proper nor productive."

UBS is being advised by Wachtell, Lipton, Rosen & Katz litigation partners John Savarese, Ralph Levene, and Martin Arms. Eugene Stearns, chairman of Florida firm Stearns Weaver Miller Weissler Alhadeff & Sitterson, is serving as local counsel to UBS along with litigation partners Ana Barnett and Gordon Mead, Jr. (Stuart Gibson, senior litigation counsel with the Justice Department's tax division, is the lead lawyer for the government.)

Acting assistant attorney general DiCicco told the subcommittee that the Justice Department arrived at the $780 million fine levied against UBS partially through estimating profits gleaned by the bank's wealth management unit and the amounts of withholding taxes due on the assets of U.S. clients.

When asked if he thought UBS was the only bank helping U.S. citizens set up illicit offshore accounts, DiCicco replied, "I don't think they're the only one."

DiCicco also testified on the whereabouts of former UBS executive Raoul Weil, who was declared a fugitive in January by a federal court in Fort Lauderdale. DiCicco said that Weil--represented by Freshfield Bruckhaus Deringer litigation partner Aaron Marcu in New York--is in Switzerland and that Swiss law does not allow for the extradition of individuals charged with tax crimes.

Prior to Senate hearings on Wednesday, UBS announced another shakeup among its top executives, naming former Swiss finance minister Kaspar Villiger to replace Peter Kurer as chairman.

Kurer, who once served as the bank's general counsel, is a former partner in the Zurich office of Homburger, a Swiss firm that for years was affiliated with Baker & McKenzie.

The two firms parted ways in the early nineties.

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