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Swiss banks history, Swiss banks operation
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Is UBS’s Tax Investigation the Death Knell for Swiss Banking Secrecy?

February 20, 2009 03:00 PM
by Anne Szustek
The IRS slapped UBS with a lawsuit accusing the Swiss bank of abetting as many as 52,000 U.S. taxpayers in tax evasion. Is this the end of Swiss banking’s trademark opacity?

IRS Lawsuit Lifts Swiss Banking Shroud

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The Internal Revenue Service issued the latest lawsuit on Thursday accusing Swiss bank UBS of hosting secret bank accounts of up to 52,000 U.S. taxpayers. One of the demands of the suit is for the bank to release the names of the alleged tax evaders.

Previous to the 52,000 number alleged in the IRS lawsuit, a Senate panel last year surmised some 19,000 U.S. taxpayers were holding secret accounts.

UBS plans to “vigorously contest” the suit, according to The Washington Post. Under Swiss law, bank accounts are accorded such a degree of secrecy that not reporting assets to the IRS is not an offense worthy of disclosure. Tax fraud, rather than evasion, would be grounds for release of data.

So far, UBS has disclosed the identities of 300 of its U.S. clients, Swiss President Hans-Rudolf Merz told Swiss reporters on Thursday. The bank is also facing investigations from the U.S. Justice Department, who said on Wednesday that the bank was immediately to reveal the names of its American account holders.

UBS has reached a $780 million fraud settlement with the Justice Department. In a Wednesday statement, Justice Department tax division Assistant Attorney General John A. DiCicco said, “The veil of secrecy has been pulled aside.”

But in the Helvetian Republic, the banking sector’s secrecy is a point of national pride. With regards to the settlement, “for Switzerland, it is a true catastrophe for the country’s first industry, that is to say the banking sector,” former Swiss parliament member and current lawyer Charles Poncet was quoted as saying by Reuters.

UBS has been under U.S. scrutiny
for some time now. Former UBS banker Bradley Birkenfeld has informed investigators that his one-time employer had gone to “elaborate lengths” to aid American customers in opening undisclosed accounts, the Post reported. Birkenfeld himself pleaded guilty to abetting a California real estate executive in tax evasion. Birkenfeld’s information also led to the November indictment of a high-ranking UBS employee.

Swiss national financial regulator FINMA announced Thursday evening that it had “found evidence of some mismanagement at UBS,” reported Reuters, and had agreed with the U.S. settlement to protect UBS’s survival.

“This is a political situation,” Reuters quoted Swiss paper Le Temps. “Berne has reviewed the definition of what constitutes a violation of bank secrecy.”

Background: Swiss banks, history and operation

Switzerland’s pledge of neutrality has translated into centuries of political and financial stability and has provided an investment climate germane to the rise of its famous banking industry. Accounting for some 15 percent of the nation’s economy, the financial sector is one of the main drivers behind Switzerland’s list-topping prosperity.

Switzerland is the world’s largest center for offshore banking. Roughly one-third of the world’s cross-border wealth filters through the Alpine country’s financial institutions. The Swiss banking sector has suffered somewhat due to the current recession, as well as to other countries’ tax amnesties and stricter regulations on offshore accounts.

Opacity is a cornerstone of the Swiss banking sector’s operations. A tradition held since the Middle Ages and codified in a 1934 banking law, banking activities in Switzerland are granted a level of privacy similar to that between a physician and a patient. In the case of a criminal investigation, however, a judge or prosecutor may ask for a “lifting order” to gain access to information on a Swiss bank account.

The shield accorded by Switzerland’s banking laws has drawn fire nonetheless. In a case that proved an international embarrassment for the Swiss government, some 10 years ago it was revealed that Holocaust victims and their relatives had been denied access to some 500,000 Swiss bank accounts. The accounts were “hoarded by the banks after the war ended,” according to the BBC. “Some banks were even reported to have refused to pay out to the victims’ relatives, because no death certificates were available from Nazi concentration camps.”

Swiss banks and the families of the Holocaust victims with connections to the bank accounts reached a deal in U.S. court worth $1.25 billion. UBS and Credit Suisse also agreed to open a database of some 2.1 million accounts opened during World War II.

Related Topic: Countries crack down on tax havens

Thirty-eight localities are currently on an OECD list of countries having strict banking secrecy laws and little to no taxation.

Some of the 38 countries are financially independent territories of the countries pointing fingers, such as British territories Jersey and the Cayman Islands. Others are full-fledged countries bordering the whistle-blowing nations, including Switzerland.

Switzerland now applies a 35 percent tax to bank accounts held in the country by EU citizens, due to pressure from the 27-country bloc. Italy and Germany also approved tax amnesties for citizens who repatriated their Swiss bank account funds.

Switzerland did not attend the OECD meeting. But a statement from the country’s Ministry of Finance read, “Switzerland has taken note of the results of the conference and does not see any reason to react.” The statement also added that Switzerland participates as an “active OECD member” on issues such as tax fraud in reference to a 2000 OECD agreement on banking data information.

Tax havens have gotten the limelight during the wave of U.S. and European bank bailouts. Politicians began to wonder how American and European banks could continue to operate in some countries despite being on the brink of failure in their home markets.

Reference: Finance guide

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