Switzerland Opens the Bank Floodgates

Europe may be continuing to wage its battle against Switzerland and Liechtenstein over banking secrecy, but after a Swiss government decision yesterday it looks like it may have been the US that has delivered the knock-out blow to the Alpine tax haven system. Switzerland's uunprecedented decision to let UBS turn over their clients' banking details to the US could open the floodgates for governments demanding previously secret bank details, causing the whole system of secret bank accounts to come crashing down like an avalanche.

Since 1934 Switzerland has relied on a pledge of secrecy to fill the coffers of its massive banking system. According to the Swiss Banking Association, 27 percent of all privately held offshore assets are located in Switzerland. The result has been that the country's economy is heavily reliant on the banking industry, with two of the world's largest financial institutions, Credit Suisse and UBS, being the pride of the country. The US Internal Revenue Service had filed criminal charges against UBS, accusing it of helping Americans avoid paying US tax by opening Swiss bank accounts and demanding that it hand over client data. Under Swiss law UBS wasn't allowed to turn over those records, so UBS petititioned the government to allow it to do so, saying that if they didn't their very existence would be at risk. Yesterday the Swiss Financial Market Supervisory Authority said it would allow the release, throwing Swiss market analysts into a panic. Many are saying the government's decision was unnecessary and premature, and could put the whole Swiss banking system at risk.

But the pressure on Switzerland to reform its banking secrecy laws has been steadily mounting for the past several years. Germany in particular has been aggressively pursuing the issue, leading the efforts to force Liechtenstein's hand by stalling its Schengen Zone membership until it makes concessions on the issues. Last year the German finance minister even made the argument that Switzerland should be put on a blacklist of tax havens. The EU has also been looking to end what it views as a no-longer-acceptable tax island within its borders. This month the EC introduced a proposal to end anonymity for bank accounts within the EU. But since such secrecy is already illegal in most EU countries anyway, many analysts think the proposal is actually being made with the intention of extending the legislation to Switzerland and Liechtenstein, which both have bilateral treaties with the EU locking them in to many decisions made in Brussels.

But although Europe's been gunning for the tax havens for some time, it looks like it is the IRS that's delivered the knock-out punch. The Swiss government was at pains today to insist that the ruling is an isolated case and will have no bearing on such negotiations with the rest of Europe. But it's undeniable that the decision is likely to encourage the EU and individual countries to pursue similar criminal action against Swiss banks in order to force their hand. And now that the precedent has been set, it will be hard for the Swiss government to block those requests in the future. As the economic crisis continues to worsen, governments will be keen to grab additional revenue wherever they can. Some of that may now come from unpaid taxes sitting in Swiss banks.