There's big trouble in little Liechtenstein, and UBS AG's private bank just got caught in the crossfire between U.S. prosecutors and U.S. nationals with funds tucked away in the Principality of Liechtenstein. According to the Wall Street Journal, U.S. prosecutors, aided by a former 'UBS insider', now have the names of American clients of UBS AG's private bank, along with details about possible collusion between these clients and UBS employees in an effort to avoid taxes. The probe originally started with an investigation of Liechtenstein's LGT Bank by German prosecutors, and soon spiralled into an international tax evasion probe. More details and background information here.

U.S. prosecutors are investigating whether the private bank, which provides services to wealthy individuals, was involved in tax-evasion schemes that may have been carried out through Liechtenstein. UBS disclosed in a securities filing that the U.S. Justice Department and the Securities and Exchange Commission are examining whether UBS aided U.S. clients in avoiding taxes. The probe is focused on advice given by UBS between 2000 and 2007. According to the filing, the Justice Department "is examining whether certain U.S. clients sought, with the assistance of UBS client advisors, to evade their U.S. tax obligations."

The UBS probe is being led by the U.S. Attorney's Office for the Southern District of New York and may have ties to an investigation being conducted by the Internal Revenue Service and other national tax agencies into how banks in Liechtenstein played a role in helping German, U.S., British, French, Canadian and Australian clients evade taxes. A spokesman for the Justice Department declined comment. -

Probe May Lay Open UBS, By GLENN R. SIMPSON in Washington, DAVID CRAWFORD in Zurich, AND CARRICK MOLLENKAMP in London, Wall
Street Journal, May 8, 2008

According to this Bloomberg report by Otis Bilodeau, Martin Liechti, the Zurich-based head of UBS's international wealth management business for the Americas, was briefly detained by U.S. authorities as a material witness. The U.S. Securities and Exchange Commission is also investigating whether UBS employees in Switzerland who advised U.S. clients failed to register with the agency as required. The employee who was detained hasn't been charged with any wrongdoing, though will remain in the U.S. "pending discussions with the U.S. authorities regarding resolution of his status as a witness,'' the bank said.

To sum it up, U.S. prosecutors were investigating tax evasion by U.S. nationals with accounts in Liechtenstein's LGT Bank. The trail led them to a former UBS insider who not only gave them a list of U.S. clients of the bank who had these off-shore accounts, but also gave prosecutors the inside track on how exactly UBS was involved in helping clients evade U.S. taxes.

(Update 1: Federal authorities indicted a former UBS banker, Bradley Birkenfeld, on charges of helping an American real estate developer evade taxes. New York Times report identifies the developer as Igor Olenicoff, the founder of Olen Properties. The indictment also names as a co-conspirator Mario Staggl, an executive at a trust company in Liechtenstein.)

(Update 2: WSJ report says U.S. prosecutors are expected to confront Swiss banking giant UBS AG with a broad subpoena for the names of wealthy American clients who may have used its services to avoid income taxes, according to lawyers and others involved in the case.)

As for UBS, they seem to be attracting probes like moths to a flame. In addition to this probe, Prosecutors in Germany are considering opening a criminal probe into allegations that UBS offered Germans help in hiding funds from local tax authorities, the Mannheim Prosecutors' Office said March 31.

And, UBS plans to exit the municipal bond underwriting business, with yet another probe in progess by Massachusetts Attorney General Martha Coakley into whether municipalities were misled by UBS into purchasing securities that weren't a 'permissible investment' under state law. More details from Michael McDonald, Bloomberg News. UBS AG agreed to refund $35 million to 20 towns and public agencies in Massachusetts that bought auction-rate securities from the Zurich-based bank amid a state probe into the sale of the debt. Authorities are still investigating whether the firm lied to investors about the bonds, which would result in penalties under the state's False Claims Act.

To top it all off, investor faith in UBS has taken a nosedive after the Swiss banking giant announced plans to cut 5500 jobs in the next year in response to a whopping 2008 Q1 loss of $10.97 billion in the wake of the subprime mortgage crisis and massive total writedowns todate worth $37 billion. UBS is selling subprime mortgage debt worth $20 billion at a 25% discount to Blackrock for $15 billion. UBS has already taken in capital infusions twice in the last few months, including a $12 billion cash offer from the Government of Singapore Investment Corp. (GIC), and an unidentified middle-east investor.