It's not just the U.S. government that wants to get its hands on the list of Americans who hold secretive Swiss bank accounts. Ex-wives, creditors and former business partners are also salivating over the idea that a settlement between the U.S., the Swiss government and a Swiss bank may lead to the public disclosure of as many as 4,450 U.S. individuals that used the foreign bank accounts to hide money. Prominent New York City divorce lawyer Raoul Lionel Felder says he is already getting calls from clients who want to know what they can do to get their portion of the money they always suspected their exloved one had tucked away overseas.
"You see allegations of Swiss bank accounts in divorce proceedings all the time," says Felder, whose clients have included Rudy Giuliani, Robin Givens and the former Mrs. Martin Scorsese. "A lot of divorces are going to get opened up."
Tax evasion may only be the beginning of the legal problems facing holders of secret UBS accounts. On Aug. 19, UBS, Switzerland's second largest bank, agreed to hand over the names of thousands of American clients suspected by the IRS of evading taxes. The settlement comes after well over a year of investigation by the U.S. government into allegations of tax fraud at the Swiss bank. Should the names become public, lawyers say a raft of lawsuits could hit the account holders from creditors and business partners who may have long believed that the individuals using the accounts were hiding money that wasn't rightfully theirs.
One lawyer for UBS account holders says he has at least one case in which a client used a Swiss bank account to hide assets from creditors in bankruptcy proceedings. Lying in bankruptcy court can result in jail time, though the statute of limitations on bankruptcy proceedings is generally six years. Divorce proceedings, however, have no statute of limitations in most states in the country. So no matter when the divorce happened, a divorce settlement could be thrown out if it is disclosed that an ex-spouse used one of the UBS accounts to shield a portion of their assets. What's more, the new settlement is likely to be harsher toward the party that lied during the original divorce proceedings.
Lawyers for UBS clients, though, say the stiffest penalties for using the UBS accounts will still probably come from the IRS. The accounts that the U.S. government is getting access to hold an average of $4 million each. Account holders found guilty of tax fraud could have to hand over as much as 50% of the money in the accounts, and many will likely receive prison time. Of the 2,144 individuals convicted of U.S. tax evasion in 2008, 1,957, or 91%, were sentenced to some form of incarceration. Some may have served that time at home with an ankle bracelet or in a halfway house, but most went to prison. According to Steve Johnson, a law professor at the University of Nevada, Las Vegas, the average prison sentence over the past 10 years for tax evasion has been 25 months.
Still, it's not clear how many of the UBS account holders will be made public. The IRS is giving account holders who have cheated on their taxes a period of clemency that lasts until Sept. 23. If they turn themselves in by then, the IRS says in most cases the agency will waive jail time, and is likely to impose a smaller fine. Most disclosures made to the IRS are subject to confidentiality, so other creditors might not ever find out about the hidden accounts.
But if a UBS client used the Swiss bank account to defraud a bankruptcy court, or others, it is not clear the IRS will allow them to enter the clemency program. Lying in divorce proceedings, though, may not be enough to get someone kicked out of the clemency program, but ex-spouses could still find out about the accounts. Attorney Charles Falk of Porzio, Bromberg & Newman says he had a situation a year ago in which a husband had filed joint tax returns before his divorce. So when the client made a voluntary disclosure to the IRS that he had used a Swiss bank account to evade taxes, his ex-wife was notified of the disclosure as well. She had technically violated tax laws as well because her name was on the income filings, even though she never knew the account existed. A new divorce settlement was reached with the man handing over more money to his ex-wife.
"People hid money in Swiss bank accounts not just to avoid the IRS, but other creditors as well," says Martin Press, a lawyer representing a number of UBS clients. "If these names become public, we are going to see a number of cases of bankruptcy fraud, corporate fraud and divorce fraud."