Clock ticking for Swiss bank secrecy

The Swiss government approved UBS's settlement with the US authorities

By Imogen Foulkes
BBC News, Geneva

The decision by Switzerland's biggest bank, UBS, to hand over details of a few hundred US clients to the US authorities has shocked the Swiss banking community, and led many to the conclusion that the days of Swiss banking secrecy are now numbered.

UBS had already admitted that some of its US staff helped wealthy American clients avoid paying tax by hiding money in Swiss bank accounts.

However, on Wednesday it handed over the client details, together with a compensation payment of $780m (£549m), before the legal process had even finished.

It became evident that if the American authorities would bring UBS to an indictment... the whole threat would have been falling also on our economy Swiss President Hans-Rudolf Merz

The Swiss government, which approved UBS's actions in a late-night emergency cabinet meeting, said the bank had no choice.

The US Department of Justice had issued Switzerland with a deadline which, had it not been met, could have led to UBS losing its US operating licence.

Swiss President and Finance Minister Hans-Rudolf Merz said the move would have threatened the very existence of the bank, and with it, the Swiss economy.

Under pressure

But many Swiss politicians and bankers are outraged at what they see as the Swiss government's weakness in the face of unfair pressure from the US.

UBS hoped that settling with the US would safeguard banking secrecy

"This is a clear case of power triumphing over the law," said Gabi Huber, member of parliament with the centre-right Radical Party.

"Switzerland's banking secrecy has been put under real pressure."

Hans Geiger, emeritus professor of banking at the University of Zurich, said he was astonished at the "unbelievable weakness" of the government.

And Toni Brunner, president of the right-wing Swiss People's Party, went even further.

"We are a sovereign state, and other countries should not be able to tell us what to do," he said. "It's time to enshrine banking secrecy in our constitution."

Confidentiality

But what is Swiss banking secrecy really, and why is Switzerland so fiercely protective of it?

"Basically, it is the obligation of a bank to treat the financial affairs of its clients in confidence," explained James Nason, spokesman for the Swiss Bankers' Association.

In Switzerland, it would be unthinkable for banks to go behind their clients' backs and pass information to the authorities James Nason Swiss Bankers' Association

That does not mean, he insists, that Swiss banks can protect clients who are suspected of committing crimes.

Deliberately hiding money in order to avoid paying tax is fraud, a crime under Swiss law, and this is why UBS was ready to reveal client information.

"In fact, this fabled myth of banking secrecy is much misunderstood," he continued. "It has never protected tax fraud."

Nevertheless, Swiss banking secrecy does give Switzerland's banks one big advantage.

"In many countries, banks automatically inform the tax authorities about how much interest they are paying on clients' accounts," explains Mr Nason.

"In Switzerland, it would be unthinkable for banks to go behind their clients' backs and pass information to the authorities."

Licence to evade tax

In effect, failure to declare earnings, or tax evasion, is not a crime in Switzerland, and therefore Swiss banks see no reason to offer information.

I give it a year and a half Hans Eichel Former German Finance Minister

What is more, sharing client information with other parties, where no crime is suspected, is actually an offence under Switzerland's banking laws.

The system is, many Swiss believe, a huge factor in what has made their banks so successful.

But such a system has been, and according to many financial analysts, still is, open to exploitation by anyone who wants to hide their money.

Swiss banks have already been involved in a number of embarrassing cases involving corrupt government leaders.

The former presidents of the Philippines and Zaire, Ferdinand Marcos and Mobutu Sese Seko, were among those who hid billions of dollars of their countries' money in Swiss banks.

Now, the US justice department claims tens of thousands of wealthy US citizens have undeclared bank accounts with UBS.

By admitting that some of its staff had indeed helped US clients to commit tax fraud, and paying out $780m in compensation, UBS hoped the US authorities would drop legal action against it.

That was a miscalculation. Within hours of UBS announcing the settlement, officials in Washington filed a new civil lawsuit, demanding that UBS hand over information on 52,000 US account holders.

Under threat

UBS immediately said it would not comply with this latest demand, but it is unlikely that the pressure from the US will go away.

Like all governments battling the current global financial crisis, the US does not want to lose a single cent of tax revenue - and it clearly believes billions of dollars may be salted away in Swiss banks.

President Merz insists Switzerland's banking secrecy remains "intact"

Meanwhile the European Union is also raising the pressure.

Germany has openly accused Switzerland of sheltering German tax dodgers.

UK Prime Minister Gordon Brown has said he wants the issue of "tax havens" to be a top priority at April's G20 financial summit in London.

Within Switzerland, smaller banks are angry at the mistakes made by UBS.

They believe the big bank's encouragement of tax evasion has opened the door to a full-frontal attack on Swiss banking secrecy.

So when President Merz announced that Switzerland's banking secrecy remained "intact", no-one really believed him.

The Tages Anzeiger newspaper called the UBS affair "the death knell" for Swiss banking secrecy.

The former German Finance Minister, Hans Eichel, went further.

Asked to put a time limit on how long banking secrecy could survive he said: "I give it a year and a half".

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