[Senate Hearing 111-30]
[From the U.S. Government Publishing Office]




                                                         S. Hrg. 111-30

 TAX HAVEN BANKS AND U.S. TAX COMPLIANCE: OBTAINING THE NAMES OF U.S. 
                      CLIENTS WITH SWISS ACCOUNTS

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                                 of the

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                             MARCH 4, 2009

                               ----------                              

       Available via http://www.gpoaccess.gov/congress/index.html

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs







                                                         S. Hrg. 111-30

 TAX HAVEN BANKS AND U.S. TAX COMPLIANCE: OBTAINING THE NAMES OF U.S. 
                      CLIENTS WITH SWISS ACCOUNTS

=======================================================================

                                HEARING

                               before the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON
               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                                 of the

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 4, 2009

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

                       Printed for the use of the
        Committee on Homeland Security and Governmental Affairs







                  U.S. GOVERNMENT PRINTING OFFICE
49-492                    WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office  Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, 
Washington, DC 20402-0001








        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware           JOHN McCAIN, Arizona
MARK PRYOR, Arkansas                 GEORGE V. VOINOVICH, Ohio
MARY L. LANDRIEU, Louisiana          JOHN ENSIGN, Nevada
CLAIRE McCASKILL, Missouri           LINDSEY GRAHAM, South Carolina
JON TESTER, Montana
ROLAND W. BURRIS, Illinois
MICHAEL F. BENNET, Colorado

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk
                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                     CARL LEVIN, Michigan, Chairman
THOMAS R. CARPER, Delaware           TOM COBURN, Oklahoma
MARK L. PRYOR, Arkansas              SUSAN M. COLLINS, Maine
CLAIRE McCASKILL, Missouri           JOHN McCAIN, Arizona
JON TESTER, Montana                  JOHN ENSIGN, Nevada
MICHAEL F. BENNET, Colorado

            Elise J. Bean, Staff Director and Chief Counsel
            Robert L. Roach, Counsel and Chief Investigator
         Christopher J. Barkley, Staff Director to the Minority
               Timothy R. Terry, Counsel to the Minority
                     Mary D. Robertson, Chief Clerk















                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Levin................................................     1
    Senator Collins..............................................     8
    Senator McCaskill............................................    20

                               WITNESSES
                        Wednesday, March 4, 2009

John A. DiCicco, Acting Assistant Attorney General, Tax Division, 
  U.S. Department of Justice.....................................    10
Hon. Douglas Shulman, Commissioner, Internal Revenue Service, 
  U.S. Department of the Treasury................................    13
Mark Branson, Chief Financial Officer, Global Wealth Management 
  and Swiss Businesses, UBS, Zurich, Switzerland.................    27

                     Alphabetical List of Witnesses

Branson, Mark:
    Testimony....................................................    27
    Prepared statement...........................................    57
DiCicco, John A.:
    Testimony....................................................    10
    Prepared statement...........................................    45
Shulman, Hon. Douglas:
    Testimony....................................................    13
    Prepared statement...........................................    51

                                EXHIBITS

  1.a. GTax Haven Bank Secrecy Tricks, chart prepared by the U.S. 
  Senate Permanent Subcommittee on Investigations................    61

    b. GQuotation from UBS Wealth Management & Business Banking 
  internal report: ``Review of US Resident Non-W9 Business, Legal 
  and Compliance,'' page 9, December 10, 2004, chart prepared by 
  the U.S. Senate Permanent Subcommittee on Investigations.......    62

    c. GQuotation from UBS Wealth Management & Business Banking 
  internal report: ``Review of US Resident Non-W9 Business, Legal 
  and Compliance,'' page 3, December 10, 2004, chart prepared by 
  the U.S. Senate Permanent Subcommittee on Investigations.......    63

    d. GQuotation from UBS document: ``US International 
  Training,'' in section subtitled: ``Lessons Learned,'' page 5, 
  September 26, 2006, chart prepared by the U.S. Senate Permanent 
  Subcommittee on Investigations.................................    64

    e. GQuotation from UBS Memorandum: ``FPWM policy for dealing 
  with US persons under the QI agreement,'' in section subtitled, 
  ``Purchase of alternative structures,'' page 2, July 4, 2000, 
  chart prepared by the U.S. Senate Permanent Subcommittee on 
  Investigations.................................................    65

    f. GQuotation from UBS email to third-party corporate 
  formation agents: ``Structures/Vehicles for U.S./Canadian 
  Clients,'' August 17, 2004, chart prepared by the U.S. Senate 
  Permanent Subcommittee on Investigations.......................    66

  2. GLetter to the Permanent Subcommittee on Investigations from 
  His Excellency Urs Ziswiler, Swiss Ambassador to the United 
  States of America, dated February 20, 2009, declining an 
  invitation to participate in the Subcommittee's hearing........    67

  3. GDEFERRED PROSECUTION AGREEMENT, UNITED STATES OF AMERICA v. 
  UBS AG, United States District Court, Southern District of 
  Florida, dated February 18, 2009 (including deferred 
  indictment)....................................................    69

  4. GCOMPLAINT, SECURITIES AND EXCHANGE COMMISSION v. UBS AG, 
  United States District Court for the District of Columbia, 
  dated February 18, 2009........................................   112

  5. GDECLARATION OF DANIEL REEVES excerpted from EX PARTE 
  PETITION FOR LEAVE TO SERVE ``JOHN DOE'' SUMMONS, United States 
  District Court, Southern District of Florida, dated June 30, 
  2008...........................................................   123

  6. GDECLARATION OF BARRY B. SHOTT, excerpted from EX PARTE 
  PETITION FOR LEAVE TO SERVE ``JOHN DOE'' SUMMONS, United States 
  District Court, Southern District of Florida, dated June 30, 
  2008...........................................................   140

  7. GPETITION TO ENFORCE JOHN DOE SUMMONS, UNITED STATES OF 
  AMERICA v. UBS AG, United States District Court, Southern 
  District of Florida, dated February 19, 2009...................   145

  8. GDECLARATION OF DANIEL REEVES, excerpted from PETITION TO 
  ENFORCE JOHN DOE SUMMONS, UNITED STATES OF AMERICA v. UBS AG, 
  United States District Court, Southern District of Florida, 
  dated February 19, 2009. [Exhibits to Declaration not attached. 
  See post-hearing Exhibit No. 18, below.].......................   151

  9. GDECLARATION OF BARRY B. SHOTT, excerpted from PETITION TO 
  ENFORCE JOHN DOE SUMMONS, UNITED STATES OF AMERICA v. UBS AG, 
  United States District Court, Southern District of Florida, 
  dated February 19, 2009. [Exhibits to Declaration not attached. 
  See post-hearing Exhibit No. 19, below.].......................   175

 10. GBACKGROUND INFORMATION FOR THE COURT'S CONSIDERATION PRIOR 
  TO THE SCHEDULED STATUS CONFERENCE, filed by UBS, and RESPONSE 
  TO BACKGROUND FILING BY RESPONDENT, filed by the United States, 
  UNITED STATES OF AMERICA v. UBS AG, United States District 
  Court, Southern District of Florida, dated February 20, 2009...   182

 11. GEBK investigation of the cross-border business of UBS AG 
  with its private clients in the USA, Summary Report, prepared 
  by the Swiss Financial Market Supervisory Authority (FINMA), 
  February 18, 2009..............................................   198

 12. GReview of US Resident Non-W9 Business, Legal and 
  Compliance, report prepared by UBS AG Wealth Management & 
  Business Banking, Risk and Compliance, December 10, 2004.......   215

 13. GUBS document entitled, US International Training, September 
  26, 2006 (protect the banking secrecy).........................   227

 14. GUBS CONTACT REPORT, November 29, 2004 (orange, green, blue, 
  C, 1 nut, a swan)..............................................   234

 15. GUBS AG Memorandum, dated July 4, 2000, regarding IRS 2001, 
  FPWM policy for dealing with US persons under the QI agreement.   235

 16. GUBS email to third-party corporate formation agents titled 
  Structures/vehicles for U.S./Canadian Clients, dated August 17, 
  2004...........................................................   237

 17. GEX PARTE PETITION FOR LEAVE TO SERVICE ``JOHN DOE'' 
  SUMMONS, United States District Court, Southern District of 
  Florida, dated June 30, 2008...................................   238

 18. GDECLARATION OF DANIEL REEVES, UNITED STATES OF AMERICA v. 
  UBS AG, United States District Court, Southern District of 
  Florida, dated February 19, 2009...............................   328

 19. GDECLARATION OF BARRY B. SHOTT, UNITED STATES OF AMERICA v. 
  UBS AG, United States District Court, Southern District of 
  Florida, dated February 19, 2009...............................   633

 20. GINDICTMENT, UNITED STATES OF AMERICA v. Raoul Weil, United 
  States District Court, Southern District of Florida, November 
  6, 2008........................................................   644

 21. GTAX CONVENTION WITH SWISS CONFEDERATION and Mutual 
  Agreement of January 23, 2003, Regarding the Administration of 
  Article 26 (Exchange of Information) of the Swiss-U.S. Income 
  Tax Convention of October 2, 1996, with Appendix of 
  Hypotheticals..................................................   657

 22. GMutual Assistance in Criminal Matters, agreement between 
  Switzerland and the United States of America...................   712

 23. GCorrespondence from O'Melveny & Myers LLP on behalf of 
  their client UBS AG to the Permanent Subcommittee on 
  Investigations, dated March 3, 2009, regarding number and types 
  of accounts that UBS maintained for U.S. clients as part of the 
  U.S. cross-border business.....................................   872

 24. GEnglish translation and original of Swiss Federal 
  Administrative Court press release, Appellate Proceeding in the 
  Matter of Administrative Assistance of the Confederate Tax 
  Administration to the United States of America for Tax Fraud 
  and Related Matters, March 6, 2009.............................   876

 25. GEnglish translation and original of Swiss Federal 
  Administrative Court Interlocutory Order, Supervision of banks 
  and stock exchanges, possibly international administrative 
  assistance, February 20, 2009..................................   881

 26. GDocuments associated with April 2, 2009, G-20 summit 
  proceedings regarding tax havens:

     a. GG-20 final communique, London Summit--Leaders' Statement   890

     b. GFinancial annex to G-20 communique, Declaration On 
  Strengthening the Financial System.............................   899

     c. GOECD list of tax havens, A Progress Report on the 
  Jurisdictions Surveyed by the OECD Global Forum in Implementing 
  the Internationally Agreed Tax Standard........................   905

 27. GSwiss Government press release, Switzerland to adopt OECD 
  standard on administrative assistance in fiscal matters, March 
  13, 2009.......................................................   908

 28. GLiechtenstein commits to the OECD standard in tax matters 
  and seeks to conclude bilateral tax agreements with individual 
  States, Liechtenstein press release and accompanying The 
  Liechtenstein Declaration, statement of H.S.H. Heriditary 
  Prince Alois of Liechtenstein, Liechtenstein Prime Minister 
  Otmar Hasler, and Liechtenstein Prime Minister elect Dr. Klaus 
  Tschutscher, March 12, 2009....................................   909

 29. GResponse provided for the record by IRS Commissioner 
  Douglas H. Shulman to a question posed at the hearing by 
  Senator Claire McCaskill regarding the whistleblower award 
  program........................................................   919

 30. GResponses to supplemental questions for the record 
  submitted to The Honorable Douglas H. Shulman, Commissioner, 
  Internal Revenue Service, U.S. Department of the Treasury......   920

 31. GResponses to supplemental questions for the record 
  submitted to John A. DiCiccio, Acting Assistant Attorney 
  General, Tax Division, U.S. Department of Justice..............   936

 32. GResponses to supplemental questions for the record 
  submitted to Mark Branson, Chief Financial Officer, Global 
  Wealth Management & Swiss Bank, UBS............................   939

 
                      TAX HAVEN BANKS AND U.S. TAX
                   COMPLIANCE: OBTAINING THE NAMES OF
                    U.S. CLIENTS WITH SWISS ACCOUNTS

                              ----------                              


                        WEDNESDAY, MARCH 4, 2009

                                   U.S. Senate,    
              Permanent Subcommittee on Investigations,    
                    of the Committee on Homeland Security  
                                  and Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:34 p.m., in 
Room SH-216, Hart Senate Office Building, Hon. Carl Levin, 
Chairman of the Subcommittee, presiding.
    Present: Senators Levin, McCaskill, and Coburn.
    Staff Present: Elise J. Bean, Staff Director and Chief 
Counsel; Mary D. Robertson, Chief Clerk; Robert L. Roach, 
Counsel and Chief Investigator; Ross Kirschner, Counsel; 
Christopher J. Barkley, Staff Director to the Minority; Timothy 
R. Terry, Counsel to the Minority; and Clifford C. Stoddard, 
Jr., Counsel to the Minority; Adam Parks, Detailee (ICE); 
Rachel Siegel, Detailee (GAO); Marcelle John, Congressional 
Fellow; Kevin Wack, Congressional Fellow; Daniel Goshorn, Law 
Clerk; Ryan McElveen, Intern; Melissa Mann and Clark Porter 
(Senator McCaskill).

