By Bob Bauman

It's another example of the huge gap between what the leftist news media tells the public and the actual truth. I refer to the news coverage of an agreement between UBS, the battered Swiss banking giant, and U.S. government prosecutors announced on Wednesday.

A subhead in The New York Times screams: "A severe blow to centuries old tradition of secrecy in banking." Not quite, in my opinion.

Swiss Finance Minister Hans-Rudolf Merz played down the dangers to banking secrecy, insisting that under the agreement UBS client details were only handed over to the U.S. because under Swiss law there was sufficient evidence of fraud in each case. "Banking secrecy will stay," he said.

Exaggerated Demise

Honest and intelligent assessment of this UBS-U.S. Department of Justice (DoJ) agreement indicates that Swiss banking secrecy is still alive - much to the chagrin of Switzerland's usual detractors - U.S. Senator Carl Levin (D-MI) and his ilk, and tax collectors at the IRS, in the EU, France, Germany and at the OECD.

Under the announced agreement UBS, the largest bank in Switzerland, will divulge the names of a limited number of American clients (a reported 250-300 names), whom the IRS alleges used UBS offshore accounts to evade U.S. taxes.

UBS admitted its private banking managers conspired from 2001 to 2006 to defraud the IRS and agreed to pay US$780 million to settle a federal investigation into these activities.

Swiss Law Prevails

As is usual in offshore financial matters, wild numbers are being thrown around by the IRS to bolster its case. The IRS is alleging (without proof) that UBS helped American clients illegally hide US$20 billion, allowing them to evade US$300 million a year in unpaid taxes.

Under Swiss law UBS may disclose the identities of only a few hundred customers. A reading of the 43-page UBS-U.S. agreement makes clear that the U.S. government officially admits that the Swiss Bank Secrecy Act of 1934 applies and that it may prevent the release of most of the UBS names. The agreement also allows the Swiss to use their bank secrecy law to defend against further IRS efforts to grab more names.

Fishing Expedition

That further IRS legal effort was fast in coming as the U.S. DoJ, in a massive fishing expedition, again sued UBS Thursday to try to force disclosure of the identities of what it claimed were as many as 52,000 American customers who allegedly hid their UBS accounts from the IRS.

Scaling the heights of class warfare demagoguery, John A. DiCicco, acting assistant attorney general in the DoJ tax division, said in a statement, "At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes."

Apparently the presumption of innocence guaranteed by U.S. laws no longer applies to Americans with UBS accounts. (And they call it the Justice Department!)

The Usual Suspects

To some, turning over any names at all means the end of the secret Swiss bank account, whose traditions date back to the Middle Ages. The gravity and timing of the controversial move has caused intense political and legal debate within Switzerland amid fears it could open the floodgates to similar demands from other countries.

But for the usual anti-privacy, anti-tax haven crowd who habitually bash offshore financial activity as tax evasion, Switzerland has always been a special target. They hate the Swiss Bank Secrecy Law because they believe that the rights of the individual must be subordinated to the government, that all offshore accounts are used for tax evasion.

Tax Fraud Is the Crime

As a matter of historic fact, the Swiss bank secrecy law has never been absolute.

That law distinguishes between tax avoidance, tax evasion and tax fraud. Unlike in the United States, tax evasion is a civil, not a criminal offense under Swiss law, but tax fraud is a crime.

In selected past cases, (which the Swiss don't like to discuss), the Swiss government has waived bank secrecy based on tax fraud. Tax fraud may have occurred when UBS American clients submitted false documents or affidavits relating to their accounts. This strict definition probably explains why so few names are reportedly to be given to U.S. prosecutors.

And there is an established Swiss procedure for the U.S. to obtain tax and other information that has been used many times, but the DoJ opted for hardball threats and lots of publicity.

Bruised Reputation

The public relations problem for the Swiss and their bankers is obvious.

Indeed it required both a meeting of the Swiss Cabinet, the nation's governing body, and action by the Swiss Financial Market Supervisory Authority (FINMA) to permit UBS to release the names.

FINMA's official order did not waive Swiss banking secrecy, but instead acted to protect UBS from likely financial collapse. Under Articles 25 and 26 of the Swiss Banking Act, FINMA has wide authority to protect the interests of UBS creditors, investors and clients and to ensure the stability of the Swiss financial system - and that was the crucial issue here.

Economic Blackmail

Ironically, the global recession and the weakening of the worldwide banking system allowed DoJ prosecutors to engage in a case of blatant blackmail against UBS and the Swiss government.

The Swiss decision to release names was made only after U.S. authorities threatened to withdraw UBS's American banking license.

Had the U.S. done that or had the DoJ indicted UBS, it would have put the bank out of business in America with a loss of thousands of UBS U.S. jobs. It would also have caused a probable collapse of the bank itself, with major Swiss and global economic repercussions. (UBS' bad management already has lost over US$50 billion in the subprime mortgage crisis).

But even U.S. prosecutors knew the global financial system could hardly weather the destruction of UBS by American prosecutors. (And that would have been ingratitude. As I revealed last year, candidate Obama was very cozy with UBS officials and UBS was one of his biggest donors, giving $505,017 to his 2008 Presidential campaign).

The collapse of UBS would have been a nasty replay of the wrongheaded DoJ indictment in 2002 that destroyed Arthur Anderson, one of America's major accounting firms, for its role in the Enron scandal. Although the U.S. Supreme Court later found that DoJ prosecution illegal, it came too late to save the already defunct firm.

Bottom Line

There is no way to sugar coat the UBS mess. We take pride in the fact that the Sovereign Society has warned against UBS accounts for years.

But we believe that Switzerland, a reputable nation that manages over US$4 trillion in cash and assets for people all over the world, (and has done so successfully for centuries), has the strength to withstand unreasonable and radical demands to compromise when they are in the right.

Let any American tax evaders be indicted, tried and convicted. But the high-handed demands of the IRS and DoJ prosecutors, threatening a major bank, an entire nation and thousands of innocent persons, must be tempered by the rule of law.