Offshore financial centers which have thrived under a veil of bank secrecy will have to embrace transparency to survive a global crackdown on tax cheats that is menacing the private banking sector in Switzerland and beyond.
A U.S. tax fraud probe into UBS AG, the world's largest wealth manager, is showing Washington is serious about chasing tax dodgers at a time when it is desperate for revenue to revive its ailing financial sector.
In Europe, Britain has joined Germany and France in the battle against tax havens and has put the item on the agenda of a Group of 20 nations meeting on April 2, bringing the political debate on tax evasion to unprecedented levels.
The pressure is on to crack down on offshore centers, said Dermot Butler, chairman of Custom House, which provides onshore and offshore funds. The long-term effects on the Caribbean, and Switzerland and Liechtenstein is that those who were suspicious of them will be even more so.
Offshore banks, which serve non-resident individuals, manage an estimated $7 trillion of wealth worldwide, a third of which is in leading offshore financial center Switzerland.
From the Andorra to Singapore, offshore centers have some form of bank secrecy in place preventing foreign tax authorities accessing a client's accounts at will.
Lobby group Tax Justice Network says up to 75 countries, including large states such as Belgium, Austria, Britain and even the United States, should be considered offshore centers and adds that tax authorities every year miss $250 billion out of $11.5 trillion of undeclared wealth stashed abroad.
But matters are changing rapidly.
The writing has been on the wall for many years, Philip Marcovici, partner and tax expert at law firm Baker & McKenzie. What we are seeing, however, is unprecedented coordination among governments to go after tax revenues associated with assets and income located abroad.
The U.S-Swiss standoff on UBS is being watched closely by the EU's executive commission, which is toughening rules to catch tax cheats inside and outside the 27-nation bloc.
Liechtenstein, a non-EU secrecy stronghold that is the target of German pressure to open up, made a U-turn in December by agreeing to share some tax data with Washington.
It is now prepared to open up further if western states allow its bank clients to bring money onshore without hefty repercussions, the country's prime minister said this month.
Belgium, a little-known haven within the EU, has said it is considering moving toward automatic exchange of tax data with other EU governments, de facto dropping bank secrecy.
Privacy laws in Luxembourg, one of Switzerland's closest allies in Europe and an advocate of banking secrecy, have been questioned after a fraud orchestrated by Bernard Madoff engulfed some of its funds and exposed weak regulatory supervision.
Some bankers say weakening bank secrecy in Switzerland and other European centers will benefit Singapore, which aspires to become a leading offshore hub and which is less exposed to EU pressure as it does not rely on trading with the bloc.
Ivan Pictet, senior managing partner at private bank Pictet & Cie, predicted last week the Swiss financial industry could be cut by half if bank secrecy were to be dropped.
But Jonathan Ivinson, partner and head of tax at law firm Hogan & Hartson, does not expect to see a third of the world's offshore banking industry de-camping from the Alps to Asia.
Banking secrecy is not only something for rich people. It is also for the German middle class and they do not like to go to Singapore, said Konrad Hummler, who heads the Swiss private bankers' association and Switzerland's oldest bank Wegelin.
Lonnie Howell, CEO of bank EFG International, expects Switzerland to relax its definition of bank secrecy and cooperate on tax evasion with other states, something it has so far resisted despite a weakening of secrecy rules over time.
Banking secrecy, which was enshrined in law in Switzerland in the 1930s and was subsequently embraced by other financial centers, had already been weakened over the last 10-15 years.
The numbered accounts shown in many James Bond-type movies are a thing of the past thanks to the introduction of strict money laundering rules, which got a further boost after the September 11, 2001 attacks in the United States.
Berne has also become more transparent with dictators' money and has returned some $1.6 billion of funds over 20 years.
Some bankers say Swiss secrecy will survive the latest attack, but say it will be a different kind of secrecy.
It has survived the past 75 years. I believe it will also survive the next 75 years, Oswald Gruebel, appointed chief executive of UBS on Thursday, told Swiss paper Tages Anzeiger. But it will adapt to the market changes.