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Good afternoon, everybody.
    Each year, the United States loses an estimated $100 
billion from U.S. taxpayers using offshore tax schemes to dodge 
their U.S. tax obligations. Those offshore shenanigans cheat 
honest U.S. taxpayers who pay their fair share and rob the U.S. 
Treasury of funds needed for the operations of our government.
    This Subcommittee has dedicated significant effort to 
combating offshore tax abuse. We have exposed some of the 
facilitators--the lawyers, accountants, broker-dealers, company 
formation agents, trust administrators, and others--that help 
clients dodge their U.S. tax obligations. We have exposed some 
of the schemes, such as mass marketed tax shelters peddled as 
investment strategies, networks of offshore trusts and 
corporations with hidden assets, phony offshore stock 
portfolios used to offset real income, and deceptive offshore 
transactions used to recast taxable income as allegedly tax-
free payments.
    Last July, we held hearings which focused on financial 
institutions which are located in offshore secrecy tax havens 
and use an array of abusive practices to help U.S. clients hide 
assets and income from Uncle Sam. The hearings and a staff 
report presented case histories showing how two tax haven banks 
used a long list of secrecy tricks to make it nearly impossible 
for U.S. tax authorities to trace funds sent offshore. Those 
tricks, as indicated on this chart,\1\ included using code 
names for clients to disguise their identities; directing 
personnel to use pay phones instead of business phones to make 
it harder to trace calls back to the bank; providing bankers 
with encrypted computers when traveling to keep client 
information out of the reach of tax authorities; funneling 
money through offshore corporations to conceal incriminating 
wire transfers and make audits difficult; opening accounts in 
the names of offshore shell companies to hide the real owners; 
and providing bankers with counter-surveillance training to 
detect and deflect inquiries from government officials.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 1.a., which appears in the Appendix on page 61.
---------------------------------------------------------------------------
    This kind of conduct, which actively facilitates tax 
evasion, amounts to a declaration of war by offshore secrecy 
jurisdictions against honest, hardworking taxpayers. We are 
determined to fight back and end the abuses inflicted on us by 
those tax havens.
    Our focus today is threefold. First, we want to understand 
the steps being taken by the U.S. Government to stop UBS, one 
of the banks we examined last July, from aiding and abetting 
tax evasion by U.S. persons. Specifically, we will examine the 
nature of our effort to obtain the names of U.S. clients whom 
the bank aided and abetted in the violation of U.S. tax law. 
Second, we want to show how our tax treaties are inadequate in 
the battle against tax cheats. Third, we want to get people to 
focus on how hard it is going to be to put an end to the 
offshore secrecy racket, and offer some ideas on what should be 
done to stop the abuses.
    First, let's examine the UBS case. UBS is headquartered in 
Switzerland and is one of the largest banks in the world. 
During our July hearing, UBS admitted publicly for the first 
time that an estimated 19,000 U.S. clients had opened UBS 
accounts in Switzerland with nearly $18 billion in assets that 
were not disclosed to the U.S. Internal Revenue Service (IRS).
    Since then, new evidence suggests that there may be far 
more than 19,000 U.S. clients with hidden accounts at that 
Swiss bank. A 2004 UBS internal report, which was introduced in 
court by the United States and we have marked as Exhibit 12,\2\ 
analyzes the U.S. client accounts opened in Switzerland. It 
states:
---------------------------------------------------------------------------
    \2\ See Exhibits No. 1.c. and 12, which appear in the Appendix on 
pages 63 and 215.
---------------------------------------------------------------------------
    ``The number of account relationships in WM&BB in 
Switzerland with U.S. residents where the account holder has 
not provided a W-9 is approximately 52,000 (representing CHF 17 
billion''--which means 17 billion Swiss francs--``in assets).''
    ``WM&BB'' stands for the Wealth Management and Business 
Banking group at UBS in Switzerland. A ``W-9'' is the form that 
is supposed to be filed with the bank by an account holder who 
is a U.S. person. The reference to ``account relationships'' 
leaves it unclear whether UBS had 19,000 U.S. clients, as UBS 
estimated in July, many of whom may have had multiple accounts; 
or whether it had 52,000 U.S. clients; or some number in 
between. We hope to clear up that issue today.
    UBS also admitted during our July hearing that, for years, 
its Swiss bankers had made a practice of traveling to the 
United States to search out new clients and service existing 
clients, even though its Swiss bankers were not licensed to 
provide banking or securities services while in the United 
States.
    In our July hearing, we presented an analysis of U.S. 
customs records showing that, from 2001 to 2008, about 20 UBS 
bankers made more than 300 trips to the United States. It now 
looks like the Subcommittee's analysis was far too 
conservative. Listen to this UBS report of 2004:
    ``In the last year, we are advised that 32 different Client 
Advisers from BS NAM''--and that is a group within UBS which 
targets business in North America, and now to continue with the 
UBS report--``that 32 different Client Advisers have traveled 
to the United States on business. On average each Client 
Adviser visited the United States for 30 days per year, seeing 
4 clients per day. This means that approximately 3,800 clients 
are visited in the US per year by Client Advisers based in 
Switzerland.''
    That is the UBS report which is part of that chart.\1\
---------------------------------------------------------------------------
    \1\ See Exhibits No. 1.b. and 12, which appear in the Appendix on 
pages 62 and 215.
---------------------------------------------------------------------------
    That UBS Swiss bankers made 3,800 client visits in a single 
year in the United States is a stunning fact.
    Another striking document involves UBS efforts to train UBS 
bankers who traveled to the United States. In the last hearing, 
we released an internal UBS training document used to instruct 
its bankers on how to detect and avoid surveillance by U.S. 
authorities. The new document filed in the court case, which we 
have marked as Exhibit 13,\2\ is a 2006 internal UBS document 
entitled ``U.S. International Training.'' And in a section 
called ``Lessons Learned,'' it states:
---------------------------------------------------------------------------
    \2\ See Exhibits No. 1.d. and 13, which appear in the Appendix on 
pages 64 and 227.
---------------------------------------------------------------------------
    ``In case of an interrogation by any authority:
      --protect the banking secrecy
      --no client respective communication/wait for assistance 
of a UBS lawyer.''
    Well, ``protect the banking secrecy'' says it all.
    These and other documents demonstrate the actions that UBS 
and its personnel took to help U.S. clients hide assets and 
income from Uncle Sam and preserve the secrecy needed to thwart 
U.S. tax enforcement.
    UBS has acknowledged its past conduct, promised to close 
the offending accounts, and announced that it would no longer 
open Swiss accounts for U.S. clients without notifying the IRS. 
Those announcements by UBS, made at our July hearing, were 
unexpected, they were welcome, and they sent a shock wave 
through the offshore bank secrecy world because they 
represented the first time that a major bank in a tax haven 
jurisdiction stated publicly it would no longer help U.S. 
clients escape their tax obligations.
    At the time UBS made these announcements, UBS was under 
pressure from the Justice Department. In April 2008, the 
Justice Department had indicted a former UBS private banker, 
Bradley Birkenfeld, for conspiracy to defraud the United States 
out of millions in taxes--specifically, $7.2 million in taxes 
owed by a U.S. citizen on $200 million in assets hidden with 
UBS' help in Switzerland and elsewhere. In June 2008, Mr. 
Birkenfeld pled guilty, and it was clear from the pleadings 
that he was cooperating with U.S. prosecutors. That guilty plea 
also shook up the offshore secrecy world, since it represented 
the first time the United States had convicted a Swiss banker 
for helping a U.S. client cheat on his taxes.
    Later in June, the United States opened up a second front 
in the UBS matter by initiating what is known as a John Doe 
summons proceeding in Federal court. In that civil proceeding, 
the United States asked a U.S. court for permission to serve a 
summons on UBS seeking the names and account information for 
all U.S. clients who had opened UBS accounts in Switzerland 
from 2002 to 2007, without notifying the IRS as required by our 
law so that the IRS could evaluate their tax liability. The 
summons is called a John Doe summons because it seeks 
information about persons for whom the United States does not 
have names. On July 1, 2008, the court issued an order allowing 
the IRS to serve the summons on UBS.
    Two weeks ago, the Department of Justice confronted UBS 
itself by instituting criminal action charging the bank with 
defrauding the IRS. UBS decided not to dispute the facts, but 
to acknowledge that it had violated U.S. law and had defrauded 
the United States of America. It entered into a Deferred 
Prosecution Agreement with the United States which provides 
that if UBS takes certain steps, the prosecution will be 
dismissed.
    What steps did the agreement require UBS to take? First, 
UBS agreed to close all of the Swiss accounts it had opened for 
U.S. clients without notifying the IRS and to put an end to 
that line of business. Second, UBS agreed to pay a fine of $780 
million. That fine requires UBS to disgorge the profits 
obtained from opening Swiss accounts for U.S. clients from 2001 
to 2008--that is, some $380 million. The remaining $400 million 
represents some of the back taxes, with interest, that UBS 
should have withheld from those accounts and paid to the IRS 
but did not.
    Next, UBS agreed to immediately turn over the names of a 
tiny subset of its U.S. clients. The President of Switzerland 
has said publicly that UBS provided the United States with the 
names of 250 to 300 such clients.
    Finally, the Deferred Prosecution Agreement addressed the 
John Doe summons proceeding. While the agreement explicitly 
acknowledged that UBS would contest in court U.S. efforts to 
obtain the names of all U.S. clients with Swiss accounts that 
were not disclosed to the IRS, the agreement also specified 
that if UBS loses that case on appeal, it either must turn over 
all of the requested client names to the IRS or face the 
possibility that the United States would resume the prosecution 
and use UBS' factual admissions in a criminal proceeding 
against the bank. A trial is now scheduled for July to 
determine whether UBS has to turn over the names.
    The basic focus in that trial will be Swiss secrecy laws. 
Today, Switzerland is one of the most vocal supporters of bank 
secrecy in the world. The Swiss hold out bank secrecy as a 
national value, in the same way Americans prize freedom and 
democracy. The Swiss claim that bank secrecy is essential to 
protecting individual privacy and is more important than any 
law in the United States requiring the payment of taxes. The 
Swiss explain that tax evasion is not a crime in their country; 
it is only a civil matter that can be remedied by the payment 
of back taxes and a fine. They say that only one narrow type of 
tax misconduct, which they call tax fraud and which requires 
deceptive conduct such as the filing of a false document, can 
justify disclosing client information from a Swiss bank.
    Switzerland and the United States disagree on whether tax 
evasion should be a crime. That has been true for decades. But 
here, Swiss bankers aided and abetted violations of U.S. tax 
law by traveling to this country, with client code names, 
encrypted computers, counter-surveillance training, and all the 
rest of it, to enable U.S. residents to hide assets and money 
in Swiss accounts. The bankers then returned to Switzerland and 
treated their conduct as blameless since Swiss law says tax 
evasion is no crime. The Swiss bank before us deliberately 
entered the United States, actively sought U.S. clients, and 
secretly helped those U.S. clients defraud the United States of 
America. Bank secrecy under those conditions is not a value to 
be protected; it is part and parcel of a conspiracy to commit a 
crime under U.S. law.
    UBS has specifically acknowledged wrongdoing and admitted 
in court that it ``participated in a scheme to defraud the 
United States and its agency, the IRS.''
    I want to read that again, because I think those words are 
so compelling. UBS has specifically acknowledged wrongdoing and 
admitted in court that it ``participated in a scheme to defraud 
the United States and its agency, the IRS.'' But the Swiss 
Government, instead of condemning UBS' misconduct, is trying to 
thwart our efforts to get the names of all of the bank's U.S. 
clients with hidden Swiss accounts. Switzerland characterizes 
our effort as a ``unilateral measure'' that is contrary to 
Swiss law. According to the press, the President of Switzerland 
insists that, in his country, ``Bank secrecy remains intact.''
    I am not surprised the Swiss Government is opposing UBS' 
compliance with the John Doe summons and has directed the bank 
not to provide all the names, or that it refused to show up at 
this hearing. They make a living off secrecy. Bank secrecy is a 
cash cow in Switzerland.
    The Swiss Government argues that, instead of the John Doe 
summons, the United States ought to be using the procedures set 
up under the U.S.-Swiss tax treaty. But that tax treaty, like 
other tax treaties and tax information exchange agreements that 
the United States has in place around the world, is not 
designed to handle inquiries for information on taxpayers whose 
names are unknown. As the IRS explained in a court pleading, 
the Swiss have consistently applied the tax treaty ``to provide 
the [IRS] assistance only in response to specific requests that 
name a particular taxpayer.''
    When we don't have specific taxpayer names, our tax 
treaties have proven to be of little use. In the UBS case, for 
example, 7 months ago at the urging of the Swiss, the United 
States made a request under the treaty to get information about 
unnamed U.S. clients with UBS accounts in Switzerland. Out of 
the 52,000 UBS account relationships and estimated 19,000 U.S. 
clients, guess how many U.S. clients the Swiss have determined 
can be provided to us under the tax treaty?
    Twelve out of either 19,000 or 52,000, or the number that 
we will make clear today. Twelve U.S. clients out of a universe 
of tens of thousands.
    To make matters worse, the Swiss Government notified the 12 
that they could appeal the determination, and lengthy appeals 
are now underway in Swiss courts. The IRS stated in a court 
pleading that, 7 months after making its request, ``the Swiss 
Government has not provided any records sought under the Treaty 
Request, and it is not clear when, if ever, it will.''
    So here is the bottom line about the failure of our tax 
treaty with Switzerland to get us needed information in order 
to go after U.S. tax cheats. UBS has accepted ``responsibility 
for the violation of [U.S.] law.'' UBS has admitted that it 
referred U.S. clients who wanted to hide their assets to 
outside firms ``with the understanding that these outside 
advisers would help such U.S. clients form offshore companies 
in order to enable such clients to evade'' U.S. law. UBS also 
admitted that its bankers and managers took a range of other 
actions which ``actively assist[ed] or otherwise 
facilitate[d]'' U.S. taxpayers who were evading U.S. taxes, 
such as having their bankers travel to the United States to 
service those clients in ways that would conceal their account 
transactions. And, again, UBS specifically agreed in the court 
case that, acting through certain of its bankers and managers, 
it ``participated in a scheme to defraud the United States and 
its agency, the IRS.''
    Despite those admitted facts, UBS refuses to turn over the 
vast majority of the names of the U.S. persons with whom they 
schemed to defraud the United States. UBS and Switzerland 
justify that refusal by invoking Swiss secrecy laws. They say 
the United States should use the tax treaty process instead, 
but that is not going to help because the Swiss have 
interpreted the treaty to deny information requests about 
potential tax cheats whose names are unknown. And why are those 
names unknown? Because of Swiss secrecy laws.
    Too many countries are using our treaties as a shield to 
deny us tax information instead of using those treaties as a 
sword to expose tax cheats as was intended. The result is a 
cynical charade in which tax havens like Switzerland try to 
have it both ways--claiming to be a cooperative partner in the 
international fight against tax abuse, while providing a safe 
haven and promising ironclad secrecy laws for tax evaders.
    We cannot rely on our tax treaties with secrecy tax havens 
to protect us from offshore tax abuse. We have to rely on our 
own laws instead, and we need to strengthen those laws if we 
want to put an end to offshore tax haven abuses against Uncle 
Sam and against honest, taxpaying Americans.
    As a first step, Congress should enact the Stop Tax Haven 
Abuse Act, S. 506, which I and a number of my colleagues 
introduced earlier this week and which the Obama Administration 
endorsed yesterday through Treasury Secretary Geithner.
    This bill offers powerful new tools to detect and stop 
offshore tax offenders, including by ending the Ugland House 
scam that allows phony offshore shell corporations operated 
from the United States to dodge U.S. taxes, permitting the 
establishment of legal presumptions that can be used to combat 
offshore secrecy, authorizing special measures--these are all 
the things our bill would do--authorizing special measures 
against financial institutions or countries that impede U.S. 
tax enforcement, requiring third-party disclosures of offshore 
transactions, extending the deadline for assessing taxes in 
offshore cases from 3 to 6 years, and closing a raft of 
offshore tax loopholes.
    Now, there are also actions that the Obama Administration 
can take to clamp down on offshore tax abuses, without waiting 
for legislation. The Administration could, for example, 
establish a special enforcement unit to handle the hundreds if 
not thousands of prosecutions likely to result from the UBS 
case alone and to initiate proceedings against other tax haven 
banks. That enforcement unit would send the message that the 
UBS tax scofflaws are not going to get off scot free, and no 
tax haven bank account is free from risk.
    The Administration could also become an active participant 
in ongoing international efforts to penalize offshore 
jurisdictions that facilitate tax evasion. Efforts by the G20 
group of nations to coordinate action against offshore tax 
havens are gaining steam in anticipation of the G20 meeting in 
April, but the United States has so far been largely silent. It 
is time for the United States to become a leader, not a 
follower, in international efforts to develop a list of 
uncooperative tax havens and to develop a toolbox of penalties 
to be imposed on those who impede tax enforcement.
    Another step the Administration could take is to continue 
the efforts of the Bush Administration to strengthen the 
Qualified Intermediary Program that determines what information 
foreign banks give to the IRS. Right now, these QI Agreements 
between the IRS and foreign banks require the foreign banks to 
report to the IRS only those foreign accounts containing U.S. 
securities. At a minimum, QI Agreements should require foreign 
banks to report all foreign accounts with U.S. account holders, 
whether those accounts contain securities, cash, or other 
assets. In addition, QI Agreements should make it clear that 
foreign banks have to disclose to the IRS accounts held by a 
foreign entity, such as an offshore corporation, that is 
beneficially owned by a U.S. person.
    A longer-range project is for the United States to 
strengthen its tax treaties and tax information exchange 
agreements. New provisions are needed to ensure that 
information can be obtained for unnamed U.S. taxpayers 
associated with entities suspected of tax misconduct, and to 
eliminate the tax fraud distinction which has become a barrier 
to effective tax information exchange.
    Finally, the Administration should consider finalizing a 
regulation proposed by the Clinton Administration years ago. 
That regulation would allow the United States to engage in 
automatic information exchanges of account information with 
countries on a reciprocal basis for tax enforcement purposes. 
Right now, the only automatic tax information exchanges we 
engage in are with Canada. A lot more countries may be willing 
to participate. The resulting account data could produce new 
information identifying U.S. tax dodgers.
    Offshore tax abuses are burning a $100 billion hole in the 
U.S. budget. While the Justice Department and the IRS are to be 
commended for their creative and tenacious efforts in the UBS 
case, nobody should think for a moment that the offshore tax 
battle is over, even if the IRS wins that lawsuit. Despite UBS 
being caught red-handed and admitting wrongdoing, the Swiss 
Government is fighting the John Doe summons and defending Swiss 
secrecy. The president of the Swiss Bankers Association told 
the press, ``The large majority of foreign investors with money 
placed in Switzerland evade taxes''--his words--but he showed 
no regret that the Swiss financial institutions are 
facilitating that tax evasion--quite the contrary since tax 
evasion is not a violation of law in Switzerland. And 
Switzerland is just one of 50 tax havens battling to keep 
offshore secrecy laws in place.
    The rest of the world is getting fed up with offshore tax 
havens that turn a blind eye to tax evasion and allow their 
financial institutions, lawyers, accountants, and others to 
profit from tax dodging. Countries victimized by offshore tax 
abuses are losing billions of dollars per year. We cannot 
afford to ignore those offshore tax losses any longer. And it 
is way past due that we act to end the offshore tax-dodging 
drain on our treasury.
    Let me now turn to my Ranking Member, Senator Coburn, for 
his opening statement. This is the first Subcommittee hearing 
in which he is participating in that new role. I welcome him. I 
look forward to working with him in the Subcommittee's ongoing 
efforts to combat offshore tax abuse and in so many other joint 
endeavors.
    Senator Coburn.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Thank you, Mr. Chairman, and let me tell 
you how much I appreciate what you and your staff and the staff 
on PSI Subcommittee have done. We have before us significant 
problems. There is no question there has been fraud. There is 
no question there have been violations of U.S. law. But there 
is also no question that the origin of these problems is a very 
complex Tax Code in the United States, and it is up to us to 
simplify it, make it fair, make it more straightforward.
    I will have a very limited statement and then put something 
into the record.
    It is just simply a matter of fairness that if you owe 
taxes in the country, you ought to pay them, because if you do 
not, you are stealing money from somebody less fortunate. You 
are not just protecting your assets; you are actually taking 
assets from somebody who is much less fortunate than you are.
    Today's hearing presents us with an opportunity today to 
get a little further along in terms of the facts of this case. 
I am reviewing Senator Levin's bill. I do have one central 
concern: That we not drive capital out of this country. But one 
of the things we want to do is have a Tax Code that rewards 
capital investment and capital formation in this country, and I 
will be working with Senator Levin in that regard.
    I look forward to hearing our witnesses and questioning 
them, and I would yield back.
              PREPARED OPENING STATEMENT OF SENATOR COBURN
    Mr. Chairman, I want to thank you for continuing this important 
inquiry into how certain foreign banks and their American clients have 
flouted U.S. tax laws. I truly appreciate what you and the Subcommittee 
staff have accomplished.
    We have before us significant problems. There is no question there 
has been fraud. There is no question there have been violations of U.S. 
law. But, let us be clear: there is also no question that the root of 
many of these problems is our country's very complex Tax Code. We need 
to simplify it, make it fair, make it straightforward.
    Of course, I don't mean to minimize the effrontery of the 
individuals involved in these schemes. Though I am no fan of the U.S. 
tax code, fraud of any kind deeply offends me. As a fundamental matter 
of fairness, if you owe taxes to your government, you ought to pay 
them. When you fail to do so, you are literally robbing your honest 
neighbors. You are not merely ``protecting your assets;'' you are 
actually stealing the assets of the less fortunate. It is a shameful 
crime. But today I would like to make a larger point . . .
    This country has the world's largest economy as well as the world's 
largest equity market. We are leaders in commodity and debt markets, as 
well. But our lead has definitely been shrinking as countries with more 
favorable tax rates and more sensible regulatory regimes attract 
capital that used to flow to our shores. The Cato Institute's Chris 
Edwards and Dan Mitchell recently described the myriad ways that U.S. 
tax policy puts this county's economy at a competitive disadvantage. 
For example, the U.S. boasts the following dubious distinctions:

