Bankers reluctant to open vault

California billionaire Igor Olenicoff had already invested US$200 million ($310 million) with UBS in 2001 when his Swiss bankers ushered him to an underground vault in Geneva.

Olenicoff, a real estate developer with a taste for yachts and Russian art, saw floor upon floor of safe-deposit boxes. His private banker, Bradley Birkenfeld, and a colleague showed Olenicoff his own space for valuables.

"They said, 'Whatever you want - corporate stock, cash, gold, silver - put it in here,"' says Olenicoff, 66, at the Newport Beach, California, headquarters of Olen Properties, the company he founded in 1973. "It was that aura of legitimacy and secrecy. They say, 'We're the world's largest wealth manager,' so how do you question?"

Birkenfeld, 44, had spent years wooing Olenicoff, visiting his homes in Laguna Beach, California, and Lighthouse Point, Florida; cruising on his 45-metre yacht to Mayan ruins in Honduras; and flying on his private jet.

Four years later, both men are admitted felons. Since December 2007, the billionaire and his banker have pleaded guilty to tax crimes.

The Olenicoff and Birkenfeld cases come amid a widening US crackdown on offshore firms that cater to wealthy Americans. US Senator Carl Levin, a Michigan Democrat, estimates the cost in unpaid taxes to the US Treasury is US$100 billion a year.

With evidence from the Olenicoff case and co-operation from Birkenfeld, US prosecutors have been able to penetrate the veil of financial invisibility that Switzerland guards as a national treasure.

To avoid immediate prosecution, UBS, Switzerland's second-largest bank by stock market value, behind Credit Suisse Group, agreed on February 18 to pay the US$780 million.

It renewed a pledge to stop unlicensed recruiting of customers in the US and agreed to co-operate with investigators during 18 months of probation. The bank admitted in court that it had helped American clients dodge taxes from 2000 to 2007.

The bank turned over information on more than 250 customers - an unprecedented breach of Switzerland's bulwark of secrecy.

The US Internal Revenue Service is suing UBS in federal court in Miami to get the names of 52,000 American account holders who may have broken US tax laws.

UBS is fighting back. The bank said in April 30 court filings that the US efforts would force bank employees to violate Swiss criminal laws barring disclosure of secret account information. The Swiss Government says the US is trampling on its sovereignty.

If the bank fails to convince a federal judge that it shouldn't turn over the names to the IRS, the court can fine UBS for civil contempt. The Justice Department, under the deferred-prosecution agreement, could seek criminal indictment of the bank, says tax attorney Robert Fink of Kostelanetz & Fink LLP in New York.

An indictment of a bank can be lethal if customers doubt its stability.

"That could be the most dangerous thing of all for UBS," says Fink, whose firm represents 200 UBS clients.

The UBS battle is yet another challenge for chief executive Oswald Gruebel, the former head of Credit Suisse, who took over UBS in February. Crushed by subprime-debt losses, UBS posted a US$16.8 billion loss for 2008, the biggest ever by a Swiss company.

The bank has announced more than 18,500 job cuts in the past 18 months and has amassed more than US$50 billion in writedowns and losses since 2007.

Since April 2, prosecutors have charged two UBS clients in Florida with filing false tax returns. Hundreds of UBS clients in the US may face prosecution, says Edward Robbins jnr, a Beverly Hills, California, tax lawyer who represented Olenicoff.

US prosecutors say UBS earned US$200 million a year managing US$20 billion in assets for US customers.

Birkenfeld, a neurosurgeon's son who worked in Switzerland for three international banks, co-operated with prosecutors and US Senate investigators in laying out a road map of how UBS courted clients like Olenicoff.

"This was a massive machine," Birkenfeld told Senate investigators on October 11, 2007. He said UBS bankers crisscrossed the US - without required licensing from the Securities and Exchange Commission - to find wealthy US customers.

As many as 60 UBS private bankers trolled for clients at UBS-sponsored art shows, yachting regattas, and golf and tennis tournaments, Birkenfeld said.

