SWISS BANKING group UBS and the US government yesterday agreed an out-of-court settlement to resolve one of the most bitter assaults on Switzerland’s hallowed bank secrecy.

The case has significant implications for the future of client confidentiality, amid fears among many Swiss bankers that a dilution of traditional secrecy rules could prompt a defection by worried foreign customers.

No details of the deal were revealed, pending formal signing, probably early next week.

However, lawyers said the settlement would involve UBS supplying the names of least 5,000 US offshore clients and possibly paying a big fine. Shares in the bank closed up 3 per cent at 16.34 Swiss francs on relief that the issue had finally been resolved.

Bankers were reluctant to comment before knowing the terms. But the Swiss bankers’ association said it expected the settlement “would be consistent with Swiss law”.

The difficulty of finding a formula allowing Bern to authorise a breach of bank secrecy rules, while maintaining the facade of client confidentiality, probably explains why the deal took so long, after lawyers indicated agreement in principle last month.

Lawyers said a crucial factor might have been the willingness of the Internal Revenue Service (IRS), the US tax authority, to act in line with formal international legal assistance procedures, rather than demanding exceptional accelerated treatment.

That concession came in February, when the US authorities scored an initial victory by securing the names of 255 offshore US clients believed most blatantly to have exploited legal loopholes to evade tax.

That deal, authorised by the Swiss government, and a $780 million (€549 million) fine on UBS resolved a criminal case against the bank for breaking US laws and alleged assistance in tax evasion.

However, the deal did not settle the linked, but separate, civil action undertaking by the IRS to discover the names of the 52,000 US clients with offshore UBS accounts in Switzerland.

“We are pleased to have initialled an agreement with the Swiss government which protects the US government’s interests,” said Doug Shulman, the IRS commissioner.

“I am pleased to say that it has been possible to resolve the matter in the form of a compromise between two sovereign states – that is in the interests of both states,” said Eveline Widmer-Schlumpf, the Swiss justice minister. – Copyright The Financial Times Limited 2009