As we reported yesterday, the Justice Department sought a court order against UBS, to force the Swiss banking giant to give up the identify of its U.S. shareholders. A long court battle was predicted, and now it has begun.

From the International Herald Tribune:

An order signed by Judge Joan A. Lenard of U.S. District Court in Miami gives investigators the authority to request the information from UBS. A spokesman for the Internal Revenue Service said the agency, which was working with U.S. prosecutors, was expected to serve UBS with a summons for names within several days. The bank can either turn the names over -- an unprecedented move for a Swiss bank under secrecy laws -- or appeal the judge's ruling.

A former senior executive at UBS, who pleaded guilty to conspiring to assist a wealthy client in hiding millions of dollars from taxes, is aiding the Justice Department in their fight to force the Swiss banking giant to give up their ultra-secret client list.

As the Wall Street Journal reports today, the former UBS executive, Bradley Birkenfeld, has shed light on the shady dealings of UBS with its wealthiest clients. Birkenfeld explained how the Zurich-based banking giant coached its executives to conceal assets, from lying on customs forms to smuggling jewels in toothpaste tubes:

Mr. Birkenfeld told U.S. prosecutors that UBS holds an estimated $20 billion in assets for U.S. clients in undeclared accounts. These accounts generated $200 million a year in revenues for the bank, prosecutors said.

. . . UBS trained private bankers in techniques to avoid detection by U.S. law enforcement, including instructing them to indicate on customs forms that they were coming to the U.S. on vacation instead of business, according to court documents.

Prosecutors say Mr. Birkenfeld also explained how bankers advised clients to hide their wealth by purchasing artwork and jewels with funds from Swiss accounts. For one client, Mr. Birkenfeld told prosecutors he smuggled diamonds into the U.S. inside a toothpaste tube.

After weeks of talking with UBS and Swiss banking authorities on divulging the identity of U.S. account holders, the DOJ has finally sought a court order. The so-called "John Doe" summons is usually used by the government to investigate tax fraud "by people whose identities are unknown." It has never been used before against a non-U.S. bank.

Revealing client lists would be a huge blow to UBS and all Swiss banks, who pride themselves on the secrecy and privacy for its clients. The DOJ's filing is likely to spark a long and tedious legal battle-- something not unfamiliar to UBS:

In a 2002 memorandum to clients following UBS's acquisition of PaineWebber, UBS bankers tried to assuage clients' worries that their secrets might be breached as a result of the bank's new connection to a U.S. firm. The memo, filed in court by prosecutors, reads in part: "information relative to your Swiss banking relationship is as safe as ever..."

The memo went on to point out that UBS has been doing business in the U.S. since 1939, without having U.S. authorities gaining "jurisdiction over assets booked abroad....Please note that our bank has a successful track record of challenging such attempts."

And perhaps being caught in the DOJ bear trap has convinced UBS to gnaw off its U.S. brokerage arm, leave the U.S. and head for the safety of the Alps. As the International Herald Tribune reported, UBS is currently in talks to sell off its U.S. wealth management base, PaineWebber.

Besides the sub-prime mortgage crisis, UBS has an entirely different set of problems to worry about: the criminal prosecution of their former employees and the possible public exposure of their massive wealth management business.

Bradley Birkenfeld, a former UBS banker in Geneva, pled guilty in a Florida court today, for conspiring to hide $200 million in client assets in order to avoid paying U.S. taxes. The plea is the latest in bad news for the bank, who has its wealthiest clients running for cover as authorities pressure bank officials to give up the names of over 20,000 of their high-net- worth clients.

And it's all because no one wanted to pay their taxes. Birkenfeld and colleague Mario Staggl, currently at large, helped billionaire American real estate developer and owner of Olen Properties Corp., Igor Olenicoff avoid almost $7.2 million in taxes between 2001 and 2006. Olenicoff was sentenced on April 14, 2008 and agreed to pay $52 million in back taxes.

In his statement today in U.S. District Court in Fort Lauderdale, Birkenfeld detailed how he, Staggl and other managers and bankers at UBS had concealed client assets.

From a Department of Justice press release earlier today:

Birkenfeld, managers and bankers at the Swiss bank, and U.S. clients prepared false and misleading IRS forms that claimed that the owners of the accounts were sham off-shore entities' and failed to prepare and file IRS forms that should have identified the true U.S. owner of the accounts.

To further assist U.S. clients of the bank in concealing their offshore accounts, Birkenfeld admitted that he, Mario Staggl, additional private bankers and managers at the Swiss bank, and others advised U.S. clients to place cash and valuables in Swiss safety deposit boxes, and purchase jewels, artwork and luxury items using the funds in their Swiss bank account while overseas. Additionally, they advised the clients to misrepresent the receipt of funds from the Swiss bank account in the United States as loans from the bank; destroy all off-shore banking records existing in the United States; utilize Swiss bank credit cards that they claimed could not be discovered by U.S. authorities; and file false U.S. individual income tax returns that omitted income earned by the clients and fraudulently misrepresented that the clients did not have an interest in and signature authority over accounts held offshore.

. . . To circumvent the requirements of the agreement between the bank and the IRS, Birkenfeld and others conspired to conceal the American real estate developer's ownership and control of the $200 million of assets hidden offshore by creating and utilizing nominee and sham entities, including Bahamian corporations, Liechtenstein trusts and Danish corporations.

According to the DOJ, Birkenfeld and his co-conspirators actions were in direct violation of a 2001 agreement between UBS and the American government, which stated that the Swiss bank would "identify and document any customers who received reportable U.S. source income or would withhold and anonymously pay a 28 percent withholding tax."

The guilty plea is the latest in what has been an ongoing and dramatic investigation of UBS and its Geneva bankers. In April of 2008, Martin Liechti, head of UBS' international wealth management business for the America's was briefly detained while passing through Miami airport. Birkenfeld, who has been talking to prosecutors for over a year regarding this matter, was arrested on May 7 upon entering the U.S. at Logan Airport for a high school reunion.

Staggl, co-founder of New Haven Trust Company Ltd. in Liechtenstein is considered a fugitive and is still at large.