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.