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Secret’s out on the Swiss bank account

The secret Swiss bank account, for years the basis of plots involving characters who either don’t like to pay taxes or who are bent on a life of fiscally efficient criminality, isn’t what it once was

DAVOS, Switzerland — The secret Swiss bank account is no longer what is used to be.

For years the accounts were the basis of plots both real and imagined in which people hid cash to avoid the taxman or the police if the gains were from crime.

But prior to a midnight New Year’s Eve deadline, many of the Swiss banks agreed to divulge to the U.S. government which Americans have accounts here to avoid prosecution on charges of helping them evade taxes.

As many as 40 of Switzerland’s approximately 300 banks are reported to have said publicly that they would voluntarily hand over closely guarded client information to the Department of Justice in return for prosecutorial immunity.

After decades of facilitating, even if not explicitly engineering, the shielding of undeclared assets from foreign tax authorities, a Swiss banking industry built on a legacy of absolute secrecy on behalf of customers may start singing like a canary.

“What’s really clear is that this (Justice) program is at the limit of what is tolerable for banks in Switzerland,” says Sindy Schmiegel, of the Swiss Bankers Association, in Basel.

“Participation is very costly, and banks that join the plan may still face huge fines,” she says. “It’s important to remember that banking secrecy in Switzerland was not introduced for tax reasons.”

Any adult can open a bank account in Switzerland no matter their citizenship. The banks would normally refuse entreaties from foreign governments looking to see if citizens hiding cash were among the account-holders identified by numbers.

That prompted accusations that the Swiss were aiding and abetting crime. But the Swiss Bankers Association insists that anonymity does not absolve account-holders from their obligation to respect what the Swiss Bankers Association refers to as “the legal provisions of the home country with regard to cross-border business.”

As for the secrecy aspect of the accounts, it’s true that under Swiss law banks are not permitted to disclose financial information to third parties. But the banks are required to be aware of the identity of account-holders. And there are numerous provisions under Swiss civil and criminal law that permit banking secrecy to be lifted.

Clive Church, a professor of Swiss politics at the University of Kent in Britain, says that the tradition for financial discretion in Switzerland can be traced back fairly precisely to 1934, when it was forged into law as a consequence of French and German agitation.

“You often hear that it was introduced to preserve Jewish money from the Nazis,” says Church. “That probably happened at first, but it actually came about because the Third Republic and Weimar governments were extremely worried about large leakages of money to Switzerland because both of them were, for all sorts of reasons, politically unstable.”

In response, Church says that Switzerland with its stable society and well-developed banking sector decided to make it a criminal offense to breach a stringent financial confidentiality law. The Swiss then ended up adopting the concept of concealment as a cornerstone of the nation’s cultural identity.

“But that’s changing now. The industry has realized that you can’t just sell yourself on the basis of secrecy. You have to have other services, as well,” says Church.

The crack in secrecy laws began in earnest following the first financial crisis when in 2009 the Swiss withdrew objections to a widely accepted Organization for Economic Co-operation and Development tax reporting convention.

The convention resulted in Swiss banks being permitted to supply some information to foreign tax authorities but only for specific and substantiated reasons. In other words, if there is a solid basis to suspect foul play, the banks would review requests for information on a possible account-holder on a case-by-case basis.

In 2009, UBS, Switzerland’s largest bank, agreed to pay a $780 million fine related to allegations of concealing identities and assets from the IRS.

Whether the loss of inviolate secrecy will hurt Swiss banking, which accounts for 10% of Swiss gross national product, remains to be seen.

The Wall Street Journal reported in December that many Swiss banks are pressuring U.S. account-holders to make sure they are not hiding anything so as not to affect their amnesty deal with the U.S. Justice Department. In some instances banks have frozen accounts unless the customer can prove what’s inside has been declared to the IRS.

“Some people believed that if they closed or moved an account, they wouldn’t be found, but that’s not the case,” William Sharp of law firm Sharp Partners told the Journal. “Now IRS detection of an account is simply a matter of when.”

In a recent report by EY, a financial services firm, around two-thirds of Swiss banks surveyed were said to be experiencing “major misgivings” over the attempt to end the tax dispute. A majority expected any future settlements to have a negative effect on its banking industry.

The Swiss, meanwhile, are pushing back and have launched a probe into a former UBS banker for revealing information in violation of Swiss law about U.S. clients, according to the Office of the Attorney General of Switzerland, which confirmed the case to USA TODAY.

This week marks the start of the World Economic Forum at the Swiss mountain resort of Davos, where more than a few of the world’s richest people in attendance may have a Swiss account or two. The forum has scheduled a discussion about how, with traditional banking secrecy gone, Switzerland can reinvent itself.

FULL COVERAGE: World Economic Forum 2014 in Davos

“Swiss bankers accept that they are living in a new reality,” says Bruno Patusi, head of wealth and asset management at EY, based in Zurich.

“But we will only see a change in certain areas. Confidentiality is still extremely important. It is true that we are seeing assets flow out (of Switzerland), but that’s partly because the next generation is more interested in spending than saving.”

Meanwhile, the Swiss bank account so long associated in the public imagination as a place to deposit large amounts of money with little expectation of discovery may be on its way out. The bank account used so often by master criminals, spies and sheiks in film and international thriller novels may live on only in fiction.

The comedian Woody Allen once joked: “If only God would give me some clear sign! Like making a large deposit in my name in a Swiss bank.” He may want to look elsewhere for a message from above.

Source:USATODAY/Kim Hjelmgaard

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