Switzerland has long been a haven for wealthy individuals using the country’s banking secrecy laws to shield their assets from governments back home. Swiss banks have been prohibited by law from revealing information about their clients since 1934, and as a result, Switzerland now holds the largest pool of off shore wealth in the world—US$2.7 trillion. But as the banking industry undergoes a profound change, the Swiss bank account as we know it—shrouded in secrecy, protected from greedy taxmen—may soon be no more.
Since the financial crisis, the U.S. government has been on a crusade against tax evasion. In 2009, the Swiss bank UBS agreed to pay a $780-million fine to U.S. authorities for helping American clients evade taxes, and turned over information on more than 4,400 accounts. Another salvo came in early February, when the U.S. Department of Justice indicted Switzerland’s oldest bank, Wegelin, for conspiring to hide more than $1.2-billion owed to the Internal Revenue Service by American clients. European authorities are becoming more aggressive, too. Germany and the U.K. have negotiated agreements with Switzerland compelling Germans and Brits who use the country’s banks to cough up a lump sum for unpaid taxes, plus an annual withholding tax. Switzerland has managed to maintain the anonymity of those German and British clients—so far. Some officials, including the European Commission’s head of taxation, argue the deals are still too weak.
So if one won’t be able to evade taxes with a Swiss bank account any longer, what good is it? “The business with U.S. clients is over. It’s completely dead,” says Tobias Straumann, a professor of economic history at the universities of Basel and Zurich. He expects business with European clients to follow suit as more governments strike agreements to declare assets. Some Swiss bank clients could move their money back home. Those still hoping to evade taxes may seek out other jurisdictions whose secrecy laws remain strong, such as Singapore, Hong Kong and Dubai. The fees Swiss banks charge for managing money will also drop, Straumann contends. Previously, bankers could command a premium because of the country’s iron-clad secrecy laws. There could even be job losses in the sector, as well as lower wages for bankers—bad news in a country where the financial sector was the largest single contributor to GDP in 2010, accounting for 195,000 skilled jobs.
But the picture isn’t entirely bleak. Martin Naville, CEO of the Swiss-American Chamber of Commerce, says private banks are still attracting clients from Eastern Europe, the Middle East and Asia, where governments are not yet targeting off shore accounts. And in emerging markets, Swiss bank accounts are still seen as an indicator of real success.
The threat of more U.S. indictments—10 banks are still under investigation—nevertheless remains a worry. The two countries are working toward an agreement that would see American clients declare assets and pay tax, though the U.S. is unlikely to accept Switzerland’s insistence on keeping those clients anonymous. Naville wants it known to U.S. authorities that there is a lot of goodwill on the part of Swiss politicians to reach an agreement—but that another indictment would “blow up the relationship.” Says Naville, “This would be seen as a declaration of war.”