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Is Switzerland Losing Its Status As an International Tax Haven?

Switzerland finds itself at a crossroads. Despite its history of neutrality, the country is now confronted with a choice between cooperating with U.S. authorities in handing over the names of bank accounts belonging to U.S. citizens or protecting its sovereignty and preserving its 77 year-old banking secrecy laws, suffering accusations of improperly shielding tax evaders in the process.

A recent Bloomberg report speculated that Swiss banks will finally spill the beans and share the names of U.S. account holders, in order to settle sweeping U.S. criminal probes of offshore tax evasion, according to five anonymous sources with knowledge of the situation. The Justice Department and IRS have been seeking both data on Americans who have dodged U.S. taxes and a pledge from Swiss banks to stop helping such clients.

Switzerland is reluctantly cooperating with the investigative probes to ultimately maintain its access to American and European markets under threats from international authorities of being locked out. But the question is how much damage will be done to tarnish their reputation of banking privacy?

It’s not against U.S. law to have an account in a private Swiss bank, but it is illegal to do so without declaring it on your taxes. Swiss bank accounts also cannot be opened without the holder signing a legal document asserting that they have no outstanding financial obligations to the IRS.

Switzerland has promised its clients complete privacy since 1934, when banking secrecy became law mainly to protect Europeans who were scrambling to hide their money from invading Nazis. The country now handles one third of the world’s internationally invested private wealth, estimated to be $2 trillion according to the Swiss Bankers’ Association. The vast majority of its 330 banks are private ones that manage people’s personal fortunes, requiring large deposits from each customer and charging relatively high fees to administer the money.

In the wake of the global recession, when governments around the world are running up record deficits and short on cash, U.S. and European governments have ramped up their efforts to crack down on tax cheats. “Until two years ago, Switzerland guaranteed banking secrecy for everybody,” says Hans Geiger, professor emeritus at the University of Zurich’s Swiss Banking Institute, and a former executive at Credit Suisse. “Today, there is uncertainty about what is secret and what is not. That is not what Switzerland promised its clients.”

Up until recently, the Swiss were able to relieve international pressure by paying fines while retaining their clients’ secrecy, and had reached similar agreements earlier this year with British and German authorities. But U.S. authorities aren’t settling this time until they get the names of the account holders they’re after.

For example, UBS, Switzerland’s largest bank, paid a $780 million fine to U.S. authorities in 2009 in exchange for deferred prosecution when U.S. officials threatened to move against UBS’s large American operation and its 22,000 employees, unless it cooperated. The IRS claimed that UBS was hiding $20 billion worth of untaxed American money among 19,000 U.S. customer accounts.

Much more controversial was a change in Swiss law that permitted UBS to give U.S. officials details of 4,450 American-held accounts - its biggest step yet toward ending 77 years of cherished secrecy. Many Swiss voters were outraged, feeling there should have at least been a referendum on it, and the deal passed a parliamentary vote only after months of intense political battles. Swiss lawmakers claimed the U.S. had bullied their small country into violating its secrecy laws, which was “breathtaking moral duplicity,” wrote Konrad Hummler, chairman of the Swiss Private Banking Association, in a commentary for bankers and investors.

Swiss bankers say they believe the U.S. and the EU (of which Switzerland is not a member) are deliberately attacking them in order to boost their own domestic banks, going so far as to call the moves “an economic war.”

Even if Switzerland loses its image as an overseas tax haven, the competition certainly isn’t going away. In fact, other international tax havens such as Singapore, the Bahamas, and Panama have been using Switzerland’s negative publicity to attract foreign wealth, including Americans, scrambling to pull their money out of Swiss banks. Switzerland, meanwhile, is left to reexamine the future of its offshore banking industry.

Photo Credit: Wikimedia Commons

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