Already a Bloomberg.com user?
Sign in with the same account.
Under intense pressure from countries trying to stamp out tax evasion, the bedrock privacy rules of Swiss banking are being chipped away
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. With power distributed equally to seven ministers of four major parties, it has proven to be slow in crisis situations. "In case of fire you don't send out seven firefighters in commanding rank and let them discuss what to do until the house is burned down," says former ambassador Thomas Borer. "The Swiss governmental system is just not up to handling such a situation."
Swiss Finance Minister Hans-Rudolf Merz, 66, suffered from a heart attack in the autumn, and he still seems debilitated today. When journalists asked him last week why the government wasn't acting more quickly, he angrily replied that he wasn't appearing in some comedy act, but is part of a government that operates on a schedule. Now the government has appointed a strategy committee.
However, banking secrecy is no longer a non-negotiable issue for the Swiss government. Over the weekend, Merz acknowledged that Switzerland would have to "compromise". And both Justice Minister Eveline Widmer-Schlumpf and Foreign Minister Micheline Calmy-Rey, hinted that Switzerland might have to give up its protection of foreign tax evaders. Banks too are rethinking their position. Oswald Grübel, the new head of UBS, said in an interview: "It's questionable whether we can continue to hide tax evaders behind banking secrecy." And even Geneva private banker Pierre Mirabaud, president of the powerful Swiss Bankers Association, said the country might "not necessarily" need to continue the practice.
In truth, banking secrecy has already been watered down. The Swiss government has signed agreements with the European Union and the United States, and Switzerland now provides legal cooperation in tax fraud cases. It also remits withholding taxes on the interest and dividends associated with foreign assets to the EU each year. In 2007, this source of revenue amounted to €88 million ($110 million) for Germany alone.
But Switzerland takes a different approach to cases involving ordinary tax evasion such as when a person merely conceals his income and does not falsify documents. This is not treated as a crime in Switzerland, but merely as a civil offence, not unlike a traffic violation. Swiss authorities so far only cooperate with foreign prosecutors in tax fraud cases, which means that common tax evaders are protected by bank secrecy laws.
A proposed compromise is gradually gaining public support, even among politicians of pro-business parties, even though it still lacks a political majority. Under it, Switzerland could provide judicial assistance to foreign courts in the future in cases of ordinary tax evasion, only applying the old distinction between tax fraud and tax evasion to its own citizens. This would satisfy the key demand of international critics.
But for Christian Levrat, the president of the Swiss Social Democratic Party, which has two seats in the government, this is not enough. He says that Switzerland must finally abandon its defensive position. In Levrat's opinion, the country should dispense with the distinction between fraud and ordinary tax evasion, even for Swiss nationals, and it should assume a trailblazing role to eliminate tax havens worldwide instead of always reacting only when under pressure and then stonewalling. "We should be the advocate for a more moral world of finance," he says.
Because Britain's Channel Islands and its Caribbean possessions are among the tax havens now in disrepute, it is somewhat peculiar for Prime Minister Brown to be so critical of Switzerland. Moreover, Swiss banks developed different business models years ago that now allow them to offer services in their customers' home countries.
Nevertheless, the Swiss still have the world's largest offshore banking site for private customers. At the end of last year, €1.47 trillion ($1.84 trillion) in assets were deposited in Swiss banks, including about €450 billion belonging to private customers.
The big question is: How important is banking secrecy to Switzerland's prosperity? Social Democratic economist Rudolf Strahm, a member of parliament for 13 years and an opponent of banking secrecy, tends to be skeptical. "Its importance for the economy is greatly overestimated—especially abroad," he says. The banks, he adds, employ only 3 percent of the Swiss working population, and they are responsible for no more than about 8 percent of gross domestic product—in good years. Strahm estimates that value added would only decrease by 1 to 2 percent if protection for foreign tax evaders were lifted.
Urs Philipp Roth, the director of the Swiss Bankers Association, is sitting in his office on Aeschenplatz Square in Basel. He gives the impression that nothing has happened.
What happened at UBS was no debacle but a "bad isolated case," says Roth, who insists there is no reason to believe that banking secrecy no longer applies. He is opposed to doing away with banking secrecy. "Imagine a table with four legs: stability, competency, quality of life, banking secrecy. If you take away one leg, the table will wobble."
Worldwide criticism that Switzerland protects tax evaders has nothing to do with morals, says Roth, but is merely an argument in the competing world of global financial centers. In some states in the United States, such as Delaware, corporate structures exist that render a company's owners practically invisible. Switzerland, on the other hand, says Roth, is a pioneer in the battle against money laundering, and the funds African dictators once deposited in Switzerland were returned long ago.
"It is too short-sighted to say that there is a dirty little place in the world, Switzerland, and it has to be cleaned. We are not the bad guys in the world," says Roth.
These days, after all that has happened, the Swiss are trying to figure out how much sheltered money is being deducted at the moment and the amount that is still in the accounts. One newspaper put it at €270 billion. "Every number is speculation," says Roth. "No one knows exactly what it is."