UBS AG warned Friday that it could go out of business if it complied with an order to reveal the names of thousands of suspected U.S. tax dodgers with secret offshore accounts at the Swiss bank.

In papers filed in federal court in Miami, attorneys for UBS said a U.S. government lawsuit filed Thursday could force it to violate Swiss criminal law by turning over information protected by Swiss financial privacy laws.

Such a violation would expose UBS employees to substantial prison terms as well as fines, penalties and other sanctions, the lawyers said.

They said compliance with demands made in the suit filed on behalf of the U.S. Internal Revenue Service would also require UBS, one of the world's largest banking institutions, to violate Swiss law in a manner that will expose it to penalties, civil liability and the possible revocation of its banking license.

The suit came just a day after UBS agreed to pay $780 million and identify some clients in a deal to resolve U.S. criminal fraud charges that it helped wealthy Americans evade taxes.

Court papers show the IRS feared it might get details on as few as 12 accounts from the Swiss government versus the 52,000 undeclared accounts that U.S. authorities allege were held by UBS for U.S. customers, however.

The lawsuit, paving the way toward what could be a protracted legal fight aimed at lifting the Swiss bank secrecy veil, reaches far beyond the deferred prosecution deal settling criminal fraud charges.

UBS was given 11 days to respond to the suit and a court hearing in the case could be set for anytime after a status conference with the federal court judge scheduled to take place Monday.

In their so-called background information paper filed with the court Friday, UBS's lawyers argued that the bank had already cooperated fully with the IRS since it was served with a U.S. summons in July 2008 seeking information on U.S. citizens who failed to report and pay U.S. income taxes.

The IRS now asks this court to place UBS and its employees into an untenable position, stuck between the enforcement power of this court and the criminal law of their sovereign home country, the lawyers said.

Swiss law strictly prohibits UBS and its employees from disclosing to the IRS the account information located in Switzerland that the IRS seeks through its summons, they added.

The IRS's petition does not acknowledge these restrictions and instead simply ignores the existence of Swiss law and sovereignty.

(Reporting by Tom Brown; Editing by Richard Chang)

Investment Privacy Criminal Law