          The 2nd-highest corporate tax rate in the world at 40 
percent, which includes the 35 percent Federal rate plus the average 
state rate. By contrast, the average corporate rate in Asia is 29 
percent, in Latin America 27 percent, and in Europe 24 percent.
          Complex and uncompetitive business taxation. The 
World Bank ranks the U.S. 76th on having a low burden of business taxes 
and tax compliance costs.
          The 8th-highest dividend tax rate in the OECD.
          The 3rd-highest estate or inheritance tax rate in the 
OECD.
          One of the highest tax rates in the world on 
corporate capital gains.
          Tax rates on individual income, capital gains, 
dividends, and estates that are scheduled to rise in 2011 when current 
tax cuts expire.
          State-level corporate tax rates that have not been 
cut in decades.

    With such albatrosses around our neck, it is no wonder that 
America's share of global equities market capitalization has plummeted 
from one-half in 1997 to just one-third in 2007; that our share of 
world gross domestic product has also declined; that our leading role 
in initial public offerings has vanished; and that we are well below 
our potential when it comes to transactions in interest-rate products 
and foreign-exchange trading.
    The world is, as they say, ``flat,'' and global competition for 
capital has become more fierce than ever before. The United States, 
with its draconian tax code, is losing this competition to countries 
like Singapore, Luxembourg, Hong Kong, and especially the U.K. Nations 
such as these are making smarter tax and regulatory policies, and these 
decisions are paying great dividends in the form of increased jobs and 
investment. These countries understand that financial activity--
especially those relating to derivatives and money management--crosses 
international borders with the greatest of ease, and they have rolled 
out the welcome mat.
    Consider how the U.K., with just a 5 percent share of world gross 
domestic product, boasts a 40 percent share of daily foreign exchange 
trading and interest rate derivatives trading and is a leader in metals 
and oil trading. Even more impressive has been the Irish experience: 
Ireland reduced its capital gains tax rate from 40 percent to 20 
percent in 1980 and later slashed its corporate tax rate to 12.5 
percent--decisions that gave birth to the Celtic Tiger. Such smart tax 
policies transformed Ireland into an industrial and financial hub, and 
Irish incomes rose from 30 percent below the European average in the 
1980s to 40 percent above the average in 2004.
    Clearly, we need a tax code that rewards capital investment and 
capital formation in this country, but we do not yet have one. Instead, 
we have a tax code that stands athwart the salutary, twin trends of 
global capitalization and increasing international tax competition. We 
need a flatter, simpler, fairer tax code and not the sky-high rates and 
convoluted provisions that are making the U.S. a less hospitable 
investment environment.
    I look forward to working with our witnesses and with Chairman 
Levin to create a more sensible tax and regulatory regime.
    Senator Levin. Thank you so much, Senator Coburn.
    And now let me welcome our first panel of witnesses for 
this afternoon's hearing: John DiCicco, Acting Assistant 
Attorney General for the Tax Division of the Department of 
Justice; and we are delighted that we have with us Doug 
Shulman, the Commissioner of the Internal Revenue Service. We 
know how busy your schedule is, Commissioner Shulman, we are 
delighted you were able to get here today.
    Mr. DiCicco, I believe this is your first appearance before 
the Subcommittee. We welcome you. Commissioner Shulman, again, 
thank you for being here. You have testified before the 
Subcommittee in the past, so we welcome you back. And as you 
know, pursuant to Rule 6, all witnesses who testify before this 
Subcommittee are required to be sworn, and I would ask you now 
both to stand and raise your right hand.
    Do you swear that the testimony you are about to give 
before this Subcommittee will be the truth, the whole truth, 
and nothing but the truth, so help you, God?
    Mr. DiCicco. I do.
    Mr. Shulman. I do.
    Senator Levin. We will use a timing system today--a minute 
before the red light comes on, you will see the lights change 
from green to yellow, which will give you an opportunity to 
conclude your remarks. Your written testimony will be printed 
in the record in its entirety, and we would appreciate your 
using up to 10 minutes for your oral testimony.
    Apparently, the order of our witnesses has been decided 
upon in advance with your mutual understanding, so, Mr. 
DiCicco, we will have you go first, followed by Commissioner 
Shulman.

  TESTIMONY OF JOHN A. DiCICCO,\1\ ACTING ASSISTANT ATTORNEY 
       GENERAL, TAX DIVISION, U.S. DEPARTMENT OF JUSTICE

    Mr. DiCicco. Chairman Levin, Acting Ranking Member Coburn, 
and Members of the Subcommittee, thank you for the opportunity 
to appear before you this afternoon to discuss the Department 
of Justice's efforts to combat the use of banks and offshore 
entities by U.S. taxpayers to evade income taxes.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. DiCicco appears in the Appendix 
on page 45.
---------------------------------------------------------------------------
    The Department greatly appreciates the extraordinary 
commitment that the Chairman, Members of the Subcommittee, and 
staff have made to investigate the often arcane world of 
offshore tax evasion and avoidance. Your tireless work over the 
last several years has brought attention to serious misconduct 
that threatens to undermine the fundamental integrity of our 
tax system. Although we stand ready to enforce the tax laws 
whenever and wherever necessary, enforcement is only one 
element of successful tax administration. Thanks to your 
efforts, taxpayers have a greater understanding of their 
obligations and the consequences of noncompliance. You have 
also put tax professionals and financial advisers on notice 
that their efforts to design, market, and facilitate tax 
evasion schemes will not be tolerated.
    In conducting law enforcement investigations, the 
Department goes to great lengths to ensure that the 
government's inquiry is complete and that testimony and 
evidence are gathered and fully analyzed outside of the public 
arena. Our policy of not disclosing non-public information 
about ongoing matters protects the rights of individuals who 
may be assisting in the investigation, protects the rights of 
criminal defendants, as well as the integrity of the 
investigation itself. Our ability to comment is also 
circumscribed by Federal Rule of Criminal Procedure 6(e), which 
protects the disclosure of grand jury information. In a tax 
case, the tax privacy statute, Section 6103 of the Internal 
Revenue Code, further limits the government's disclosure of tax 
information. Although certain aspects of the UBS matter are 
public, both the civil and the criminal matters are ongoing, 
and certain documents relating to the criminal matter remain 
under court seal. Therefore, my remarks today will be strictly 
limited to positions the Department has taken on the public 
record.
    As the Chairman has mentioned, on February 28, 2009, the 
district court in Florida accepted a Deferred Prosecution 
Agreement between the government and UBS. Under the terms of 
that agreement, UBS waived indictment and consented to the 
filing of a one-count criminal information charging UBS in a 
conspiracy to defraud the United States and the Internal 
Revenue Service, in violation of U.S. criminal law. As part of 
the Deferred Prosecution Agreement, UBS also agreed to pay $780 
million in fines, penalties, interest, and restitution. If UBS 
carries out its obligations under the Deferred Prosecution 
Agreement, the government will recommend dismissal of the 
charge. The Deferred Prosecution Agreement is a product of UBS' 
willingness to cooperate thus far with our investigation. The 
Government of Switzerland has also endeavored to provide 
significant assistance and cooperation. We appreciate the Swiss 
Government's efforts and those of its finance and banking 
regulator who assisted in expediting the production of the 
records that we have secured and that we are in the process of 
securing.
    Fundamental to the agreement is UBS' acceptance of 
responsibility for violating U.S. law. As set forth in detail 
in the Deferred Prosecution Agreement, UBS acknowledged that, 
beginning in 2002 and continuing through 2007, UBS private 
bankers and managers actively facilitated the creation of 
accounts in the names of offshore companies, allowing U.S. 
taxpayers to conceal their ownership or beneficial interest in 
those accounts in an effort to evade U.S. tax reporting and 
payment requirements and in violation of a qualified 
intermediary agreement UBS had entered into with the Internal 
Revenue Service. UBS also admitted that certain UBS executives 
and managers were aware of the misconduct, and UBS agreed that 
it failed to implement effective controls to detect and prevent 
the unlawful activity, that it failed to initiate an effective 
investigation into credible allegations of such unlawful 
activity, and that it failed to take effective action to stop 
such activities.
    UBS bankers routinely traveled to the United States to 
market Swiss bank secrecy to U.S. clients interested in 
attempting to evade U.S. income taxes. An internal UBS 
memorandum filed with the court demonstrates that, in 2004 
alone, UBS bankers traveled to the United States where they 
held approximately 3,800 separate meetings with U.S. clients to 
discuss their clients' Swiss accounts.
    UBS used a variety of strategies to conceal their cross-
border activities. They instructed their bankers who traveled 
to the United States to falsely represent to Customs that they 
were traveling for pleasure. They also recommended that bankers 
rotate hotel accommodations in the United States to avoid 
detection. UBS bankers used counter-surveillance techniques, 
including encrypted spread sheets, designed to help prevent the 
detection of their marketing efforts, as well as the identities 
and undeclared assets of their U.S. clients.
    U.S. clients in turn filed false tax returns with the 
Internal Revenue Service which omitted the existence of and the 
income earned on the UBS accounts. UBS bankers advised U.S. 
clients to misrepresent the receipt of funds in the United 
States from their UBS accounts as loans from UBS. U.S. clients 
were also advised to destroy all U.S.-based records of their 
offshore accounts.
    With the assistance of UBS bankers and managers, the U.S. 
taxpayers have used Swiss bank secrecy laws and sham entities 
to conceal from the IRS approximately $20 billion in assets. 
For the period 2000 through 2007, UBS failed to withhold 
approximately $120 million in income taxes on income earned in 
those accounts.
    As part of the Deferred Prosecution Agreement, UBS has 
agreed to provide the United States with voluminous and 
detailed records concerning accounts held directly or through 
beneficial arrangements by U.S. taxpayers. UBS has also 
undertaken a continuing obligation to cooperate with the 
criminal investigation and any resulting prosecutions. UBS has 
further agreed to search for and turn over any additional 
records found concerning such accounts. The specific criteria 
for account records disclosed and the number of such accounts 
as to which records have been disclosed to date are set forth 
in a document that the district court has ordered sealed.
    UBS has also agreed to pay the United States $780 million 
and that it will terminate its U.S. cross-border business. And 
as mentioned in the prosecution agreement, while they will 
litigate in Federal court the government's motion to enforce 
the John Doe summons, in the event that they are ordered to 
comply with the summons and they refuse to do so, the United 
States can determine that a breach of the Deferred Prosecution 
Agreement has occurred and can take appropriate action.
    UBS' failure to comply with the terms of the Deferred 
Prosecution Agreement may, in the sole discretion of the United 
States, be deemed a material breach, permitting the United 
States to proceed with the criminal prosecution of UBS. If UBS 
fully complies with the Deferred Prosecution Agreement, then 
the criminal information will be dismissed.
    It is important that the Deferred Prosecution Agreement 
only applies and provides protection for the bank as to the 
specific conduct set forth in the Deferred Prosecution 
Agreement. It does not provide any protection for any conduct 
or as to any matter or proceeding outside the scope of the 
agreement.
    It is also important to emphasize that under U.S. law, U.S. 
taxpayers are subject to taxation on their worldwide income. 
Although a U.S. taxpayer is free to hold accounts offshore or 
in a foreign bank, a U.S. taxpayer must report information 
about those assets and must pay the tax on the income 
generated. Taxpayers who fail to make disclosure or to report 
their income are potentially subject to civil penalties and in 
appropriate circumstances criminal prosecution.
    As noted in the Deferred Prosecution Agreement, in addition 
to addressing UBS' role in designing and facilitating this 
scheme, the Department is also assisting the Internal Revenue 
Service in determining the identities of the U.S. taxpayers 
involved. We are presently involved in a proceeding to enforce 
the John Doe summons pending in the Southern District of 
Florida, and we have a schedule there which would allow for a 
hearing on, I think, July 13 of this year.
    In closing, I think it is important to remember that the 
vast majority of Americans voluntarily pay their taxes on time 
and in full. And at a time when millions of Americans are 
losing their jobs, their homes, and their health care, it is 
deeply troubling that thousands of the wealthiest among us have 
actively sought to evade their civic and legal duty to pay 
taxes. The Department of Justice is committed to doing all that 
it can to aid the Internal Revenue Service in locating those 
who would seek to hide behind secret accounts and to hold them 
accountable under the Federal tax laws. And we greatly 
appreciate your interest in our efforts.
    Thank you for this opportunity to testify before the 
Subcommittee, and I am happy to take your questions, within the 
parameters that I have outlined.
    Senator Levin. Thank you very much, Mr. DiCicco. Mr. 
Shulman.

