Court Forces Swiss Rethink in UBS Tax Deal With U.S.

The Swiss government said Wednesday it may have to renegotiate a carefully wrought deal with the United States to hand over thousands of files on suspected tax cheats in return for an end to U.S. legal proceedings against Switzerland's biggest bank, UBS.

Bowing to a court decision that declared parts of the deal illegal, officials will now seek a way to honor the agreement reached with Washington last August without breaking Swiss law, Justice Minister Eveline Widmer-Schlumpf said.

"The discussions that we will lead may result in formal or material changes to the treaty," Widmer-Schlumpf told a news conference after a cabinet meeting in the capital Bern.

Until the legal impasse has been resolved, Switzerland will stop transferring any more files on UBS AG customers alleged to have hidden money in offshore accounts with the bank's help, she added.

Officials at the Internal Revenue Service, the U.S. agency that has taken the lead on this issue, declined immediately to comment on the Swiss government's announcement.

The move is an embarrassment for Switzerland, which is trying to change its image as a haven for tax cheats, and a headache for UBS, whose reputation has been tarnished by revelations about its cross-border dealings with rich American clients.

Widmer-Schlumpf said the outcome of the talks, which could require parliament to approve changes to Swiss law, will affect not just the future of UBS but "also the stability of the financial center and the economic situation of Switzerland."

U.S. authorities last year agreed to drop their demand for details of 50,000 American UBS clients if the Swiss divulged the names of 4,450 U.S. customers believed to have been involved in large-scale tax evasion or fraud. In a separate deal, UBS paid a $780 million penalty as part of a deferred prosecution agreement that included disclosure of an additional 150 names.

Widmer-Schlumpf said the government would do what it could to prevent Switzerland or UBS from being punished for not meeting its side of the bargain. But she explicitly ruled out an emergency decree to force through a change in Swiss law.

The Swiss Federal Administrative Court ruled Friday that UBS clients' failure to fill out a required tax form — even if this concerned large sums of money and occurred repeatedly — could not be interpreted as fraud or fraud-like activity. This is required for Switzerland to break its strict banking secrecy rules and hand over files to foreign governments.