He toted customer cheques to deposit in European banks and bought diamonds for one client, smuggling them to the US in a toothpaste tube, he said in pleading guilty to conspiracy in federal court in June 2008.

By serving as couriers, the UBS bankers enabled clients to sidestep a US surveillance system that reviews large cash transfers. That programme is intended to prevent fraud, money laundering and the movement of funds by terrorists.

Such transactions often trigger the filing of a so-called suspicious activity report by the Treasury Department. Those alerts can prompt investigations into the money's source.

The bank had extensive schemes to avoid getting caught by US regulators, Birkenfeld told investigators. UBS bankers carried encrypted laptop computers, and the bank trained its staff to dodge detection by US authorities.

The bankers falsely said on customs forms that they were travelling for pleasure, not business, and told clients to destroy offshore records that could be tied to UBS, Birkenfeld said in his guilty plea.

Peter Kurer, before he resigned as UBS's chairman, apologised in a statement in February.

"UBS sincerely regrets the compliance failures in its US cross-border business," he said. "We accept full responsibility for these activities. Client confidentiality, to which UBS remains committed, was never designed to protect fraudulent acts."

Olenicoff, who moved from the Soviet Union to Tehran as a boy and emigrated to the US in 1957, has sued UBS, Birkenfeld and 37 other defendants.

His lawsuit filed on September 16 and amended twice in federal court in Santa Ana, California, claims they misled him about his tax liabilities, tarred his reputation and cheated him out of millions of dollars.

He's seeking US$500 million in damages. UBS says Olenicoff's complaint lacks merit and denies its actions had subjected Olenicoff to tax penalties, interest or criminal investigations.

Olenicoff says he's not backing away from his December 2007 guilty plea to one count of filing a false tax return in 2002. Olenicoff also admitted in federal court in Santa Ana that from 1998 to 2004, he failed to declare accounts in the Bahamas, Britain, Liechtenstein and Switzerland.

US District Judge Cormac Carney sentenced Olenicoff on April 14, 2008, to two years' probation and 120 hours of community service. He paid US$52 million in taxes, interest and penalties.

The judge asked Olenicoff why he had failed to fill in a box on his tax returns asking if he controlled foreign bank accounts. "It's not crystal clear to me why someone of Mr Olenicoff's intelligence would answer a question that seems to be so easily proved to be false," the judge said. Olenicoff told Carney bankers gave him bad advice.

After a three-year criminal probe that included a search of his office and house by IRS agents in 2005, Olenicoff says he decided to plead guilty.

Olenicoff has built an empire by buying land and building industrial and office parks and apartment buildings in four US states. Like many wealthy Americans and corporations, he had used offshore accounts that allowed him to pay less in US taxes. Moving money to such havens is legal as long as a taxpayer reports the accounts and any income to the IRS. Failing to report such information can result in criminal charges of filing a false tax return or tax evasion.

Birkenfeld, who faces up to five years in prison, is seeking leniency for his co-operation. His sentencing is set for August 21.

Olenicoff says he opened an account in the Cayman Islands and eventually moved tens of millions of dollars to the Bahamas, where he began banking with Barclays. He says he got a call out of the blue in 2000 from Birkenfeld at the Geneva office of London-based Barclays, where he worked before joining UBS.

Olenicoff says Birkenfeld set out to befriend him and asked to visit him in Newport Beach to discuss his Barclays holdings, which exceeded US$90 million at the time.

"Your money in the Bahamas is in jeopardy," Olenicoff says Birkenfeld told him. Olenicoff says Birkenfeld said he had information that Barclays would sell its Bahamas business. Barclays did sell it six years later, according to the bank.

Birkenfeld advised Olenicoff to take his funds to another bank. Three months after that, Olenicoff says, Birkenfeld called again.

"Igor, it's time to move your money," Olenicoff says Birkenfeld said. "You ought to move it to UBS here in Geneva."