 TESTIMONY OF HON. DOUGLAS SHULMAN,\1\ COMMISSIONER, INTERNAL 
        REVENUE SERVICE, U.S. DEPARTMENT OF THE TREASURY

    Mr. Shulman. Mr. Chairman, Ranking Member Coburn, and 
Senator McCaskill, I want to thank you for the opportunity to 
testify today on the Internal Revenue Service's ongoing efforts 
to detect and stop unlawful offshore tax avoidance.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Shulman appears in the Appendix 
on page 51.
---------------------------------------------------------------------------
    Mr. Chairman, I am pleased to be here today to tell you 
about the unprecedented focus that the IRS has placed on 
detecting and bringing to justice those who unlawfully hide 
assets overseas to avoid paying tax. In today's economic 
environment, where the Federal Government is necessarily 
running deficits to restore economic growth, it is more 
important than ever that citizens feel confident that 
individuals and corporations are playing by the rules and 
paying the taxes that they owe.
    When the American public is confronted with stories of 
financial institutions helping American citizens maintain 
secret overseas accounts involving sham trusts to improperly 
avoid U.S. tax, they should be outraged, as I am and I know you 
are. But they should also know that the U.S. Government is 
taking unprecedented measures, and there is much more in the 
works.
    I can assure you that the President and the Treasury 
Secretary are committed to taking aggressive action on offshore 
tax abuse. Over the next several months, the Administration 
intends to propose a series of legislative and enforcement 
measures to reduce U.S. tax evasion and avoidance.
    While I am proud of the progress we have made at the IRS 
since I have become Commissioner, we are only at the beginning. 
You can expect to see a multi-year effort to beef up our 
resources and the tools that we have to address international 
tax abuse.
    In the wake of publicity around the recent case that my 
colleague Mr. DiCicco discussed, the press has been full of 
speculation from those who are advising U.S. taxpayers who have 
undeclared offshore accounts and income. My advice to those 
taxpayers who are hiding accounts still is very simple: The IRS 
has been steadily increasing pressure on offshore financial 
institutions that facilitate concealment of taxable income by 
U.S. citizens. That pressure will only increase under my watch. 
Those who are unlawfully hiding assets should come and get 
right with their government through our voluntary disclosure 
process.
    Mr. Chairman, there is no silver bullet or one strategy 
that will alone solve the problems of offshore tax avoidance. 
Rather, an integrated approach is needed, made up of separate 
but complementary programs that will tighten the net around tax 
cheats.
    My written testimony today explores elements of these 
strategies in more detail, but let me highlight a couple of 
them here today.
    First, the IRS is devoting significant and ever increasing 
resources to international issues. I have both increased the 
number of audits and increased hiring in the area of offshore 
tax abuse, hiring international experts and investigators. 
Indeed, over the last 5 months, when we have essentially been 
in a hiring freeze because of the continuing resolution, I have 
shifted resources to make sure we can keep hiring people for 
international issues.
    The President's 2010 budget will allow us to increase our 
resources in the international area as well by including 
funding for a robust portfolio of IRS international tax 
compliance initiatives.
    The IRS is also looking closely at how to continue to 
improve our Qualified Intermediary Program, or QI program for 
short. Let me just say that the QI program gives us a very 
important line of sight into banks that service U.S. and 
foreign taxpayers, and that is a line of sight that we did not 
have before. But as I have said before, with any large and 
complex program, we have to strive to continuously improve the 
QI system and address weaknesses as they become apparent.
    Accordingly, the IRS and the Treasury Department are 
considering enhancements to strengthen the QI program, 
including: First, expanding information reporting requirements 
to include more sources of income for U.S. persons with 
accounts at QI banks; second, strengthening documentation rules 
to look through trusts and private corporations to their 
beneficial owners and requiring withholding for accounts with 
documentation that is considered insufficient. Additionally, we 
have already proposed changes that would shore up the 
independent review by outside auditors of the QI program in 
substantial ways.
    As you can see, the IRS and Treasury Department are 
considering a range of measures to ensure that the QI program 
is working as intended. However, there will always be instances 
where the IRS discovers a potential violation of the tax law 
after the fact. In these cases, there are administrative and 
legislative changes that would be helpful to the IRS as we 
investigate potential wrongdoing.
    Secretary Geithner stated during his confirmation process 
that he will treat offshore tax abuse issues as a high priority 
and will examine a range of policy issues, including changing 
presumptions for transactions in tax secrecy jurisdictions and 
other ideas that are included in your legislation. That 
dialogue is underway at the Treasury Department.
    Additionally, Mr. Chairman, I want to applaud the work of 
you, Senator Whitehouse, Senator McCaskill, Senator Nelson, as 
well as the work of your staff in producing the Stop Tax Haven 
Abuse Act. I look forward to working with you to put a halt to 
offshore tax haven and tax shelter abuses.
    Mr. Chairman, these are important steps forward, but much 
more will come. The President's budget committed to identifying 
$210 billion in savings over the next decade from international 
enforcement and reforming deferral and other tax reform 
policies. The Administration will have more detailed and 
specific announcements in the near future.
    Thank you for this opportunity to provide an update on our 
activities to combat illegal tax avoidance schemes relating to 
offshore accounts and transactions. Because this is a global 
problem, it will require closely coordinated strategy among 
nations dedicated to ending abusive practices that deprive our 
country of precious resources and erode confidence in the 
fairness of our tax administration system.
    I want to compliment the work that you and this 
Subcommittee have done to bring to light offshore tax abuse. I 
have enjoyed working together on these issues, and I look 
forward to continuing to work together with this Subcommittee 
in the future. And I am happy to respond to questions.
    Senator Levin. All right. Now, Dr. Coburn has a couple of 
amendments of his own on the floor, so he is going to need to 
leave when the votes have started. So I am going to yield to 
him to go first.
    Senator Coburn. Thank you, Mr. Chairman. I appreciate that. 
I will go very quickly.
    First, to Mr. DiCicco, if you can, what is your estimated 
timeline on the Deferred Prosecution Agreement? At what time 
will you all say they are not complying, we are going to drop 
this?
    Mr. DiCicco. Well, at any time during the process, if we 
see a material breach and it is not corrected, I think we can 
take action at that time. Right now the Deferred Prosecution 
Agreement is to come to an end at the later of--I think it is 
18 months or when the summons enforcement action is concluded.
    Senator Coburn. Right.
    Mr. DiCicco. But at any place along the line if there is a 
significant breach or material breach, then we have the option 
to conclude the agreement and to go back and institute----
    Senator Coburn. So it would be safe to say 18 months from 
now, if we do not have the information, it is going to get 
dropped and the prosecution will commence?
    Mr. DiCicco. Well, Senator, I would have to see how--
    Senator Coburn. I am not going to hold you to it. I am just 
trying to get a timeline.
    Mr. DiCicco. I would think, Senator, that the timeline for 
getting the John Doe summons matter resolved would probably be 
more than 18 months, more likely could be as long as a couple 
years because I suspect that appeals will be taken, and it 
takes time for that process.
    Senator Coburn. Well, is there any provision agreement if 
UBS is obstructing through the courts?
    Mr. DiCicco. Well, one of the conditions of the Deferred 
Prosecution Agreement and what we agreed to was that we would 
proceed--both parties agreed that we would proceed in the 
district court and have a court decide whether we would get 
that information or not. So as long as that is going forward--
--
    Senator Coburn. So if, in fact, that is delayed, what we 
would extend to is outside the bounds of that 18 months.
    Mr. DiCicco. That is right.
    Senator Coburn. Can you tell me what are the circumstances 
for criminal prosecution of offshore accounts? You mentioned 
offshore accounts and that some of them are prosecuted on a 
criminal basis. What would make them a criminal--set them up 
for a criminal prosecution?
    Mr. DiCicco. Well, there are a lot of factors that go into 
making that determination, including the intent, the amount 
involved, the circumstances surrounding how the account was 
opened, whether it was the result of criminal proceeds, drug 
trafficking, stolen money, or whether it was perhaps just a 
simple inherited account. I mean, all these factors would be 
weighed before a decision really can be made.
    Senator Coburn. OK. Commissioner Shulman, in your statement 
you included individuals and corporations. Do we have evidence 
that there are corporations involved in this process or are you 
mostly talking about LLC's and other such personal investment 
vehicles?
    Mr. Shulman. Just speaking as the Commissioner, I would 
defer any discussion about specifics to my colleague.
    Senator Coburn. Well, it is very important because in your 
statement you implied individuals and corporations.
    Mr. Shulman. Yes. Generally, since I became IRS 
Commissioner, I made international issues one of my top issues 
that we are going to pursue, dedicate resources to, focus on, 
both from a policy perspective and administrative perspective. 
The big issue we are focusing on today in the hearing is 
offshore accounts, wealthy individuals hiding money overseas.
    We also have a lot of major initiatives around corporations 
using the vagaries of international commerce and international 
tax laws to avoid taxes in a civil matter. So that is what I 
was referring to.
    Senator Coburn. But avoidance is very different from 
evasion.
    Mr. Shulman. Absolutely.
    Senator Coburn. OK. And so the implication is what we are 
talking about here was not meant to include corporate accounts 
in what we have seen thus far. Is that true?
    Mr. DiCicco. Well, Senator, we have not gotten the 
information yet, and we have not been able to analyze it.
    Senator Coburn. It is possible, but that is not what we 
have seen, that is not what we have heard about. Most of these, 
at least what we have been told, of somewhere between 19,000 
and 52,000 accounts, are probably individual accounts.
    Mr. DiCicco. I think that is correct, but I do not know the 
answer to that.
    Senator Coburn. I am intrigued by your voluntary disclosure 
process. I think that is a message that needs to go out to this 
country. We are going to help you become more aggressive in 
going after this avoidance and evasion. But I would think that 
we would want to signal loud and clear, Mr. Chairman, that 
there is a way to avoid some of the pitfalls of pain if you are 
one of those who is illegally evading taxes in this country, 
and that is through your voluntary disclosure program.
    Mr. Shulman. Absolutely. It is a longstanding program. 
People who come in voluntarily before we found them. So, if we 
found you already or we have an active, ongoing investigation, 
you are not eligible. But people who come in voluntarily, truly 
voluntarily, usually avoid criminal prosecution as long as they 
get right with taxes, interest, and the penalties that will 
apply. And I cannot say strongly enough, people who are out 
there, we are continuing to put pressure and dedicate 
resources. This Subcommittee and others are going to continue 
to focus on this, and the best thing people can do is come in 
through the voluntary disclosure process and avoid criminal 
prosecution in most cases.
    Senator Coburn. We are going to find you, in other words.
    How can you see, Commissioner, tax simplification aiding 
this? In other words, if we had a much simpler Tax Code, if we 
had a Tax Code, for example, that was based on a national sales 
tax, would we see this kind of movement to foreign tax shelters 
that we see today?
    Mr. Shulman. Well, let me not speak to flat tax or any 
specific proposal.
    Senator Coburn. Just a simplified, straightforward, easy--
everybody can calculate it. You do not need a CPA to do your 
taxes. If we had that kind of tax program, what would be the 
benefit of some of these shelters?
    Mr. Shulman. As Commissioner of the Internal Revenue 
Service, who has to implement a very complicated Tax Code, I am 
a big fan of simplification. There are a lot of U.S. citizens 
who get caught up in mistakes because they are confused. I 
think the folks we are talking about today, generally it is not 
mistakes. They are actively avoiding tax. I am a fan in general 
of simplification.
    Senator Coburn. And you would agree that probably we would 
have less incentive to do this if we had a simple, more 
straightforward, fairer tax code?
    Mr. Shulman. I am not sure about incentive, but certainly I 
think there would be a lot fewer mistakes in preparing taxes 
and it would be easier for the American citizen. So I am a big 
fan of simplification.
    Senator Coburn. All right. Let me go the other way. You do 
not think people would lessen their desire for tax shelters if 
we had a straightforward, simple, fair tax system?
    Mr. Shulman. Well, certainly the complexity of the Tax Code 
and then you add to it the complexity of crossing the border 
and sovereign laws creates loopholes and opportunities for 
people who want to push the envelope. So I certainly think it 
would certainly help with tax enforcement.
    Senator Coburn. Thank you, Mr. Chairman.
    Senator Levin. Thank you very much.
    Let me start, Mr. DiCicco, with you. In the Deferred 
Prosecution Agreement,\1\ UBS acknowledged ``participating in a 
scheme to defraud the United States of America.'' Among the 
facts that UBS acknowledged and accepted as part of the filing 
entitled ``Acceptance of Responsibility for Violation of Law'' 
is the following: ``Private bankers and managers would actively 
assist or otherwise facilitate certain undeclared U.S. 
taxpayers who such private bankers and managers knew or should 
have known they were evading U.S. taxes by meeting with such 
clients in the United States and communicating with them via 
jurisdictional means on a regular and recurring basis with 
respect to their UBS undeclared accounts. This enabled the U.S. 
clients to conceal from the IRS the active trading of 
securities held in such accounts and/or the making of payments 
and/or asset transfers to and from such accounts. Certain UBS 
executives and managers who knew of the conduct described in 
this paragraph continued to operate and expand the U.S. cross-
border business because of its profitability.''
---------------------------------------------------------------------------
    \1\ See Exhibit No. 3, which appears in the Appendix on page 69.
---------------------------------------------------------------------------
    Now, what this paragraph shows, does it not, is that the 
evasion facilitated by UBS goes to all kinds of U.S. account 
holders? It does not make any difference whether they held 
cash, securities, or other assets in those accounts. The 
critical fact is that they did not report those accounts and 
income to the IRS, and UBS, by coming to this country and 
engaging in practices that helped the U.S. account holders to 
conceal those accounts and income, was part of the alleged 
conspiracy. Is that correct?
    Mr. DiCicco. That is correct, Senator.
    Senator Levin. Now, Commissioner, yesterday Secretary 
Geithner stated that he fully supports my bill, S. 506, a bill 
which has a number of cosponsors, which is called the ``Stop 
Tax Haven Abuse Act.'' Is that good news in terms of 
enforcement for the IRS?
    Mr. Shulman. Yes.
    Senator Levin. When I say ``good news,'' I mean the support 
of the Administration for our bill. Is that good news to the 
IRS?
    Mr. Shulman. Yes.
    Senator Levin. It is good news for American taxpayers, too, 
and we very much welcome that support. And I mentioned this to 
the President this morning, by the way. He also happened to be 
a cosponsor of this bill when he was a Senator. I did not draw 
any connection between the two.
    Mr. DiCicco, do you think UBS is the only tax haven bank 
that is facilitating tax evasion by U.S. clients or are there 
more out there?
    Mr. DiCicco. I do not think they are the only one.
    Senator Levin. UBS has said in court, Mr. DiCicco, that it 
cannot provide the information sought in the John Doe summons 
because it is bound by Swiss secrecy laws not to disclose 
client-specific information outside of Switzerland. Can you 
explain how UBS can invoke Swiss secrecy laws to refuse 
compliance with U.S. requests for information about U.S. 
clients?
    Mr. DiCicco. Senator, I have to be a little careful about 
what I say because the matter is pending, but what I will----
    Senator Levin. All right. Then let me ask you the question 
this way: How big a barrier are secrecy laws to tax 
investigations by the United States?
    Mr. DiCicco. I think they are a significant barrier, but 
what I would say about the UBS matter, the approach that we are 
taking is this is a dispute between the United States and UBS. 
We are not going head to head with the Swiss Government, but 
UBS which, as the Chairman has pointed out, came into this 
country, systemically violated its laws, subjected itself to 
the jurisdiction of U.S. courts, and we are using U.S. remedies 
to get the information that we believe we are entitled to.
    Senator Levin. Now, that may not be the purpose of the 
case, to go head to head with the Swiss Government, but we are 
going head to head with tax secrecy jurisdictions. We are, and 
this bill, and I think this Congress, and now this 
Administration; we are going head to head with those tax havens 
that help American taxpayers who owe taxes avoid paying their 
fair share.
    Is it your belief, Mr. DiCicco, that the UBS and the Swiss 
understood at the time the Deferred Prosecution Agreement was 
signed that the U.S. Government planned to seek enforcement of 
the summons?
    Mr. DiCicco. No question about that, Senator. Discussions 
had taken place over a period of time which made it very clear 
that is what we would be doing, and in the Deferred Prosecution 
Agreement itself, it says very explicitly that we will bring an 
enforcement action. It does not say ``we may,'' ``we are 
thinking about it.'' It says very specifically ``we will be,'' 
and that is what we did.
    Senator Levin. All right. So it was not a surprise to them 
when you proceeded?
    Mr. DiCicco. It should not have been.
    Senator Levin. In the Deferred Prosecution Agreement, UBS 
acknowledged and accepted that some of its private bankers and 
managers ``facilitated the creation of accounts in the names of 
offshore companies, allowing the U.S. taxpayers to evade 
reporting requirements and to trade in securities as well as 
other financial transactions.''
    Now, Exhibits 15 and 16 \1\ are UBS documents that were 
filed as part of the John Doe summons enforcement petition. 
Exhibit 15 is a memo to the Private Banking Business Committee 
from members of the Financial Planning and Wealth Management 
Department of UBS recommending how UBS should handle U.S. 
client accounts under the Qualified Intermediary Program. One 
part of the memo says the following: ``In the case where the 
U.S. person holds his U.S. investments directly, we have been 
advised by Baker & McKenzie''--the ``we'' here now being UBS; 
that is the ``we''--``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. Further, such 
recommendations could infringe upon our Qualified Intermediary 
status if, on audit in 2003, it is determined that we have 
systematically helped U.S. persons to avoid the QI rules.''
---------------------------------------------------------------------------
    \1\ See Exhibits No. 15 and 16, which appear in the Appendix on 
pages 235 and 237.
---------------------------------------------------------------------------
    But then they say the following: ``What we can do is to 
suggest that clients seek external professional advice and 
offer them a choice of approved service providers if they 
request it. With this approach it seems clear that we would not 
be able to share fees with, for example, an insurance 
provider.''
    Now, do you see much difference between recommending a 
strategy to get out of complying with reporting requirements 
and referring a client to someone who you know will make the 
same recommendation?
    Mr. DiCicco. No, Senator. I do not see any difference.
    Senator Levin. Thank you. Senator McCaskill, I will be back 
from voting, I hope in 10 minutes.

