(Bloomberg) -- A former UBS AG executive gave a primer on the workings of Swiss bank secrecy to a Florida jury hearing the tax-conspiracy trial of Raoul Weil, who once ran the bank’s global wealth-management business.

Hansruedi Schumacher told jurors yesterday that he oversaw UBS accounts for about 15,000 U.S. clients in 1999, and most were structured to cheat the Internal Revenue Service. Clients shunned calls or account statements from their Swiss bankers, preferring personal visits, usually in hotels, he said. Bankers often changed hotels to avoid suspicion from the staff.

“We knew from the way the accounts were set up that the majority of these 15,000 clients were cheating on their taxes,” said Schumacher, the first banker to testify at the federal trial in Fort Lauderdale.

Weil, 54, was indicted in 2008 on charges of conspiring to help as many as 17,000 U.S. taxpayers hide $20 billion from the IRS. He was arrested last year in Bologna, Italy, and waived extradition. Schumacher was also indicted, in August 2009, and is testifying against Weil without a plea deal in hand.

Schumacher, who ran the cross-border business for Zurich-based UBS from 2000 through 2002, said that holdings were called “non-declared” or “black” or “simple” accounts. Schumacher set up sham entities to hide assets from the IRS, helped clients move offshore assets to the U.S. and hand-delivered cash, prosecutors said in the indictment against him.

UBS admissions

UBS avoided prosecution in February 2009 by admitting to conduct similar to that for which Weil stands accused. UBS said it helped clients evade taxes from 2000 to 2007, turned over data on 250 secret accounts to the IRS and agreed to reveal information on 4,450 more. More than 50 UBS clients and four bankers have pleaded guilty.

“This world of Swiss bank secrecy makes you as a Swiss banker learn to try to stay under the radar,” Schumacher testified. “I personally am not a very outgoing person. I can’t even tell jokes.”

Schumacher, who worked at Neue Zuercher Bank from 2002 to 2009, surrendered to U.S. authorities on October 6 and pleaded not guilty the next day. He told jurors he turned himself in because his indictment had caused him personal problems.

“I’m just here to tell the truth,” he said. “I have to face up to what I did.”

Cooperating witnesses who plead guilty often get their sentences reduced.

Weil is the highest-ranking official among three dozen foreign bankers, lawyers and advisers charged in a seven-year U.S. crackdown on offshore tax evasion. Aaron Marcu, Weil’s lawyer, said October 14 in his opening statement that the U.S. case hinges on “rogue” bankers from UBS, the largest Swiss bank, and clients who will implicate Weil to save themselves.

Schumacher said UBS charged much higher fees than U.S. banks. When clients complained, he said, he told them they were saving so much in taxes that the fees were worth it. “It was a win-win,” he said. “The clients kept 100 percent of their profits and the bank made money on the fees.”

Schumacher testified about a 2001 deal that UBS entered into with the IRS known as a qualified intermediary, or QI, agreement. UBS said it would tell the IRS about income and identifying information for American clients with U.S. stocks and bonds, if those clients gave permission.

Without such consent, clients were supposed to sell their U.S. stocks and bonds. If they didn’t consent and didn’t sell their stocks and bonds, UBS was supposed to withhold about 30 percent of any sale proceeds or income on the account. The bank was supposed to anonymously pay withheld amounts to the IRS.

“The funny part was during that time there were already lawyers around who came up with some kind of solutions going around that QI agreement,” Schumacher said.

One popular way, he said, was to set up accounts listing phony foreign companies as the owners.

Schumacher testified about e-mails that were sent to Weil and other UBS officials in which problems with the bank’s compliance with the QI agreement were discussed. He said the bank had “black” accounts worth about $4 billion in 2000.

The bank decided to force those clients to sell their assets and then buy new UBS funds holding securities to avoid the reporting requirements under the QI agreement, Schumacher said. Those new funds continued to hold U.S. securities, he said.

He said the sale of $4 billion in securities took place over two or three days, with UBS charging transaction and management fees to clients.

“It was quite a profitable transaction for the bank,” he said.

Clients, he said, remained in the market, yet their identities were hidden from the IRS. Despite paying fees, they still saved money on taxes avoided, he said.

The case is U.S. v. Weil, 08-cr-60322, U.S. District Court, Southern District of Florida (Fort Lauderdale).

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