Olenicoff says Birkenfeld arranged for him to meet a UBS banker in Geneva. Olenicoff says he moved US$70 million from Barclays in the Bahamas to UBS in Switzerland. Birkenfeld then left Barclays and was hired at UBS and became Olenicoff's private banker.

Olenicoff says Birkenfeld visited him in Miami and encouraged him to come to Switzerland.

In Geneva, Olenicoff says, Birkenfeld and other bankers promised UBS would provide estate planning and meet IRS reporting requirements.

Birkenfeld told investigators that he and UBS knew their cross-border bankers were not registered with the SEC as broker-dealers or investment advisers, meaning they were not legally permitted to recruit or service clients in the US. UBS bankers made 3800 US. client visits in 2004, according to its court filing.

UBS began to make promises to the IRS after buying Paine Webber Group for US$11.9 billion in 2000. The New York-based securities firm had 8000 brokers and held about US$500 billion in assets.

That year, UBS signed a so-called qualified intermediary agreement with the IRS to give tax information to the US. agency about US clients holding securities in Swiss accounts. UBS was supposed to withhold taxes at a 28 per cent rate if clients didn't declare their accounts to the IRS.

The arrangement allowed UBS to shield client names from the IRS for those who had taxes withheld.

Baker & McKenzie LLP, an outside international law firm advising UBS, warned that the bank could violate US criminal laws if it didn't adhere to its agreement with the IRS, according to a 2000 UBS memo filed by the IRS in court in Miami.

Olenicoff says no one at UBS told him about the qualified intermediary accord.

UBS helped clients circumvent US securities restrictions by referring them to outside advisers who set up sham companies in tax havens, according to the bank's February 18 admission.

UBS kept records showing the true owners of accounts as well as phony records saying they were owned by the sham firms.

Birkenfeld began working in 2001 with Mario Staggl, a Liechtenstein investment adviser at New Haven Trust, to create accounts for Olenicoff, according to documents made public by the US Senate.

Staggl contacted Olenicoff about setting up a Danish shell corporation and a Liechtenstein trust as well as transferring his yacht ownership to Gibraltar, Olenicoff says. In 2005, Birkenfeld and Staggl told Olenicoff to transfer his UBS accounts to Liechtenstein because it had better bank secrecy laws, the Senate reported.

Staggl and Birkenfeld travelled for nine days in 2004 with Olenicoff and his friends to Mayan ruins in Honduras. Olenicoff says he flew the group on his jet to Roatan Island off Honduras, where he sent ahead his yacht, which was built in Japan in 1986.

Staggl was criminally charged by a US grand jury in a sealed indictment with Birkenfeld in April 2008. On May 7, 2008, Birkenfeld had flown into the US to a school reunion when he was arrested at Logan International Airport in Boston.

A US judge later declared Staggl a fugitive.

Olenicoff says that after his guilty plea and before his sentencing in April 2008, Birkenfeld visited him.

"The guy was still a friend and he was helping me, and he was consoling me with my IRS issues," Olenicoff says. "Talk about a two-faced liar. I considered these bankers friends, but all the time they were screwing me. That's the way that group works. They talk right, they smell right, but they're not right."

UBS has now stopped recruiting clients without proper licensing in the US and is co-operating with the Justice Department.

Still, UBS is battling in a Miami courtroom to protect Swiss bank secrecy. It refuses to release the names of the 52,000 US account holders.

For UBS and its US clients, the question of whether they'll be charged hinges on whether they co-operate with the IRS.

If UBS misreads the resolve of the US authorities, it could find itself under indictment and fighting in court to defend its existence.

IGOR OLENICOFF

* The son of a father who fled the Soviet Union in 1945, he became a self-made billionaire who is largely an unknown.
* Built an empire by buying land and building industrial and office parks and apartment buildings - and using tax havens to protect his wealth.
* Since December 2007, the billionaire and his banker have pleaded guilty to tax crimes.

- BLOOMBERG