             OPENING STATEMENT OF SENATOR McCASKILL

    Senator McCaskill [presiding]. As a former prosecutor, I am 
familiar with Deferred Prosecution Agreements. Frankly, in my 
experience, in terms of most crime that is committed in our 
country, they are generally used to get the cooperation of a 
defendant in order to prosecute other defendants. I am not 
aware of anyone who has been arrested--for most crimes in this 
country, that get a Deferred Prosecution Agreement, and all 
they have to do is what at a minimum they would have had to do 
if they had been convicted.
    I am curious if there is any part of this agreement that 
requires the cooperation of UBS to disclose anything that they 
know about other banking institutions that may be utilizing 
these kinds of tactics to help citizens avoid taxes?
    Mr. DiCicco. No, Senator, there is nothing like that in the 
Deferred Prosecution Agreement between the United States and 
UBS.
    Senator McCaskill. Was there ever any consideration made of 
actually putting somebody in jail?
    Mr. DiCicco. Well, we have secured the conviction of one of 
the UBS people, Bradley Birkenfeld; he is awaiting sentencing. 
There is a criminal prosecution of Raoul Weil, who is absent 
from this country. I am not going to rule out one way or the 
other whether there will be prosecutions of others.
    Senator McCaskill. And how far up in the UBS organization 
did knowledge of these tactics, how far up did it go?
    Mr. DiCicco. Well, certainly the executives in UBS knew 
what was going on and failed to take action. Mr. Weil was 
highly placed in UBS' wealth management sector.
    Senator McCaskill. And he is evading us now?
    Mr. DiCicco. He is back in Switzerland. He has been 
declared a fugitive from justice.
    Senator McCaskill. And is part of the negotiations with the 
Swiss Government concerning cooperation on getting the names of 
American citizens, does it also involve whether or not they are 
going to cooperate in letting us get to him?
    Mr. DiCicco. We have not had discussions regarding that. If 
we have, I am not aware of that.
    Senator McCaskill. And I am just curious, who within DOJ--
--
    Mr. DiCicco. He was just advising me that the Swiss will 
not allow extradition of somebody for tax crimes.
    Senator McCaskill. They will not allow someone----
    Mr. DiCicco. They do not recognize extradition for that.
    Senator McCaskill. So this bank, in order to avoid 
prosecution of anybody involved in this, all they have to do is 
send folks back to Switzerland? That is it? They are home free, 
scot-free?
    Mr. DiCicco. Well, we have not made any agreements other 
than with the bank itself as to its criminal behavior. I do not 
know that the bank would have authority to keep somebody in 
this country or in Switzerland. We would have to use normal 
procedures that we would do in any circumstance where we had 
somebody that we wanted to extradite, and----
    Senator McCaskill. Are there other groups of people that 
have been removed from the bank because of their conduct in 
this case?
    Mr. DiCicco. I believe that some executives have been 
replaced, but I can get back to you on which ones to make sure.
    Senator McCaskill. It always kind of strikes me as unfair 
that so many of the large white-collar cases involve a civil 
fine in lieu of prosecution or deferred prosecution and that 
there are not--I look at some of the cases, the minimum 
mandatories in the Federal system for a girlfriend of a guy who 
is moving drugs, and I think about her culpability, which, no 
question she is culpable. But there is just not a lot of 
deferred prosecution on those cases. And I am trying to get at 
the policy as to why this kind of massive thumbing the nose at 
our laws--we have got one person who is facing prosecution out 
of the whole shebang?
    Mr. DiCicco. Well, there may or may not be others. I am not 
at liberty to disclose that.
    Senator McCaskill. OK.
    Mr. DiCicco. But we entered into a Deferred Prosecution 
Agreement with the bank, in exchange for which we got 
significant concessions on their part. We thought that it was 
in the government's best interest at the time we entered into 
it, and we have made it very clear that the bank was not off 
the hook for any other transgressions it might have engaged in, 
and that any individual is not off the hook for any criminal 
acts that they engaged in.
    Senator McCaskill. How was the figure $780 million arrived 
at?
    Mr. DiCicco. Senator, I really cannot go into the give and 
take of the negotiations, but in our judgment, that was a 
significant sum and that would be a real burden on the bank to 
have to make those payments.
    Senator McCaskill. The reasoning behind my question is that 
I am trying to figure out if there was any attempt to match up 
that amount with the amount of profit that had been derived?
    Mr. DiCicco. We did some of that. Some of that is 
regurgitation of profits. Some of it is also paying the 
withholding taxes that should have been withheld on the 
accounts of the individuals involved. So there was an effort to 
arrive at that.
    Senator McCaskill. Mr. Shulman, how many other foreign 
entities or banks or financial institutions are you currently 
trying to work on with the same kind of problems that UBS had?
    Mr. Shulman. Yes, I cannot disclose specifics, but we have 
a robust voluntary disclosure program. We have recently 
significantly expanded our whistleblower program, and so the 
one thing I would say in a public setting is that individuals 
who are hiding bank accounts should know that we are going to 
continue to come after them, and institutions that are 
facilitating that, we are not going to hesitate to go after.
    Senator McCaskill. And what do whistleblowers get?
    Mr. Shulman. Whistleblowers, there is a new whistleblower 
statute for the IRS. They can get a range of rewards based on 
their information and based on what we have at the time.
    Senator McCaskill. Was there a whistleblower in this case?
    Mr. Shulman. Before you came in--I am going to defer all 
case-specific things to Mr. DiCicco.
    Mr. DiCicco. Mr. Birkenfeld did come in and give testimony. 
That is really all.
    Senator McCaskill. OK. Well, I think it would be helpful if 
you could be more specific about what a whistleblower could 
get. This is a very public opportunity for whistleblowers to 
realize that there is, as we would say at home, ``money in them 
thar hills.''
    Mr. Shulman. I do not want to recite the details wrong, and 
I am happy to get you, for the record, the details of our 
whistleblower program. People can get substantial monetary 
rewards for coming in and helping us with investigations and 
giving us information.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 29, which appears in the Appendix on page 919.
---------------------------------------------------------------------------
    Senator McCaskill. OK. I do not want to tie you down in 
terms of saying ``robust,'' but could you give me some 
ballpark? I mean, I do not know what to compare this to. I do 
not know if UBS is the tip of the iceberg, or if UBS is a major 
part of the problem. Can you be any more specific than 
``robust''? Because ``robust'' is in the eye of the beholder.
    Mr. Shulman. When I became Commissioner, we decided to 
focus on international activities for a couple of reasons: One, 
because it is a matter of fundamental fairness. The people who 
have enough money to go overseas and hide their assets should 
be paying taxes, and the average American--a teacher, a 
policeman, a fireman who is actually paying their taxes, is 
outraged at this, as are we.
    We have been shifting resources to the area of 
international. This is just one segment of where we are 
focusing, people hiding assets offshore, using financial 
institutions to do so. As I mentioned to the Ranking Member, we 
are also very active in the international arena where people 
are pushing the envelope, transferring intangibles, setting up 
corporations that do not have substance beneath them.
    I would say that given the global economy, given that 
international commerce is increasing significantly, in the last 
5 years there has been a 70-percent increase in foreign tax 
credits claimed by corporations in the United States and a 170-
percent increase of foreign tax credits being claimed by 
individuals in the United States. So, not speaking to this 
case, we think this is a major issue that we are going to 
continue to focus on over the next several years. The 
President's budget has made it clear that this is something the 
whole Administration is committed to and is behind.
    Senator McCaskill. Has there been any analysis done of how 
much of this money that is being hidden overseas is, in fact, a 
result of criminal activity?
    Mr. Shulman. Not that I am aware of. I mean, estimating how 
much money that is overseas and not being paid to the 
government. As far as I am aware, there is no credible estimate 
out because it is kind of a chicken and egg. If it is over 
there and we have not found it, it is hard to estimate what is 
there. And all estimates that I have seen have not broken down 
criminal versus civil because, again, until we see the cases, 
it is hard to say.
    Senator McCaskill. Well, I am trying to--there are lots of 
reasons people hide money, and one of the major reasons people 
hide money is because they got that money in a way they cannot 
explain to anyone.
    Mr. Shulman. Yes.
    Senator McCaskill. Obviously, tracking money laundering is 
a huge part of any large criminal investigation that I have 
ever been aware of that is trying to follow the money, the ill-
gotten gains of that crime. Can you give the Subcommittee any 
information from the Department of Justice as to are you all 
merging your tracking assets of criminals with the work that 
you have done in this regard as it relates to monies held 
overseas?
    Mr. DiCicco. Well, certainly during the course of our 
investigations, if we become aware of money overseas and the 
like, I mean, that is taken into account, and it is usually a 
factor that is used in the prosecution of tax evasion itself. 
Just regular prosecutions of money being overseas alone, there 
are not very many stand-alone investigations of that. But it is 
just part of the broader investigation that you have when you 
are trying to determine whether somebody violated tax laws.
    Mr. Shulman. Senator, if I could add to that?
    Senator McCaskill. Yes.
    Mr. Shulman. At the IRS, our Criminal Investigation Unit 
actively coordinates with other Federal law enforcement 
agencies. We pitch in with our accounting forensic teams, etc., 
on money-laundering cases, and on terrorist financing. Often 
there is a tax crime involved. FinCEN information and SARs 
reports are available to our Criminal Investigation Unit. I 
would say over the last several years there has been an effort 
to coordinate these cases. I think one of our beliefs is, going 
forward, we are stepping up that coordination of Federal 
agencies for our purposes of finding criminal tax evasion and 
making sure we use all the information that is out there and 
make sure there are good cooperative relationships.
    Senator McCaskill. I think that is really important because 
sometimes it is the folks that you catch in a criminal 
investigation that are the most willing to give information 
concerning where they have placed their money. Usually somebody 
cornered is the most willing to give good information. So I 
hope that you are coordinating that.
    Mr. Chairman, are you ready for the next panel, or do you 
have another round?
    Senator Levin. I have another round.
    Senator McCaskill. OK.
    Senator Levin. Commissioner, let me ask you a question 
about some declarations which the IRS filed from Barry Shott, 
who is titled ``the U.S. Competent Authority who oversees the 
international exchange of information between the U.S. and 
foreign countries pursuant to tax treaties.'' Exhibit 9 \1\ is 
one of those declarations, and this is what Mr. Shott said in 
that declaration: ``The Swiss Treaty does not provide an 
alternative way to obtain the information sought in the John 
Doe summons at issue in this case.''
---------------------------------------------------------------------------
    \1\ See Exhibit No. 9, which appears in the Appendix on page 175.
---------------------------------------------------------------------------
    Is that correct? Is that an accurate reading of what he 
said? Do you have it in front of you? It is Exhibit 9.
    Mr. Shulman. Let me say, if Mr. Shott said it as head of 
the agency, I fully support it.
    Senator Levin. In paragraph 16, he goes on to say the 
following: ``The Swiss Treaty has been strictly applied by the 
Swiss Competent Authority to provide the IRS assistance only in 
response to specific requests that name a particular taxpayer. 
As a consequence, it had also been the IRS' experience that the 
Swiss Competent Authority would only provide the IRS with 
information for an examination or investigation that concerns a 
specifically identified taxpayer. The current IRS investigation 
is focused on learning the identities of U.S. taxpayers not 
known to the IRS.''
    So, unless the U.S. Government already knows the names of 
specific taxpayers, the Swiss treaty generally cannot be used 
to get information in Switzerland about a U.S. person. Is that 
correct?
    Mr. Shulman. Yes, generally it is correct. As you stated 
earlier, most of these treaties were designed to get 
information from taxpayers who we can identify by name.
    Senator Levin. All right. Now, in the UBS case, the 
government does not have the names, and that is what we are 
trying to find out. The Shott declaration states, however, that 
despite the treaty history requiring specific names, the Swiss 
urged the United States to make a treaty request in the UBS 
case, anyway. So on July 16, 2008, the United States did 
formally seek information; they made a Treaty Request--seeking 
information about U.S. clients with UBS accounts in 
Switzerland. And the declaration says that 6 months after that 
request, so as of January 21, 2009, ``the Swiss Government had 
made final determinations to provide the requested records for 
only twelve accounts. The Swiss Government will not, however, 
provide records to the IRS about those twelve accounts until 
after the account holders have been given an opportunity to 
litigate in a Swiss court the Swiss Government's decision to 
turn their records over to the IRS.''
    Is that litigation going on now, do you know?
    Mr. Shulman. I would defer to Mr. DiCicco.
    Mr. DiCicco. Senator, yes, it is. That is the summons 
enforcement action that is going forward in Florida.
    Senator Levin. It says here that the 12 accounts I am 
talking about in the Swiss court, is that litigation, as far as 
you know, going on in the Swiss court now?
    Mr. DiCicco. I believe so.
    Senator Levin. Now, the declaration says the following: 
``In sum, the Swiss Government has not provided any records 
sought under the Treaty Request, and it is not clear when, if 
ever, it will.''
    Do you agree with that declaration, Commissioner Shulman?
    Mr. Shulman. Again, I will support what Mr. Shott put in 
there, and I will also just say that is a big reason, based on 
what he said, that we are aggressively requesting the Justice 
Department to pursue the summons.
    Senator Levin. Now, the Shott declaration raises a second 
problem as well. On page 5, in paragraph 15, it says that even 
if the United States had the name of specific taxpayers, ``the 
Swiss Government will not exchange information about a taxpayer 
unless the taxpayer committed an affirmative act of deception 
(such as falsifying a document), above and beyond a mere 
failure to report the existence of an account, or income earned 
in that account. But for now,'' Mr. Shott writes, ``the IRS is 
investigating U.S. taxpayers who failed to report the existence 
of Swiss bank accounts--or income earned on those accounts. 
Absent additional facts, those failures do not enable the IRS 
to obtain from the Swiss Government the information demanded in 
the John Doe summons issued to UBS.''
    So now let me summarize this. U.S. tax law requires U.S. 
taxpayers to disclose the existence of any foreign bank account 
in which they have an interest. If a U.S. taxpayer fails to do 
that, that taxpayer has violated U.S. tax law and is subject to 
penalty. The Swiss tax treaty says that it is not enough to 
require a Swiss bank to produce information about an individual 
even if we have the name of the individual. The individual has 
to do more than conceal the existence of a Swiss bank account 
from us. He would have to have committed an affirmative action 
of deception before the treaty kicks in, as the Swiss define 
``affirmative action of deception.'' And that is the tax fraud 
issue that we have heard so much about. Is that correct? Have I 
summarized the situation correctly?
    Mr. Shulman. It sounds right.
    Senator Levin. Do you know, Mr. DiCicco?
    Mr. DiCicco. That is correct.
    Senator Levin. That is correct. All right. So even if we 
had the names of 19,000 U.S. persons with Swiss bank accounts 
that were not disclosed to the IRS, we could not get their 
account information under the Swiss tax treaty unless we could 
show that they did more than simply conceal the account and 
fail to pay taxes owed to Uncle Sam. Is that right, Mr. 
DiCicco?
    Mr. DiCicco. That is correct.
    Senator Levin. That is a pretty high bar between the 
requirement for specific names and proof of affirmative 
deceptive acts, the way the Swiss define it. It is no wonder 
that the Swiss treaty does not produce much information of use 
to U.S. tax investigations.
    Now, is the Swiss treaty unique in this regard, Mr. 
DiCicco, or is it the general rule that tax treaties and tax 
information exchange agreements that the United States has in 
place around the world, that we are required to provide the 
names of specific individuals before information will be 
supplied about those individuals?
    Mr. DiCicco. I will have to defer a treaty question----
    Senator Levin. All right. Do you know the answer to that 
question, Commissioner Shulman?
    Mr. Shulman. Yes, if you do not mind, I will give kind of a 
general statement----
    Senator Levin. Is that the general rule?
    Mr. Shulman. Yes. Treaties--the model treaty has 30 
articles, and it is everything from art to pension and 
annuities, a lot of issues around mutual tax treatment. There 
is one article, Article 26, which is enforcement related, and 
it is about exchange of information. Generally it can be 
helpful. Generally it needs to have a specific taxpayer.
    Senator Levin. That we identify.
    Mr. Shulman. That we identify, and in a lot of cases, 
sovereign law actually trumps the treaty. And so the issue you 
are pointing out, I think that is what you are pointing out.
    I would not say that all treaties are ineffective because 
they are not just about tax, but in cases where sovereign law 
trumps it, they can be limited in our ability to go after 
taxpayers who we find and, therefore, we use tools like the 
John Doe summons and others.
    Senator Levin. And would welcome the tools that we have in 
our bill?
    Mr. Shulman. Absolutely.
    Senator Levin. The G20 group of countries is planning a 
meeting in London on April 2, 2009, to address a host of 
financial regulatory issues, and one likely topic to be 
addressed is whether the international community should clamp 
down on tax havens with secrecy laws that facilitate tax 
evasion by persons from other countries. I believe the British 
Prime Minister spoke about the importance of that in his speech 
to the Congress this morning about taking a leadership role in 
getting the G20 group of countries to come together to take on 
these secrecy laws.
    Can you tell us whether or not we will be--presumably, the 
President--taking a leadership role at the G20 meeting in this 
area that Prime Minister Brown described this morning?
    Mr. Shulman. I cannot tell you specifically about G20 
plans. I can tell you, as you know, this President is very 
focused on shutting down tax abuses and that these discussions 
are ongoing.
    Senator Levin. All right. Can you give us the name of the 
Treasury official or officials, other than Mr. Geithner, who 
would be involved in the negotiations which would precede the 
G20? Is there one person yet identified?
    Mr. Shulman. I cannot give you that name.
    Senator Levin. OK. Thank you both. You have been very 
helpful.
    We will now call as a witness Mark Branson, the Chief 
Financial Officer of UBS Global Wealth Management and Swiss 
Bank of Zurich, Switzerland.
    Mr. Branson, we welcome you back to the Subcommittee. You 
testified before us last July. We thank you for traveling here 
today, and pursuant to Rule VI, all witnesses, as you know, who 
testify before the Subcommittee are required to be sworn. At 
this time, I would ask you to please stand and raise your right 
hand.
    Do you swear that the testimony you are about to give 
before this Subcommittee will be the truth, the whole truth, 
and nothing but the truth, so help you, God?
    Mr. Branson. I do.
    Senator Levin. Thank you. We understand that you do have a 
prepared statement today, I believe, and you may proceed with 
that statement.

