Cracking Switzerland's best-kept secret: as solid and secure as the Alps: this was the reputation of Swiss banking secrecy. But even the toughest mountain can crack. Similarly, a banking secrecy law can be overturned. See how U.S. authorities shook the very foundations of Swiss bank UBS, alarmed and galvanised the Swiss government, shattered world-renowned Swiss confidentiality--and brought about the end of an era.

AuteurGallinelli, Sven

Try this stereotype on for size: Every time Hollywood's bad guys want to hide illegal money, they transfer it to numbered Swiss bank accounts.

Both inside and out of the movie theatre, Switzerland has quite a reputation as a safe haven for criminal money. However, the numbered bank account was actually abolished years ago, in 2004. And, criminals shouldn't bet on their money being too safe in Swiss accounts for another reason as well--the country has one of the toughest laws in the world against money laundering.

Until recently however, there was one aspect of Swiss banking that wasn't just an outmoded stereotype: Swiss banking secrecy. Invented 75 years ago to grant financial privacy to any individual, the law ensured authorities couldn't simply access someone's bank account for no reason. However, the banking secrecy law has increasingly become the target of global criticism in the last couple of months.

And this resulted in a dramatic step that stunned many Swiss: On March 13 (a Friday), Swiss Finance Minister Hans-Rudolf Merz announced Switzerland would abolish banking secrecy in order to assist other countries that are pursuing citizens believed to have hidden money from tax authorities in a Swiss bank account. Sacrificing Swiss banking secrecy--the unimaginable had happened. An era had ended.

How we got here

The Swiss Federal Council took this extraordinary step after a build-up of events during the weeks prior to Merz's Friday the 13th press conference.

It started in February when UBS and the Swiss government did something that horrified many investors: it agreed to reveal account details of more than 250 UBS customers to the United States Internal Revenue Service (IRS), which was in direct violation of the Swiss banking secrecy law.

For nearly a year the IRS had been trying to obtain the data, but Swiss authorities were cautious, and proceeding slowly in an effort to adhere to their own laws as well. Too slowly, as far as the United States was concerned. The IRS lost its patience and threatened to cancel UBS' banking licence in the United States if the Swiss authorities failed to act.

The threat, made in February, came when UBS had already been hit badly by the ongoing financial crisis. Since U.S. business is an important and profitable part of UBS' balance sheet, Swiss authorities didn't want to risk harming the bank more. Therefore, the Swiss banking regulatory body (Financial Market Supervisory Authority) decided to reveal the data. And with that decision, it overruled Swiss legislation.

Caught red-handed

Naturally, the IRS was eager to get the data because the customers in question were under suspicion of tax evasion in the United States. And, they were very wealthy U.S. citizens. About a dozen have since filed suit in the Swiss federal court system, claiming both UBS and the Financial Market Supervisory Authority violated banking secrecy laws.

However, the real scandal starts here: UBS illegally acquired these customers in the United States by actively soliciting them with a scheme to deliberately hide their assets. The U.S. authorities first caught wind of this scheme after they arrested a UBS manager in...

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