The Secret's Out: Can Swiss Banking Adapt to Scrutiny?

With privacy laws changing, Swiss banks need to find another competitive advantage. Do they have one?

By Vivienne Walt / Geneva Monday, Oct. 04, 2010
    • Bradley C. Bower / Bloomberg / Getty Images

    Bradley Birkenfeld is serving 40 months in a U.S. prison after blowing the whistle on UBS

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    Much more contentious was a change in Swiss law that permitted UBS to give U.S. officials details of 4,450 American-held accounts. Many Swiss were outraged, and the deal passed a parliamentary vote last June only after intense political battles. Swiss lawmakers claimed the U.S. had bullied their small country into violating its secrecy laws. That was "breathtaking moral duplicity," wrote Konrad Hummler, chairman of the Swiss Private Banking Association, in a commentary for bankers and investors last year, noting that Florida and Delaware act as tax havens for many Americans. Hummler, who heads the private bank Wegelin & Co., advised his clients to divest from U.S. stocks.

    Swiss bankers say they believe the U.S. and the E.U. (of which Switzerland is not a member) are deliberately attacking them in order to boost their own domestic banks. In interviews, two bankers at separate institutions called the tensions "an economic war."

    It may not amount to war, but there have been some fierce skirmishes. Six months after Birkenfeld exposed UBS's conspiracy, a computer technician at the LGT Group, a bank in Liechtenstein, a tiny territory with close ties to neighboring Switzerland, stole data showing that hundreds of superrich Germans (including the head of the huge Deutsche Post company) had hidden billions in secret accounts. He sold the information to German intelligence for $6.4 million.

    Then in December 2008, Swiss police stormed the Geneva offices of HSBC Private Bank and arrested an employee, Hervé Falciani, for allegedly stealing data on about 24,000 foreign clients' accounts and hawking the information to governments. Falciani jumped bail, driving a rented car into southern France, then retrieving the data from remote servers. France, Spain and Italy have since used the information to investigate possible tax cheats.

    Falciani's theft was not the final shock. On July 14, German police raided 13 branches of Credit Suisse across Germany, searching for data about secret Swiss bank accounts held by alleged tax-dodging Germans. German officials admitted they paid $3.18 million for a computer disk containing the information from a Credit Suisse employee in Switzerland.

    In contrast to those thefts, Birkenfeld blew the whistle in clear daylight. He floored Justice Department officials and the Senate Permanent Subcommittee on Investigations with details of how he and other UBS bankers in Geneva had recruited thousands of wealthy Americans. Birkenfeld and the other bankers breezed in and out of the U.S. carrying bundles of checks, advising clients on art purchases and even once transporting diamonds inside a toothpaste tube. When Birkenfeld wasn't home in Switzerland, he was wherever affluent people might be found. "Centre Court at Wimbledon every year, regattas at St.-Tropez and St. Barts, the film festivals at Cannes and Bangkok," Birkenfeld says, listing his old haunts wistfully. It was a sweet life. "I like good cuisine, good beaches, and I traveled in those circles," he says.

    Once the scandal erupted, UBS folded Birkenfeld's unit, but the bank is still suffering the aftereffects. Thousands of UBS clients have left "for reputational reasons," says bank spokesman Serge Steiner. So UBS is out to get new ones. The bank is expanding in Asia, and its new partnership deal with Formula One is seen as an attempt to attract clients outside the U.S. "UBS did wrong things in the past, and that has to be dealt with," Steiner says. "It hit us hard."

    It has hit Switzerland hard too. The country's share of global wealth management is still a whopping 27% or so, according to the Boston Consulting Group. But bankers admit that thousands of clients have shifted money elsewhere in search of total secrecy or have brought it home under tax-amnesty programs. Last year, Switzerland began forcing intermediaries, like money-transmitting services, to report all suspicious activity to the Swiss police's money-laundering office, and a record-high 896 incidents were reported in 2009.

    That leaves the banking industry in a quandary with regard to Americans. The U.S. has large numbers of high-net-worth individuals, but with the IRS on a campaign to roll up foreign tax shelters, "many Swiss banks don't want to deal with American clients anymore," says Hans Geiger, the former banking professor in Zurich. "They just throw them out." Banks are right to feel jittery. Switzerland revised its international-tax-agreement policy and will now provide administrative assistance to foreign governments in cases of suspected tax fraud and tax evasion — its biggest step toward ending 76 years of cherished secrecy.

    U.S. officials will be waiting. The IRS announced in August that it had boosted its investigations of foreign bank accounts, focusing on U.S. taxpayers worth more than $10 million. And under a new U.S. law, all foreign banks will need to disclose which U.S. taxpayers have undeclared accounts by 2013. Kevin Downing, a senior U.S. tax attorney for the Justice Department who prosecuted Birkenfeld, said in a speech in Singapore last May that his office would soon net from 4,000 to 7,000 more tax dodgers and that the operation would be easier than its bitter face-off with UBS. "We just took down the largest private wealth-management bank in the world," Downing was quoted as saying. "Do you really think we're going to have trouble doing the next one?" If he's right, Birkenfeld could soon have company.

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