 TESTIMONY OF MARK BRANSON,\1\ CHIEF FINANCIAL OFFICER, GLOBAL 
     WEALTH MANAGEMENT AND SWISS BUSINESSES, UBS, ZURICH, 
                          SWITZERLAND

    Mr. Branson. Thank you, Chairman Levin, Senator McCaskill. 
My name is Mark Branson. I am the Chief Financial Officer of 
the Global Wealth Management and Swiss businesses of UBS. I am 
based in Zurich. I am responsible for the financial and risk 
control of that division.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Branson appears in the Appendix 
on page 57.
---------------------------------------------------------------------------
    When I testified before your Subcommittee last summer, I 
described our efforts to investigate and correct problems with 
the bank's provision of cross-border financial services to U.S. 
residents. At the hearing, we committed to cooperate with the 
U.S. Government's investigations, to exit the cross-border 
business for U.S. residents, and to take corrective measures to 
ensure that such problems cannot reoccur. I am pleased to say 
that we are making good on each of those commitments.
    First, we recently entered agreements with the U.S. Justice 
Department and the Securities and Exchange Commission that 
resolve their investigations of our cross-border business. 
Through these agreements, UBS has delivered on its promise to 
cooperate with the various investigations of the bank, accept 
responsibility for its unlawful conduct, and remedy that 
misconduct.
    As part of these settlements, we agreed to disgorge profits 
from the U.S. cross-border business. We also agreed to pay back 
taxes, interest, and substantial civil penalties. In addition, 
following an emergency order from the Swiss financial 
regulator, we disclosed on an expedited basis the name and 
account information of certain U.S. clients who appear to have 
engaged in ``tax fraud or the like'' within the meaning of the 
Double Taxation Treaty between the U.S. and Switzerland. Those 
clients misused the confidentiality protection of Swiss law.
    Second, following my testimony before the Subcommittee last 
summer, we began the process of exiting the U.S. cross-border 
business. Since then, we have closed more than 14,000 
individual relationships. Going forward, U.S. residents will 
only be permitted to maintain accounts that are fully disclosed 
to the IRS, with UBS affiliates that are SEC registered.
    Our exit plan is also designed to encourage our cross-
border U.S. clients to make voluntary disclosures to the IRS, 
where appropriate. Our communications to affected clients 
clearly encourage them to disclose their accounts to the IRS, 
if they have not already done so. We also guarantee our exiting 
U.S. clients that we will provide them with the documentation 
necessary to file amended U.S. tax returns.
    As part of the recent settlements, the U.S. Government has 
authorized our exit plan, and we will now complete the exit in 
accordance with those agreements. Progress will be reviewed by 
an independent auditor who will periodically report to the U.S. 
Government.
    Third, UBS will implement an enhanced control framework 
around our compliance with the Qualified Intermediary (QI) 
Agreement. This new framework will include the appointment of a 
senior executive to supervise QI compliance across UBS.
    Through all these actions, UBS is making good on the 
commitments that I gave to the Subcommittee last summer.
    Mr. Chairman, we deeply regret our breaches of U.S. law. I 
can honestly say that what took place in one small part of our 
business is not representative of the firm's culture nor the 
values of the 78,000 UBS employees around the world. Those 
employees, including over 25,000 employees here in the United 
States, and roughly the same number in Switzerland, have 
suffered as they have seen the reputation of their firm harmed. 
That is very painful to me, as is the fact that the bank's 
behavior has brought international criticism to the country of 
Switzerland.
    Before I conclude, I would like to address the recent civil 
action filed by the IRS. That action asks a U.S. court to 
compel UBS to disclose the names and account information of 
thousands of U.S. clients who maintained cross-border accounts 
with UBS in Switzerland and did not provide the bank with a 
Form W-9. Because Swiss law prohibits UBS from producing 
responsive information located in Switzerland, UBS has sought 
to work cooperatively with the IRS to identify information 
responsive to the summons that is located in the United States. 
We undertook substantial efforts over many months to collect 
and produce such U.S.-based information. This was information 
that we could provide to the IRS without violating Swiss law, 
and this process is continuing. We took these steps in a good-
faith effort to cooperate with the summons. But we believe that 
UBS has now complied with the summons to the fullest extent 
possible without subjecting its employees to criminal 
prosecution in Switzerland.
    Mr. Chairman, the John Doe summons is fundamentally a 
dispute between the IRS and the Swiss Government. UBS believes 
this dispute should be resolved through diplomatic discussions 
between the two governments, and we will continue to support 
actively such discussions. But we respectfully submit that the 
IRS is attempting to resolve this diplomatic dispute in a 
courtroom, which is neither productive nor proper.
    The QI Agreement that UBS entered with the IRS in 2001 
expressly recognized that UBS would open and maintain accounts 
covered by Swiss financial privacy laws for U.S. clients who 
chose not to provide a Form W-9, as long as those accounts held 
no U.S. securities. The Swiss accounts that are potentially 
subject to the summons do not contain U.S. securities. UBS 
legitimately maintained those accounts consistent with the QI 
Agreement signed by the IRS. The summons, therefore, seeks 
client information that the IRS itself agreed would be kept 
confidential.
    In addition, Switzerland and the United States are 
signatories to treaties that specify the circumstances under 
which client names and account information located in 
Switzerland can be shared with U.S. authorities. We believe 
that the John Doe summons is inconsistent with those 
longstanding treaties.
    When I was last before the Subcommittee, I promised that 
UBS would cooperate with the IRS, and I believe that we have. 
We made a good-faith effort to produce responsive information 
available in this country that could be disclosed without 
violation of Swiss law. The bank has now done all that it can 
do to cooperate with the John Doe summons. But UBS cannot 
disclose information to the IRS that would put its employees at 
serious risk of criminal prosecution under Swiss law.
    Mr. Chairman, these are challenging times for my firm. But 
everyone at the bank is now dedicated to one goal: Fixing UBS, 
its finances, and the problems we have created here in the 
United States.
    Thank you for this opportunity to address the Subcommittee 
again, and I am happy to answer your questions.
    Senator Levin. Thank you very much, Mr. Branson.
    First, there are different numbers that have been presented 
about how many Swiss accounts are held by U.S. clients. One 
number we had last time from you, I believe, was 19,000. Then 
there was a number in a document which has been made part of 
the record, which I believe was 52,000.
    Yesterday, UBS provided the Subcommittee with its current 
best estimate that at the end of July 2008, there were about 
46,000 U.S. client accounts in Switzerland for which no W-9 was 
filed. Is that correct?
    Mr. Branson. I have that information with me that was 
provided to your staff over the last couple of days. We 
provided you with a total number of accounts as of September 
30, 2008, of some 48,000 accounts.
    Senator Levin. Forty-eight thousand.
    Mr. Branson. That is 47,760----
    Senator Levin. Let's call it 48,000. Apparently, 1,000 of 
those had W-9s, so that now it is roughly 47,000.
    Mr. Branson. That is correct.
    Senator Levin. Let's talk then about 47,000. Thirty 
thousand-plus of those accounts are accounts of U.S. clients 
who reside in the United States, and the remaining 17,000 
accounts that you have not closed are held by U.S. clients who 
do not live in the United States. Is that correct?
    Mr. Branson. I am not sure about those exact numbers, but 
these numbers, the 47,000, cover U.S. clients both resident in 
the United States and outside the United States.
    Senator Levin. Well, our estimate is about 17,000 of those 
accounts, using your numbers or your figures, are held by 
clients that are American citizens who do not live in the 
United States. Is that consistent with what your document 
shows?
    Mr. Branson. I am not familiar with that exactly.
    Senator Levin. All right. We will assume it is accurate. It 
is your document we are working from, so let me ask you this 
question: Are you going to close the accounts of U.S. citizens 
or only U.S. residents?
    Mr. Branson. What we have concluded since running through 
the exit program since the time we were here last is that our 
focus should not just be on U.S. residents with securities 
accounts, but it should include non-resident U.S. citizens with 
securities accounts.
    Senator Levin. Well, you are not going to close 17,000 
accounts apparently. You have acknowledged there are 47,000 
accounts. You testified 30,000 of them you have exited. Are you 
going to exit out of the balance? And if not, why not?
    Mr. Branson. So there is, I think, just over 14,000 that we 
have exited so far. The only category of these accounts that we 
will not exit are those held by non-residents and banking 
accounts only. And the vast majority of those will be located 
in Switzerland, provided to residents of Switzerland.
    Senator Levin. All right. Are you going to be closing the 
accounts of U.S. citizens who are not residents of the United 
States?
    Mr. Branson. With that one exception.
    Senator Levin. And that exception is?
    Mr. Branson. That exception is non-residents who have 
banking accounts only, no securities accounts. All securities 
accounts of residents and non-residents will be closed.
    Senator Levin. All right. And so why are you not dealing 
also with bank accounts that do not have securities in them but 
only cash, or something other than securities?
    Mr. Branson. The reason for that is there is only one place 
in the world where we provide banking-only services as a matter 
of course to our client base, and that is in Switzerland. There 
are obviously a very large number of U.S. expatriates, U.S. 
dual citizens, green card holders, U.S. persons resident in 
Switzerland. It would be simply impractical for us, as the 
largest bank in Switzerland, not to be able to offer very 
simple day-to-day banking services to that clientele.
    Senator Levin. And are you going to notify the IRS?
    Mr. Branson. There is no explicit mechanism in place for 
notification around those types of accounts right now.
    Senator Levin. Why? Shouldn't they be notified? Those 
clients are supposed to notify the IRS, are they not, with a W-
9?
    Mr. Branson. The W-9 is a securities-based concept. The QI 
Agreement is a securities-based concept. So there is no 
explicit mechanism for banking-only clients.
    Senator Levin. But they are supposed to notify--they are 
supposed to pay taxes on those revenues, are they not?
    Mr. Branson. That is correct. That is correct.
    Senator Levin. But you are not going to notify the IRS or 
require a W-9 for those non-residents that have cash in 
Switzerland. Is that correct?
    Mr. Branson. What we will make sure--as we examine that 
population that will remain with UBS, we will make sure that we 
have the appropriate controls and will evaluate what those 
appropriate controls are.
    Senator Levin. Well, that is something you will do. I want 
to know whether or not you will require that U.S. citizens who 
are not residents of the United States but are citizens that 
they take steps to notify the IRS of that revenue. Will you 
take those steps?
    Mr. Branson. We will evaluate what the proper----
    Senator Levin. You will evaluate. But is your intent to 
include that group? Is that your intent?
    Mr. Branson. Our intent is to make sure we have got the 
right controls over that population to make sure that we----
    Senator Levin. And you do not know whether that is a right 
control or not? You are not committing here today to make sure 
that you take the steps to make sure that those hidden accounts 
that are secret from the IRS are now disclosed to the IRS. You 
are not flat out committing to do that. You are just saying you 
will take whatever is the appropriate steps.
    Mr. Branson. We will make sure that there are the 
appropriate controls around that.
    Senator Levin. Does that mean that you will make sure that 
those citizens of the United States notify the IRS one way or 
another, or that you do, of that account? Is that what you are 
saying? Is that appropriate?
    Mr. Branson. We are going to make sure that we evaluate 
what is the most appropriate way of putting controls around 
that limited remaining population.
    Senator Levin. Controls so that there is no tax evasion?
    Mr. Branson. All appropriate controls.
    Senator Levin. Will you let this Subcommittee know what you 
decide is appropriate?
    Mr. Branson. Yes, I am sure that we can report back.
    Senator Levin. UBS has committed wrongdoing by its own 
acknowledgment by referring U.S. clients who wanted to hide 
their assets to outside firms, ``with the understanding that 
these outside advisers would help such U.S. clients form 
offshore companies in order to enable such clients to evade'' 
U.S. law.
    So when UBS managers referred U.S. clients to those 
advisers to create those shell corporations and to form those 
offshore companies, your folks knew that those advisers were 
going to help those clients do what your lawyers said you could 
not do directly. Is that correct?
    Mr. Branson. There are many references in the statement of 
facts connected with the Deferred Prosecution Agreement of the 
kind of misconduct that we have admitted as part of that 
process, which includes, as you have identified, the use of 
sham offshore structures. I think that the behavior you are 
referencing is consistent with what we see in that statement of 
facts.
    Senator Levin. Well, it is not just consistent. I want you 
to say that is, in fact, what you have acknowledged, because it 
is.
    Mr. Branson. We have acknowledged----
    Senator Levin. It is not just that it is consistent with 
what you have acknowledged. It is what you have acknowledged. 
Is that not true?
    Mr. Branson. We have acknowledged that there are clients 
who used inappropriately offshore structures which the----
    Senator Levin. And that your private bankers and managers 
knew or should have known that the purpose of that referral to 
the outside advisers was to create the sham corporations. Is 
that correct? You have acknowledged that in that proceeding?
    Mr. Branson. We have acknowledged in the statement of facts 
inappropriate use of offshore structures and inappropriate 
behavior of UBS employees in connection with the creation of 
those structures, yes.
    Senator Levin. I know it is inappropriate, but I am being 
very precise here. It is not just inappropriate behavior, but 
that they knew or should have known that, in fact, the people 
to whom they were referring your clients were going to create 
those corporations. Is that true, that you have acknowledged 
that?
    Mr. Branson. We have acknowledged that such referrals did 
take place, that such inappropriate structures were set up, and 
that UBS employees knew about that. That is all set out in the 
admission in the statement of facts.
    Senator Levin. And that the UBS employees knew that was the 
purpose of the referal? I just want to know whether you are 
willing to acknowledge what you have already acknowledged. It 
is very simple. Have you acknowledged that?
    Mr. Branson. What is in the statement, set out in the 
statement of facts is the complete record of what we have 
admitted connected to the behavior around the offshore 
structures, and the exact formulation of that is not something 
I have in hand, but certainly the inappropriate use of offshore 
structures, referrals, and the involvement of UBS advisers and 
management in that is a topic that is covered within there. It 
is acknowledged within there. It is part of the misconduct that 
we have admitted.
    Senator Levin. I am going to read something to you and just 
ask you whether or not you still acknowledge it, whether you 
are backing away from this statement in any way: 
``Notwithstanding the warnings, certain managers in the U.S. 
cross-border business thereafter authorized''--I am reading 
from paragraph 11--``UBS private bankers to refer those U.S. 
clients who did not wish to comply with the new requirements of 
the QI Agreement to certain outside lawyers and consultants, 
and did so''--and here are the key words--``with the 
understanding that those outside advisers would help such U.S. 
clients form offshore companies in order to enable such clients 
to evade the U.S. securities investment restrictions in the QI 
Agreement.''
    Is that an accurate reading of that acknowledgment? And do 
you still acknowledge it?
    Mr. Branson. Absolutely. That is from the statement of 
facts. That is our acknowledgment of what went on within UBS.
    Senator Levin. OK. Why would it take me four questions to 
get you to just say ``yes, we have acknowledged that,'' instead 
of wrapping it around generalities, like ``we have acknowledged 
inappropriate conduct''? I mean, I was giving you specific 
words from an acknowledgment, and it took me 3 minutes to get 
from you a very simple statement, ``Yes, we acknowledged it, 
and it is an accurate acknowledgment.'' And that is something 
which is very troubling to me, that it should take that long to 
get you to say something that you have already acknowledged. 
But it is a very important acknowledgment because it means your 
folks knew that they were participating in this violation of 
U.S. law. They knew it when they referred folks to these 
advisers who created these sham corporations for them and other 
tax havens.
    I am going to go now and vote, and then I will be back. I 
