The end looms for numbered accounts

GENEVA — There is a growing panic here that time may be running out for Switzerland’s time-honored bank secrecy.

Hans-Rudolf Merz, who is serving both as Switzerland’s finance minister and as president, convened an emergency meeting on Sunday with his counterparts in Luxembourg and Austria. It was a last-ditch attempt to mount a counterattack in what is beginning to look like a doomed battle.

All three countries are up in arms over the prospect that the G20 meeting of leading global economies, which is scheduled to take place in London on April 2, may decide to include Switzerland and other countries offering banking secrecy in a new blacklist to be shunned by respectable economies. With banks everywhere feeling the pressure, the threat is not something the Swiss are taking lightly.

Switzerland is not part of the European Union or the G20, but Merz is determined at all costs to have Switzerland included in the discussions. Above all, Switzerland wants to avoid having its respectable banking industry lumped together with shadier offshore operations in the Bahamas or the Cayman Islands that may really be involved in illegal tax evasion and money laundering schemes.

An advance preparatory meeting of finance ministers will take place on March 14, and Merz wants to use the occasion to meet U.S. Treasury Secretary Timothy Geithner and plead his case that U.S. pressure will only make the current crisis worse.

The stakes for Switzerland are not small. By some estimates Swiss banks hold up to one third of the world’s offshore funds. The banking industry has traditionally accounted for roughly 10 percent of Switzerland’s GDP, and it employs about 5 percent of the population.

The U.S. assault on Switzerland’s bank secrecy started with an IRS crackdown on the country’s leading bank, UBS, which was accused of actively recruiting customers in the United States with various schemes intended to shield their finances from the IRS. While fraud is a crime in Switzerland, tax avoidance is not. A major problem, which the Swiss are trying to deal with now, is that even in Switzerland the line between tax fraud and tax avoidance has not been clearly identified.

In the case of UBS, however, the IRS had convincing evidence that the bank had knowingly set out to help various Americans break U.S. law. Intercepted e-mails indicated that Swiss bank officers had used codes to conceal deposits by Americans from the U.S. government, and UBS, which bought the U.S. investment house, Paine Webber, in 2000, had simply ignored a pledge that it had made to withhold millions of dollars of taxes on earnings.

To avoid a court case, UBS paid a $720 million fine in February and agreed to turn over the names of between 250 and 300 American clients of the bank. The concession appears to have opened a Pandora’s box. The Justice Department immediately upped the ante by demanding that Switzerland turn over the names of 52,000 Americans believed to have accounts in Switzerland. The IRS believes that those accounts could be worth up to $14.8 billion. So far, the Swiss have refused.

As a preemptive measure, Swiss banks have reacted by trying to dump as many American accounts as possible. UBS says that it closed 47,000 offshore accounts held by Americans or American companies. Americans trying to open new accounts from outside Switzerland are being told that at least for the time being they are not welcome. The crackdown at UBS has been so complete that high school children with American passports on the French side of the border have been told that they have to shut down their starter savings accounts. Despite these preventive measures, hardly anyone expects the crisis to go away.

In the emergency meeting Sunday, Austria and Luxembourg agreed to support Switzerland’s stand on continuing bank secrecy, but the threat of blacklisting banks could make resistance futile. Hong Kong and Singapore have already agreed to modify their secrecy laws, and it is uncertain in the current worldwide financial meltdown how long the Swiss can go it alone.

The government bailed out UBS to the tune of $60 billion to keep the system from collapsing completely, but even Switzerland lacks the resources to provide that kind of support indefinitely.

While the U.S. threat to Swiss banking secrecy is the most serious challenge the system has faced so far, it is not the first.

The concept of numbered accounts began in the 1930s when the Nazis tried to force political dissidents and Jewish citizens in Germany to hand over their savings. To find out who had an account, a Nazi agent would try to make a deposit in the victim’s name in a Swiss bank. If the deposit was accepted, the account holder could then be held hostage until the money had been turned over. Numbering the accounts got around that, and in the old days the system was so complete that letters concerning numbered accounts were addressed by hand with no mention of the bank on the envelope.

But while secrecy served depositors likely to be pressured by authoritarian regimes, it could also work both ways. As soon as bank secrecy was formally introduced into the system, there were charges that the Nazis were using it for their own purposes, and that by the end of the war, they had chosen Swiss banks to stash much of the gold looted from other European countries. The top U.S. priority back then, however, was to reestablish stability and to prevent the Soviets from pushing more deeply into Europe. To a certain extent, the Swiss got a free pass.

These days, the main objection to banking secrecy has come from tax authorities, and the United States is not alone on that score. France and Germany have both challenged secrecy laws in an effort to prevent their own citizens from avoiding taxes. At one point, the French sent plainclothes agents to photograph French customers entering and leaving Geneva’s banks. On another occasion, the French tried to bribe a Swiss bank official to turn over the names of French customers. The Swiss threatened to jail the French agent until Paris caved in and agreed not to use the information in court.

This time around, with banks everywhere facing what amounts to a financial perfect storm, the threat seems more serious. The IRS has been advising Americans who have tried to conceal funds in Swiss accounts to make voluntary disclosures now, before it is too late.

More dispatches from GlobalPost correspondent William Dowell:

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