The Blame Shifters


Last fall, we shared the story of Bradley Birkenfeld, the whistleblower who tattled on UBS, one of Switzerland’s largest banks. UBS had used strict Swiss secrecy laws to attract depositors and solicited Americans to open accounts, knowing that many of them were using those accounts to cheat the IRS – and in some cases, even advising them how to do it. After Birkenfeld blew the whistle, UBS paid $780 million and released the names of 4,700 clients to settle charges. The scandal scared 35,000 taxpayers into joining an IRS amnesty program and paying over $5 billion in back taxes to dodge criminal charges.

In a litigious society such as the United States, it’s no surprise that a few lawsuits emerged from the wreckage. What is surprising however, is what one group of former UBS clients decided to do: they sued the bank for not stopping them from cheating!

The three plaintiffs in Thomas V. UBS each hid money with the bank, in amounts ranging from $500,000 to $2 million. They didn't report the existence of the accounts on their tax returns, as the law requires. They didn't report the interest they earned on their accounts. And of course, they didn't pay tax on that interest. When the scandal broke, they scurried to the shelter of the amnesty program, paying taxes, interest, and a 20% penalty. They then took UBS to court to recover the penalties, interest, and other costs they incurred to come clean. Why? Because UBS profited from the fraud and other wrongful acts the plaintiffs had committed when UBS invited depositors to bank with them in the first place.

While it may seem like common sense that the plaintiffs had no case, one never really knows how lawsuits like this can go. In the end though, the Appeals Court Judge dismissed the plaintiffs' complaint, and had some particularly harsh (and clever) comments in his decision:

"Our plaintiffs do not argue that they (or other members of the class) received tax advice from UBS. They argue rather that the bank should have prevented them from violating the law. This is like suing one’s parents to recover tax penalties one has paid, on the ground that the parents had failed to bring one up to be an honest person who would not evade taxes and so would not subject himself to penalties. There is in general no common law duty to prevent another person from violating the law."

The irony here is that none of the plaintiffs who sent their money on alpine vacations had to cheat to pay less tax. They just needed a plan to take advantage of perfectly legal concepts and strategies. And, we’ve said this before but it bears repeating: our experts here at are geniuses in many ways, but we’ll never be wizards – we can’t make crimes disappear. So make sure you are always honest with your taxes and, most importantly, keep detailed records!