think Dr. Coburn would be--have you voted?
    Senator Coburn. Yes, I have. And vote yes, by the way.
    Senator Levin. You can be sure I----
    Senator Coburn. It is my amendment.
    Senator Levin. I know, yes. [Laughter.]
    Senator Levin. You do not want to hear this, folks.
    Senator McCaskill. I voted yes.
    Senator Levin. All right. Well, then it is one to two.
    Senator Coburn. Maybe it will be three to zero by the time 
you get down there and think about it.
    Senator Levin. Doctor, well, I have thought a lot about 
this amendment, as a matter of fact, believe me. First Dr. 
Coburn, then Senator McCaskill.
    Senator Coburn. Thank you, Mr. Chairman.
    Through your admission of fact and statement, we know that 
you chose to send bankers on hundreds of trips to the United 
States to do things in violation of American law. What are we 
to understand that UBS is doing now to make sure that you are 
complying with U.S. law as we move forward?
    Mr. Branson. Well, the No. 1 action, obviously, is to exit 
the business completely and, therefore, not to provide services 
to U.S. residents going forward. And as we said today, we are 
making steady, strong progress on exiting that business, and 
that will be completed as soon as it possibly can be. That is a 
major program involving the recruitment of a large number of 
staff, project management, and governance. We are putting a 
huge amount of effort into getting that exit done and right.
    In terms of travel specifically, in the interim period, 
obviously we have got a complete ban in place that stops any 
client advisers making travel to the United States for any 
reason connected with visiting of those clients. It just simply 
cannot happen anymore. So the business is being exited, and 
that particular aspect in the meantime is strictly controlled.
    Senator Coburn. And this is a small portion of UBS' 
business in this country, correct?
    Mr. Branson. This is a minute portion of UBS' business 
overall.
    Senator Coburn. Right.
    Mr. Branson. This was some 60 client advisers, about 0.3 
percent of the population of client advisers we have. And we 
have some 26,000, 27,000 employees located here in the United 
States. This is a very small part of our business where things 
went badly wrong.
    Senator Coburn. So this is a compliance failure in one 
segment of your business. What is the assurance that UBS is in 
compliance in the other segments of your business in this 
country?
    Mr. Branson. This is the top priority of UBS right now, is 
to make sure that nothing like this can happen in any other 
business within UBS, I mean that this just cannot reoccur. I 
mean, this particular business is finished, we are exiting it, 
that cannot reoccur. I can only re-emphasize to you what I know 
about the culture of our firm, which is that compliance with 
all the applicable laws and regulation in every jurisdiction in 
which we operate, keeping that compliance is a No. 1 priority.
    Senator Coburn. So that is part of the corporate culture at 
UBS today?
    Mr. Branson. Yes, that is.
    Senator Coburn. Thank you. Can you describe for me maybe a 
legitimate reason why someone might want to--other than 
business--might want to have an offshore account with UBS?
    Mr. Branson. There are many reasons, and if we are talking 
particularly about Switzerland, which is the focus of this 
hearing, then Switzerland is a well-renowned financial center 
with a huge amount of expertise, particularly in the management 
of private wealth. It is the world's greatest center for that, 
so there is a delivery of expertise and service which you can 
get in Switzerland which is not available everywhere else. 
There are other aspects--diversification of jurisdictions, 
stability of the financial, political, legal systems of 
Switzerland which are attractive to people from outside 
Switzerland who want to hold their assets somewhere other than 
their home country. So there are many legitimate reasons why 
offshore banking exists and will continue to exist.
    Senator Coburn. So let us say I had a significant amount of 
money, and I initiated--you did not initiate, but I initiated 
going to your company and, without evidence of giving you a 
1099 or any other thing, are you going to take my money?
    Mr. Branson. If you are a U.S. resident, no.
    Senator Coburn. You are not?
    Mr. Branson. We are exiting that business, U.S. residents--
--
    Senator Coburn. Even if I initiate that I want to put a 
deposit in your bank?
    Mr. Branson. We will not--if it was a deposit that fell 
within the small exception that Chairman Levin was talking 
about earlier, if you happened to be living in Switzerland as 
an expatriate and needed day-to-day banking services, then we 
would consider that, but in no other circumstances.
    Senator Coburn. So if I live in Muskogee, Oklahoma, and I 
want to send you half a million dollars, you do not want my 
money?
    Mr. Branson. No way.
    Senator Coburn. And why not?
    Mr. Branson. That is the business we have chosen to exit. 
We do not want to continue to operate that business.
    Senator Coburn. Because of the compliance?
    Mr. Branson. Because of the fact that the particular nature 
of operating in the United States is extremely complicated. 
There is no way, with the SEC restrictions around that 
business, that we can provide the kind of service that we would 
consider would be a good service for you, and we have 
operations here in the United States that those 30,000 people 
are operating which would be much better suited for your needs.
    Senator Coburn. Let us say I am an expatriate living in 
Zurich, and I want to put a million dollars in your bank, and I 
am not going to give you a 1099 or anything else. Are you going 
to take my million dollars?
    Mr. Branson. Obviously, there would be a number of checks 
around any account opening and any large amounts that come in--
--
    Senator Coburn. But there is no requirement for you to 
check on whether or not I am supplying a 1099 or any other 
compliance fact that I have paid taxes on that money that I am 
depositing?
    Mr. Branson. There is currently no formal treaty mechanism 
or any kind of bilateral agreement in place that would force 
that check on UBS or any other bank in Switzerland or anywhere 
else.
    Senator Coburn. Well, let me ask you this: Should there be?
    Mr. Branson. And that is what we said, we will evaluate 
what the proper controls will be around that small exception.
    Senator Coburn. Is it UBS' position that there should be an 
enhancement in the treaty obligations between Switzerland and 
the United States for such a thing like that?
    Mr. Branson. Obviously, I am not here to talk about the 
Swiss Government's position----
    Senator Coburn. No, I am just saying, as a business 
decision for UBS, would you see that as advantageous for your 
business model for expatriates living in Switzerland?
    Mr. Branson. I mean, this is not a major part of our 
business model. It is not something that we are seeking to 
market as a big part of our business. As the biggest, by far 
the biggest bank in Switzerland, it seems impractical to us not 
to be able to offer those kind of services. And to the extent 
we need to put controls around those services to make sure 
everybody is comfortable, that we continue to operate that, 
that is what we will be evaluating.
    Senator Coburn. Of those accounts that are there now, if a 
person's account was nothing but cash, no securities or 
anything else, would UBS have any reason to know or not know 
whether or not the earnings off that cash account had been 
reported to the IRS?
    Mr. Branson. We would not as a bank--UBS or any other bank 
would not have a reason to know.
    Senator Coburn. And you would not attempt to know?
    Mr. Branson. We would have no reason to know, no.
    Senator Coburn. Because the QI between UBS and the IRS is 
about stocks only.
    Mr. Branson. It is about stocks, and it is, in fact----
    Senator Coburn. American stocks.
    Mr. Branson. American stocks only.
    Senator Coburn. Right.
    Mr. Branson. Not non-U.S. stocks.
    Senator Coburn. All right. I will have additional questions 
to submit, if you would not mind responding to them in writing. 
I will not take additional time.
    The Senator from Missouri is recognized.
    Senator McCaskill [presiding]. You say that UBS will 
continue to keep open the Swiss accounts of U.S. citizens who 
are not residents in the United States as long as these 
accounts do not hold securities. Could you give us an estimate 
of how many accounts that is?
    Mr. Branson. It is certainly a minor amount of that 
population. The amount of assets in there is certainly well 
below $1 billion. I do not have the exact number at hand.
    Senator McCaskill. OK. If you could try to get that for the 
Subcommittee, we would appreciate it.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 32, which appears in the Appendix on page 939.
---------------------------------------------------------------------------
    The good news is that Switzerland has a reputation for 
secrecy; the bad news is Switzerland has a reputation for 
secrecy. I understand that this is causing quite an uproar in 
the banking community in Switzerland, and I would like you to 
speak to that.
    You are trying to compete with other banks in what I think 
we need to acknowledge today, in fairness to UBS and to every 
other banking institution, could not be a more difficult 
climate right now. I know that the financial sector is taking a 
pounding for a variety of reasons, some self-inflicted, some a 
matter of confidence right now in terms of the perception of 
investors and people engaged in the financial sector about what 
is out there that we do not know about.
    I am trying to figure out how in this global economy we are 
going to effectively get at this problem. Clearly, you guys got 
caught big time, but I realize there are many other banks that 
are crossing the line on a daily basis because a whole lot of 
people do not want to pay taxes and a whole lot of people have 
money they do not want other people to know about.
    Could you speak to how you think the laws in Switzerland 
could possibly evolve to at least acknowledge that the kind of 
secrecy that you all have branded yourself with is going to be 
counterproductive in a global economy when you run into 
problems like this?
    Mr. Branson. Obviously, I cannot speak on behalf of the 
Swiss Government, and it is a Swiss Government/Swiss people 
issue. But I think the most important thing as far as we are 
concerned is that discussions about that, bilateral discussions 
are taking place, should be taking place, those diplomatic 
discussions which we think are a more appropriate way of 
working on that evolution than through the courtroom. We are 
very happy to see those discussions have started. The Swiss 
Justice Minister was here in Washington visiting her 
counterpart on Monday. They discussed this topic. Those 
discussions have started and should be ongoing, and only 
through those kinds of discussions can you get the evolution in 
these kinds of legal frameworks which will result in a 
satisfactory outcome for the parties involved.
    Senator McCaskill. What is the most likely place--if 
Switzerland changes its very bright lines of financial secrecy 
and begins to become more of a cooperative world player, where 
is the next likely place that people are going to try to park 
money?
    Mr. Branson. I could not comment on other people's 
motivation.
    Senator McCaskill. No, not motivations. I am just talking 
about your knowledge of the banking world. I know this is 
uncomfortable for you because this is not your nature to give 
an opinion about this. But you are a businessman in this sector 
of the economy. You are someone who is involved in global 
banking. I am trying to predict, if we work on this problem 
with Switzerland and we resolve this issue about whether or not 
we are entitled to these names and entitled to get our pound of 
flesh from these Americans who have broken the law with the aid 
and assistance of your bank, I am trying to get at the issue of 
where is the next place that we need to be looking where this 
is going to continue to go on.
    Mr. Branson. There are many financial centers in the world 
that run big offshore businesses. Switzerland is obviously well 
known for that. In terms of the size of assets in offshore 
centers, you have centers in the United States; you have 
centers in the U.K. and their dependencies; you have centers in 
Asia. So there are many different offshore jurisdictions in the 
world that have a different overlapping network of bilateral 
treaties between them and the destination countries. So I think 
it is impossible to single out one location or the other, but 
offshore banking is regulated generally through these kind of 
double taxation treaties.
    It is clear that in the case of Switzerland and the United 
States that treaty is going to be discussed as part of these 
diplomatic contacts between the governments. We think that is 
right, proper. We are going to actively support those 
discussions. And then for Switzerland, if that framework 
adapts, then the new framework is the one we comply with, and 
that is the way things move forward.
    Senator McCaskill. Are there middlemen in this business?
    Mr. Branson. I am not quite sure I understand.
    Senator McCaskill. Brokers or people who actually deal with 
wealthy people to try to help find places they can park money 
and avoid taxes, that they help locate folks for them, someone 
who is a go-between--back when you did this business, between 
your bank and the person who holds the monies or securities. Is 
there an industry there?
    Mr. Branson. There is a part of the wealth management 
industry which would be referred to as ``financial 
intermediaries,'' where advisory firms look after the clients' 
interests, but maybe the assets are booked elsewhere.
    Senator McCaskill. Are they, in your opinion, sufficiently 
regulated?
    Mr. Branson. That is not something I have a clear opinion 
on. There is a mosaic of those kind of intermediaries in many 
different jurisdictions around the world.
    Senator McCaskill. We are not going to get you to offer 
opinions on much outside your lane, are we? I think I am 
beginning to get that. Have the deposits in your bank dropped 
since this controversy?
    Mr. Branson. Yes.
    Senator McCaskill. And how much of that do you attribute to 
this controversy as opposed to the economic climate?
    Mr. Branson. That is impossible to tell. UBS has been faced 
with a number of problems, as you said, many of them self-
inflicted, many of them connected to the global meltdown in the 
financial sector. As a result of that, we have seen outflows of 
client assets. There is no way of pinning each of those onto a 
specific reason. But each and every client that leaves the bank 
is a problem for us. It is painful for us, and that is clearly 
why re-establishing trust in UBS is absolutely the No. 1 
priority, and getting these issues behind us is absolutely 
critical to re-establishing trust in UBS.
    Senator McCaskill. And it is my understanding you have a 
new CEO?
    Mr. Branson. That is correct, yes.
    Senator McCaskill. And his name is?
    Mr. Branson. Oswald Gruebel.
    Senator McCaskill. And is he Swiss?
    Mr. Branson. He is German.
    Senator McCaskill. I know I will not get you to give an 
opinion of your competitors, but you are the largest bank in 
Switzerland?
    Mr. Branson. That is correct.
    Senator McCaskill. Who is No. 2?
    Mr. Branson. Credit Suisse.
    Senator McCaskill. Credit Suisse. And No. 3?
    Mr. Branson. Three, single bank, it may be one of the 
cantonal banks, so the Zurich Cantonal Bank.
    Senator McCaskill. And how much bigger are you than Credit 
Suisse?
    Mr. Branson. In terms of market capitalization, not 
tremendously bigger now.
    Senator McCaskill. So you are the two big ones.
    Mr. Branson. We are the two big multinational banks based 
in Switzerland. That is correct.
    Senator McCaskill. And I do not even need to ask because 
you would not offer an opinion, as to whether or not Credit 
Suisse has been involved in the same kind of activity.
    Mr. Branson. I would have no knowledge.
    Senator McCaskill. OK. That is all, Mr. Chairman. I will 
have further questions for the record.
    Senator Levin [presiding]. Thank you.
    Just going back to this 47,000 number again, is that 
estimate, that approximation, the number of accounts or clients 
or both?
    Mr. Branson. That is the number of accounts.
    Senator Levin. And how close would that be to the number of 
U.S. clients?
    Mr. Branson. It would be relatively close.
    Senator Levin. You do not have a better number for the 
clients than that?
    Mr. Branson. Not today. There are a number of reasons why. 
Obviously, clients can hold multiple accounts or accounts can 
have multiple clients behind them. So there is not a one-to-one 
mapping. But there is no reason to think you would get 
something of a grossly different order of magnitude.
    Senator Levin. All right. So it is somewhere in the mid-
40s, probably, the number of clients?
    Mr. Branson. I would not like to hazard an exact number, 
but I think----
    Senator Levin. Well, that is not an exact number. That is 
an approximation. I am just saying would it be in the area of 
the mid-40s, probably.
    Mr. Branson. I do not have that level of precision today.
    Senator Levin. OK. Is it as good a number as you got in 
terms of clients?
    Mr. Branson. Well, we can pull that number out of our 
systems if we----
    Senator Levin. Well, that would be great.
    Mr. Branson [continuing]. Go back and do that.
    Senator Levin. Would you do that?
    Mr. Branson. I can make sure that we work on that.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 32, which appears in the Appendix on page 939.
---------------------------------------------------------------------------
    Senator Levin. OK. Mr. Branson, this is kind of a summary 
as to what has happened here recently in the last 2 weeks. You 
have entered into a Deferred Prosecution Agreement with the 
United States in which it admitted facts, the bank, that 
related to past conduct, accepted responsibility for a 
violation of U.S. law, paid a $780 million fine, and turned 
over the names of a very tiny subset of U.S. clients. The 
