UBS's landmark settlement deal with U.S. tax authorities could be the final nail in the coffin for Switzerland's prized bank secrecy and will have far-reaching consequences for the whole offshore financial industry.
Under pressure from Washington, Berne agreed to let UBS pass on data of certain U.S. clients without waiting for an ongoing appeal process against the data transfer by some of these clients, an unprecedented step in Switzerland.
Switzerland's leading newspaper, Neue Zuercher Zeitung, called the $780 million settlement, which UBS agreed with Berne's blessing, a capitulation.
For Switzerland, it is a true catastrophe for the country's first industry, that is to say the banking sector, Geneva lawyer Charles Poncet, a former member of the Swiss parliament, told Radio Suisse Romande.
Switzerland is the world's biggest offshore center, managing about a third of an estimated $7 trillion of wealth. The industry has prospered thanks to undeclared accounts that protect the privacy of ultra-rich customers, whether from potential kidnappers or from tax authorities.
Lawyers say other Swiss banks and all institutions involved in offshore banking should watch out as the U.S. tax axe may continue to grind.
This is part of a general move toward greater transparency, said Stephanie Jarrett, a tax expert at law firm Baker & McKenzie.
Under Swiss law, bank data can be transferred to foreign tax authorities only in clear cases of tax fraud, not tax evasion. The latter is not a criminal offence in Switzerland. Clients have the chance to appeal against a data transfer.
The country's financial regulator, FINMA, said last night it had found evidence of some mismanagement at UBS. It said it had decided to push ahead with the U.S. tax settlement as the investigation had put (UBS's) existence at risk.
French-language newspaper Le Temps, which broke the news of an imminent deal late on Wednesday, said the government agreed to lift its bank secrecy rules during an emergency meeting on Wednesday night.
This is a political decision. Berne has reviewed the definition of what constitutes a violation of bank secrecy, the newspaper said.
The tax spat had been closely watched by cash-strapped western governments and could set a precedent for similar deals with other banks or by other jurisdictions.
Any success by the US tax authority could encourage tax authorities in other jurisdictions to pursue a similar strategy, Merrill Lynch analysts said in a note.
Tax experts say Germany and France in particular have been watching carefully and may take action against their own banks.
German Finance Minister Peer Steinbrueck has taken aim at Switzerland, repeatedly accusing the country of hiding untaxed money.
UBS itself had warned of potential further actions by other states in its latest financial report.
Following disclosure of the U.S. cross-border matter, it is possible that tax or regulatory authorities in various jurisdictions will focus on the cross-border wealth management services provided by UBS and other financial institutions, the bank said in a note on litigation.
Tax experts say Switzerland will continue to retain some privacy rules, but expect the country and other smaller jurisdictions to co-operate more and more with western tax authorities when required.
The offshore industry is dead for customers coming from countries where there is a will to enforce tax obligations, said a Swiss tax lawyer involved in the tax dispute.
(Editing by John Stonestreet)
(Additional reporting by Stephanie Nebehay in Geneva)