Switzerland’s storied role as discreet banker to the world’s tax-avoiding wealthy is under threat like never before, and this time the country ultimately may not be able to stop the rest of the world from prying into those legendary ‘secret’ accounts, said to contain between $1 trillion and $2 trillion.
Like Paul Revere, Konrad Hummler sounded the alarm last week as he made his way by train and by plane to his bank’s branches across Switzerland. This country’s storied role as secret banker to the world’s wealthy is under threat like never before, Mr. Hummler warned.
Mr. Hummler, the jaunty, blunt-spoken managing partner of Wegelin & Company, a small private bank in St. Gallen, has watched a German tax-evasion scandal evolve into a debate about banking secrecy here. Worried that the treasured discretion of Swiss banks is under assault, Wegelin’s foreign clients have been inquiring about their money.
Mr. Hummler says that this time, Switzerland may not be able to stop the rest of the world from prying open Swiss banking.
“What is going on is a power play,” he said. “It may be unusual in today’s Europe, but it is here.”
This land of stunning Alpine vistas, which has chosen to remain outside the European Union, has always loomed large in the global imagination as the place where the wealthy stash their money beyond the tax man’s reach. The best estimates suggest that image is true, to the tune of $1 trillion to $2 trillion.
The scandal that threatens that lucrative business began when German authorities obtained secret financial data from Liechtenstein, Switzerland’s tiny neighbor with similar banking laws. The information in hand, investigators fanned out across Germany to seize documents thought to be related to tax evasion by hundreds of wealthy Germans. Cases are now being prepared based on the information, a process likely to take years. The fallout has claimed the job of one top executive, Klaus Zumwinkel, who had headed the German postal service, and has given the German left a political boost.
But Switzerland is the bigger prize. And its continuing refusal to help other countries catch tax cheats hiding their money there appears to have hardened Europe’s resolve to force change.
“If a car is stolen in Germany and taken to Switzerland, the Swiss help find it,” said Hans Eichel, a member of the German Parliament and a former finance minister. “But when it’s about tax evasion — and much larger sums — they do nothing. No one outside Switzerland understands that.”
To Thomas Borer, a former Swiss ambassador to Germany, few inside Switzerland understand the depth of foreign discontent.
“It is obvious,” said Mr. Borer, now a lobbyist, “the government and the banks, really, are heavily underestimating the impact of this scandal.”
“There may be an avalanche coming, and we are not ready,” he added.
Mr. Borer compares the coming storm to the debate Switzerland faced in the late 1990s over dormant bank accounts belonging to Holocaust victims and their families. When first faced with demands for restitution, Swiss banks dismissed the claims despite urgent warnings from some Swiss diplomats that the issue would not go away.
After an international blowup that sullied their reputation, the banks settled the matter by creating a $1.25 billion restitution fund.
Last month, Germany threatened to delay a new passport-free travel arrangement with Liechtenstein, the clearest sign that Germany is willing to hold other policies hostage to its goal of cracking banking secrecy laws.
Angela Merkel, the German chancellor, is due to visit Switzerland in late April and is expected to press demands for more investigative assistance from Swiss authorities in tracking down German tax dodgers — and less secrecy generally.
The official Swiss reaction has been self-conscious detachment, which they hope will deflate the issue.
No one expects Swiss banking secrecy to dissolve overnight. What European governments are aiming for is a middle ground between Switzerland’s being a banking black hole and the openness of other major countries.
One compromise might be for the Swiss to agree to provide greater assistance to foreign authorities investigating suspected crimes. But that kind of move could breach the discretion so many Swiss clients value.
Under current agreements with the 27-nation European Union, Switzerland imposes its own capital gains tax on people who invest here but live in European Union countries, and remit the money to the appropriate national authorities. Some countries, including Germany, believe the current system gives them less money than they are owed.
European officials believe they can seize this moment to rally public opinion against the Swiss, German officials said. France, which will take over the rotating presidency of the European Union in the second half of this year, has agreed to take up the issue.
Even American leaders are taking note. Senator Carl Levin, Democrat of Michigan, has announced his own inquiry into tax evasion by Americans in Liechtenstein, and both he and Senator Barack Obama are pushing legislation that would give the federal government new powers to track down money in Switzerland and elsewhere.
The concept of bank secrecy is deeply rooted in Switzerland, akin to the confidentiality rules governing doctors and lawyers in other countries, and a 1934 law makes it a crime for bankers to disclose client information. For foreigners, this combination is an effective shield against authorities at home.
Generally, treaties on mutual legal assistance between sovereign nations apply only to matters that would be deemed a crime in both countries.
Mr. Hummler is unusual only in that he openly admits Swiss banks manage lots of money that escapes taxation elsewhere. But he makes no apologies. Recently he wrote a widely read eight-page tract defending Europeans who put their money in Switzerland as engaging in “financial self-defense” against high taxes at home.
Most analysts say big Swiss banks like UBS and Credit Suisse, which make most of their money outside Switzerland, would do just fine without banking secrecy. But Mr. Hummler said such secrecy is vital for the small private banks, a stable business with fat margins even in bad times.
Polls consistently show that 80 percent of Swiss support the banking confidentiality law — but that number drops into the 40s when it is applied to foreigners, suggesting the Swiss care much less about the privacy of non-Swiss citizens.
Mr. Hummler experienced that reality first hand a few weeks ago. During a meeting of his Rotary Club in Zurich, his fellow members were appalled that Swiss bankers might be managing the money of foreign tax evaders. “We had no idea,” Mr. Hummler recalls them saying, “that you did things like that.”
Hans-Rudolf Merz, the Swiss finance minister, has brushed aside notions that Switzerland will water down banking confidentiality, a cornerstone of the financial system. Jean-Michel Treyvaud, a spokesman for Mr. Merz, called the debate “a media phenomenon” and declined an interview request.
But bankers here said Swiss authorities’ worries actually run deeper. The quandary they face is that even discussing the issue could unnerve foreign clients.
Mr. Hummler said clients were already unnerved, since the dangers facing secrecy are obvious.
“You don’t want to say Swiss banking secrecy is in danger because of marketing issues,” he said. “But when it is so obvious, as it is now, it does not do much for marketing.”