President of Switzerland estimated that number was 250 to 300, 
and that is, if it is 40,000 clients--and you do not want to 
hazard a number, but it is the best number we have got--that 
would be less than half of 1 percent of those clients' names so 
far.
    Now, you have agreed that you have committed wrongdoing by 
referring U.S. clients who wanted to hide their assets to 
outside firms because you had the understanding that these 
outside advisers would help those clients form offshore 
companies in order to enable the clients to evade--those are 
your words--U.S. law.
    UBS also admitted that its bankers and managers took a 
range of other actions which actively assisted or otherwise 
facilitated U.S. taxpayers--again, your words--``actively 
assisted or otherwise facilitated''--U.S. taxpayers who were 
evading U.S. taxes. You agreed in court that, acting through 
your bankers and managers, you ``participated in a scheme to 
defraud the United States of America.''
    Now, you have acknowledged that you schemed with people. 
Why won't you give us the names of the people with whom you 
schemed to commit violations of American law?
    Mr. Branson. The issue with the John Doe summons and the 
production of those names is to go beyond what we have done 
already, which is to produce information located here in the 
United States and to move to information located in 
Switzerland, and to produce would be a breach of Swiss client 
confidentiality laws.
    Senator Levin. All right. So the short answer is that Swiss 
law in your judgment does not allow you to produce more than 
that small subset of names which you have already produced. Is 
that the short answer?
    Mr. Branson. Yes.
    Senator Levin. And if it were not for Swiss law, would you 
do it?
    Mr. Branson. We can only live within the legal framework we 
have today.
    Senator Levin. If there were no prohibition in Swiss law, 
would you then give the IRS the names since you have 
acknowledged that you participated in a scheme with a large 
number of people to defraud the United States? If it were not 
prohibited by Swiss law, would your bank give us those names?
    Mr. Branson. If there was a framework and these frameworks 
will evolve--and if the frameworks evolve, then we will comply 
with however that framework evolves. So if the framework 
evolves to make that appropriate, that would happen. If it 
doesn't, then it wouldn't.
    Senator Levin. All right. I do not know why I cannot get 
direct answers here. Your answers are needlessly evasive, it 
seems to me. If it were not for the Swiss prohibition, would 
you be willing to provide those names to the IRS when you have 
agreed that you participated in a scheme with people to defraud 
our government? Would you then be willing to supply the names?
    Mr. Branson. If there is a treaty framework----
    Senator Levin. No treaty framework. No treaties. You have 
agreed you participated in a fraud with certain people. Since 
you have agreed that you have done that, if it were not for a 
prohibition in law and there is no treaty involvement, would 
you be willing as a bank to give us the names so we could 
enforce our laws? Would that be something you would be willing 
to do, do you think?
    Mr. Branson. Well, with respect to all kinds of exchange of 
information across borders are always going to be subject to a 
treaty framework or some other bilateral or multilateral 
framework. And it is only within that framework--
    Senator Levin. Would you be willing to enter into an 
agreement to give us those names?
    Mr. Branson. We believe that the discussions between the 
governments is the right way to look at those agreements, and 
we are very happy that those discussions are underway. We are 
very supportive of those discussions, and whatever framework 
evolves out of those discussions will be the one that we comply 
with.
    Senator Levin. The last discussion I have heard is a 
unilateral statement on the part of the President of 
Switzerland or the head of the banking industry in Switzerland 
saying that you are going to continue Swiss secrecy. That is 
the last so-called discussion that we have heard.
    I think the document we have made reference to indicated--
it is a UBS document--that during the period in question, 32 
UBS bankers made 3,800 client visits to the United States. Your 
bankers chose to come to this country and to conduct business 
here voluntarily. Is that correct?
    Mr. Branson. That is correct.
    Senator Levin. Now, since you have acknowledged 
participating in a scheme to defraud the government, why didn't 
you consider that before you sent your bankers over here? Or 
did you? Were there discussions inside UBS about, hey, wait a 
minute, if we have our bankers go over there and carry out all 
these shenanigans, then that would be participating in a scheme 
to defraud the U.S. Government. Were there any discussions 
about that and any urging not to do that, that you know of?
    Mr. Branson. Not that I am aware of, but everything about 
this inappropriate travel is acknowledged within the statement 
of facts. It is something we acknowledged. The way that travel 
was done and the use of U.S. jurisdictional means should not 
have happened.
    Senator Levin. No, we understand that, but were there 
conversations prior to those bankers and employees of UBS 
coming here as to the propriety of their coming to the United 
States and engaging in those activities?
    Mr. Branson. I would not have knowledge of the 
conversations. My responsibility, as you know, for the business 
is limited to last year, so I am not privy to the conversations 
there may have been.
    Senator Levin. All right. Now, we have been informed by the 
Swiss Government that it has identified 12 U.S. clients whose 
names and account information can be supplied under the treaty. 
So that is 12 out of somewhere in the area of 40,000 persons. 
Why is there only 12 when you have acknowledged in this 
statement, this joint statement, that you have helped to hide 
thousands of accounts from the IRS? Why only 12?
    Mr. Branson. Well, I believe the number of 12 is probably 
superseded by the production of client data pursuant to the 
settlement agreement that was reached with the Department of 
Justice.
    Senator Levin. And that is 250, roughly?
    Mr. Branson. It is a number I am not at liberty to confirm 
exactly, but----
    Senator Levin. I have made reference to a UBS memo, and it 
is on a chart \1\ which says that, ``In the case where the U.S. 
person holds his U.S. investments directly, we have been 
advised by Baker & McKenzie that we cannot recommend 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.''
---------------------------------------------------------------------------
    \1\ See Exhibits No. 1.e. and 15, which appear in the Appendix on 
pages 65 and 235.
---------------------------------------------------------------------------
    ``What we can do is to suggest that clients seek external 
professional advice and offer them a choice of approved service 
providers, if they request it.''
    Do you agree--again, I want to be very clear on this 
point--that your folks knew when they--that you understood from 
Baker & McKenzie that you could recommend your clients to 
outside professional advisers who you knew would offer them 
advice on how to create shell corporations and tax havens? Is 
that what you understood the advice to mean?
    Mr. Branson. I think this is the point we covered earlier 
about what was in the statement of----
    Senator Levin. It is not quite the same point. I am asking 
about did you understand that Baker & McKenzie were advising 
you that you could seek external professional advice knowing 
that advice would be the same as your bank could not directly 
recommend? Is that what you understood the Baker & McKenzie 
advice to be? Or did you ignore the Baker & McKenzie advice in 
going to these outside advisers--or having these clients go to 
the outside advisers?
    Mr. Branson. I do not have a knowledge of the Baker & 
McKenzie advice or what was or was not done with that. But that 
behavior or that memo that you have referred to there does seem 
to be consistent to the quick review with what we have referred 
to in the statement of facts earlier, part of this misconduct 
related to the sham offshore structures and the referral to 
outside advisers.
    Senator Levin. Did Baker & McKenzie tell you you could go 
to an adviser who would recommend the creation of a sham 
corporation?
    Mr. Branson. I have no knowledge of that.
    Senator Levin. Are you familiar with your own document 
which says that, ``We have been advised by Baker & McKenzie we 
cannot recommend products . . . to our clients as an 
`alternative' to filing a Form W-9,'' that would be ``viewed as 
actively helping our clients to evade U.S. tax. What we can 
do''--presumably referring to Baker & McKenzie--``is to suggest 
that clients seek external professional advice and offer them a 
choice of approved service providers.''\1\
---------------------------------------------------------------------------
    \1\ See Exhibits No. 1.e. and 15, which appear in the Appendix on 
pages 65 and 235.
---------------------------------------------------------------------------
    Did you understand from that document, which is UBS' own 
memo, that Baker & McKenzie was telling you that you could do 
indirectly and knowingly what you could not do directly?
    Mr. Branson. I think it is really impossible for me to 
impute a motive of Baker & McKenzie.
    Senator Levin. It is not the motive; it is the words. Did 
you understand, did UBS understand from those words that you 
could recommend to your clients that they go to external 
professional advice and have the same effect as if you directly 
referred them to the creation of a sham corporation offshore? 
Is that what you understood that advice to mean?
    Mr. Branson. I think the result of this----
    Senator Levin. The words. I am asking about did you 
understand those words to mean--not motive, not intent. Those 
words.
    Mr. Branson. I think the result of this is the creation of 
the sham offshore structures that we have acknowledged this 
misconduct. We are not trying to minimize it. We are not trying 
to run away from it. We have acknowledged it. We have paid for 
it. It is acknowledged, set out there in the statement of 
facts.
    Senator Levin. Maybe you have paid for it, but 40,000 
American tax evaders have not.
    Do you have the exhibits in front of you? If you take a 
look at Exhibit 16,\2\ this is an internal UBS e-mail. These 
are not just 40,000 American citizens who have avoided paying 
taxes. These are folks that you aided and abetted in that 
process.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 16, which appears in the Appendix on page 237.
---------------------------------------------------------------------------
    Anyway, take a look at Exhibit 16. It says here that you 
contacted in this e-mail some of the company formation agents 
that have been opening accounts at UBS in the name of offshore 
shell companies at the request of U.S. clients. Here is the 
message from you: ``We invite you to make a short presentation 
on the structures/vehicles that you recommend to U.S. and 
Canadian clients who do not appear to declare income/capital 
gains to their respective tax authorities.''
    So when you were asking these folks to make a short 
presentation to UBS, you were aware that these folks were 
providing these structures and vehicles to your clients who 
were not apparently declaring their income to their 
governments' tax authorities. Is that correct?
    Mr. Branson. I have no personal knowledge of that e-mail or 
any of the details around it. It does appear to be conduct 
consistent with what we have discussed from the statement of 
facts and that acknowledged pattern of misconduct around 
offshore structures.
    Senator Levin. And, again, these structures were being set 
up for the purpose of hiding who the true owner or beneficiary 
of the accounts were. Is that correct?
    Mr. Branson. On all of these topics, Chairman Levin, it is 
difficult for me to have any knowledge of the exact 
conversations. I have been in my job less than a year. I do not 
have a personal knowledge of the way----
    Senator Levin. Well, is it your understanding--I mean, this 
is based on the documents that you folks have signed. Is it 
your understanding that these structures that I have been 
referring to were being set up for the purpose of trying to 
hide who the true beneficial owner was of these accounts?
    Mr. Branson. The sham use of offshore structures is part of 
the misconduct that we have identified and acknowledged.
    Senator Levin. And was the purpose of those sham structures 
to hide who the true owner of the accounts were? Was that the 
purpose?
    Mr. Branson. Yes.
    Senator Levin. Now, that message that I made reference to 
went to four companies. I am not sure I am pronouncing their 
names correctly. Quadris, Sinco Treuhand, Rickenbach & Partner, 
and MMG Panazur. You asked those companies to come in, in 2004, 
and they actually had started forming offshore shell 
corporations for U.S. persons in 2000 when the QI Program was 
set up for the first time. Is that correct?
    Mr. Branson. I have no knowledge of the activities of those 
firms.
    Senator Levin. OK. Well, at our request, your company 
estimated that about 81 non-U.S. entities were established in 
2000 to open accounts for U.S. clients, and your company, your 
bank provided estimates for the number of entities created by 
three companies named in that e-mail. This is what UBS told us: 
Sinco formed 26 entities, Rickenbach formed 10 entities, MMG 
Panazur formed 12 entities, for a total of 48.
    Do you know whether there were other companies that were 
establishing these type of entities for U.S. clients with UBS 
accounts in Switzerland?
    Mr. Branson. I do not know, no.
    Senator Levin. A recent press article quoted your new CEO, 
Mr. Gruebel, as follows. He said, ``It is questionable whether 
we can continue to hide tax evaders behind banking secrecy.'' 
Is your bank going to recommend to the Swiss Government that 
they drop their strict secrecy requirements and cooperate with 
law enforcement in friendly countries such as ours to go after 
people who violate our laws? Is that what UBS is going to 
recommend to the Swiss authorities?
    Mr. Branson. We are going to actively support the 
discussions between the Swiss Government and your government. 
We think that is the right way for this to evolve and this to 
develop, and that will create a framework which will be the one 
with which we would comply in the future.
    Senator Levin. What is going to be your recommendation in 
terms of any shift in Swiss policy so that bank secrecy is no 
longer used to protect tax avoiders?
    Mr. Branson. I cannot speak today to a position the bank 
may develop on that topic.
    Senator Levin. Is that the bank's official position, that 
it is questionable whether we can continue to hide tax evaders 
behind banking secrecy? Is that what you understand when Mr. 
Gruebel made that statement? Or is that just kind of an off-
the-cuff kind of statement?
    Mr. Branson. I am not aware that the bank has an official 
publicly stated position on the issue.
    Senator Levin. Mr. Branson, thank you for being here today. 
Needless to say, we and I hope most of the rest of the world 
that loses tax revenues to your secrecy policies will come 
together and jointly determine to end those policies. When you 
say that our problem is with the law of Switzerland, we have 
problems with, obviously, your bank. That is why you are 
involved in a criminal proceeding. But we also have very 
serious problems with the Swiss secrecy laws because of what 
they lead to, which is the kind of participation, the aiding 
and abetting in tax evasion which has taken place so 
prominently in this situation.
    We now have a President of the United States who 
cosponsored my bill last Congress to go after these secrecy 
jurisdictions with all of our might. It is absurd that any 
country wants to make money off our loss of tax revenues, 
particularly friends. And we consider the Swiss our friends. It 
offends our people who are in very stressful economic times, 
but even before that. It is offensive to us that our laws are 
being circumvented with the assistance of tax havens in secrecy 
jurisdictions.
    We may not be able to change your law, but we are going to 
do everything we can to pass a law here which is going to make 
it difficult, if not impossible, for American citizens, whether 
they are residents or non-residents, to use tax havens offshore 
that maintain the secrecy of bank accounts in order, obviously, 
to make our law enforcement more difficult since that is the 
purpose of so many of these account holders.
    So I hope you will take that message back to your bank. I 
hope your bank will not just say you will follow the law. It is 
a law which has created real harm in terms of other countries' 
tax revenues, and I do not know why any country would want to 
benefit from that kind of behavior. I do not know why any 
country that genuinely cares about values would want to be in a 
position where its entities, its businesses are operated in 
such a way that other countries which have legitimate tax laws 
are the losers.
    You may be the gainers so far, but we are going to do 
everything we can to take away that ill-begotten gain because 
that is the way we view it, and I think that is the way the 
world more and more views it. Prime Minister Brown today made 
that very clear in his speech to the Congress of the United 
States. And I know our President--and I have spoken to him 
personally about this today at the White House--and I know that 
his heart is exactly in making sure that we do not lose 
revenues to these offshore secrecy jurisdictions.
    Again, I hope you will take back the message. I will give 
you a chance if you want to say anything, obviously, but I want 
to thank you for being here today. Do you want to say anything?
    Mr. Branson. I have nothing further to add.
    Senator Levin. Thank you.
    [Whereupon, at 5:03 p.m., the Subcommittee was adjourned.]




                            A P P E N D I X

                              ----------                              

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                                 
