Yet More Transparency Comes to Swiss Banking

The leak in the dike of Swiss bank secrecy that opened up recently has turned into a torrent. In fact, it looks increasingly as if the dispute between Switzerland and the United States over personal banking records has helped to expose a growing intolerance worldwide towards offshore tax havens that is leading many of them to increase transparency, at least nominally.

Swiss Finance Minister Hans Rudolf Merz acknowledged late last week that the country “had caved in to outside pressure” from the U.S. to loosen the legal protection it had offered its banking industry, according to a report in the Financial Times. Switzerland now plans to abolish the strict distinction between tax fraud, a crime under Swiss law, and tax evasion, a civil offense, the Times story noted. That means foreign governments pursuing tax evasion cases will get more help from Swiss bank regulators. Until now, the Swiss maintained very strict bank secrecy policies except in clear cases of tax fraud.

Prospective bank customers in Switzerland “will never have the same level of confidence in the privacy of their accounts that they once had,” notes Wharton professor of operations and information management Maurice Schweitzer. Swiss banking has long been synonymous with secrecy, but the recent events have broken this bond, he says. And while some may argue that the practical effects of the government’s decision are minor because they affect only a small number of accounts, or that the main secrecy protections are still in place, “the psychological effects of this move are profound,” Schweitzer asserts. “The guarantee of absolute secrecy is gone. And more importantly, Switzerland has demonstrated that [it is] willing to change the rules.”

Wharton finance professor Franklin Allen calls the move by the Swiss late last week “a very important development.” Essentially, the Swiss have “backed down. As the FT makes clear, the key distinction in the past has been between fraud… and evasion…. In particular, they should now be willing to allow UBS to give the IRS the 47,000 names of [American account holders]… who are suspected of tax evasion. With regard to global financial stability, we can hopefully all sleep more soundly in our beds.”

Adds Schweitzer, “Ultimately, I think this is a good outcome. This helps to put international banking on a level playing field, and very importantly, this deters investors seeking to evade taxes.”

In the current issue of Knowledge at Wharton, published just before the latest Swiss announcement, Schweitzer, Allen and other Wharton professors discussed additional implications of the loosening of bank secrecy rules in Switzerland.