Bank Secrecy Gives Way in Switzerland

Under intense pressure from countries trying to stamp out tax evasion, the bedrock privacy rules of Swiss banking are being chipped away

By Mathieu von Rohr

Normally, Thomas Borer tries to stay out of the public eye. But there are times, he says, when he can no longer contain himself, and this is one of them. For Borer, what is happening today is painful to him as a Swiss citizen. "You can certainly make a mistake once in a while," he says, "but you cannot make the same mistake twice."

Borer served as Switzerland's ambassador to Berlin at the start of the new millenium. In Germany, he was a part of the high society social circuit, and he regularly made headlines with his wife Shawne, a former "Mrs. Texas." Irritated by coverage of Borer in the tabloids the Swiss Foreign Ministry stripped the ambassador of his posting, and he now works as a strategic consultant for Russian oligarch Viktor Vekselberg, and has an office overlooking Lake Zurich.

He began his career in the 1990s, when he was called upon to represent his country in a crisis. Switzerland faced sharp criticism worldwide, because its banks were refusing to pay back the assets of the dormant accounts of Holocaust victims. The government was overwhelmed and gave in to its critics. It was not until late in the game that it installed a task force, which Borer headed. He appeared before the US Senate, where he explained Switzerland's role in World War II, and he helped to negotiate a settlement between banks and plaintiffs that was worth billions.

Switzerland is going through another crisis today. As happened in the 1990s crisis, the focus is on Swiss banks and, once again, the country is under considerable international pressure. This time even more is at stake, namely Switzerland's principle of bank secrecy, a concept that is celebrated in spy thrillers and is part of the country's identity, as much a cliché as the Swiss watch and Swiss cheese.

It came as a shock to the country when, on Feb. 18, major bank UBS—in a major breach of bank secrecy laws—was forced to reveal the names of about 300 presumed tax evaders to the American tax authority, the Internal Revenue Service. To secure UBS's compliance, the Americans had threatened to sue the bank in the United States. The Swiss Financial Market Supervisory Authority, fearing that such a trial would lead to the bank's demise, invoked an emergency paragraph in the Swiss banking law—only to end up revealing the names itself. By the time Switzerland's Federal Administrative Court tried to stop the process, in response to objections filed by some accountholders, the data had long since arrived in the US.

It appeared that Switzerland's largest bank had deliberately encouraged American customers to commit tax fraud. In the settlement, UBS (UBS) was ordered to a pay a fine of $780 million (€624 million). Ironically, the bank that had always fought for bank secrecy laws had jeopardized them. Generations of Swiss finance ministers have repeatedly stressed that bank secrecy is "non-negotiable," and yet every few years, responding to pressure, they would relax the country's bank secrecy laws slightly. Now cash-strapped governments around the world see their opportunity to finally put an end to bank secrecy in order to gain access to information about tax evaders who had hidden their assets in Switzerland.

Heads of state worldwide, including British Prime Minister Gordon Brown, French President Nicolas Sarkozy, and German Chancellor Angela Merkel, are now joining forces in the fight against tax havens, and they have set their sights squarely on Switzerland. The Organization for Economic Cooperation and Development (OECD) is considering adding Switzerland to a new blacklist of tax havens. The G-20 group of major industrialized nations demonstratively excluded Switzerland from its upcoming meeting in early April. In London, the British government is examining measures to penalize tax havens.

Once again, Switzerland is in the hot seat. As in the past, the government in Bern has been passive on the issue for weeks, a position that has triggered criticism from all sides in Switzerland. And, once again, the Swiss government seems overwhelmed.