The announcement that Switzerland?s largest bank, UBS, has reached an ?outline settlement? with the government of the US over a tax evasion dispute has highlighted the abrasive politics of global financial regulation.
Since early 2008, US investigators had been asking UBS to hand over details of 52,000 American accounts suspected to be cases of tax evasion by the ?ber-rich.
Prosecution of corporate crimes had been on the backburner during the two terms of the George W Bush presidency, but gathered steam under the Barack Obama administration. This year, the deepening global financial crisis and the attendant focus on misdeeds of bankers added ballast to more vociferous American demands on UBS.
Berne maintained all along that complying with the American legal requirements would violate Switzerland?s own famed banking secrecy laws, where no questions are asked about the source of patrons? wealth. Sharing client details for prosecution in the US would entail a major blow to confidence of high net worth individuals and corporations in Switzerland?s banking sector, which is the country?s economic mainstay. Bowing to American demands was tantamount to suicide for the Swiss economy.
A battle of attrition played out over several months, first between Swiss and American courts which issued contradictory orders, and then finally on the big stage of political relations between the two countries. Eventually, the row attracted high level diplomatic intervention and negotiation between the Swiss foreign ministry and the American State Department. Once the US raised the stakes by opening up possibilities of a souring of ties more generally, Berne moved the issue out of the hands of the confrontational ministry of finance into the lap of the suave foreign ministry, which struck a less adamant posture.
The ?outline? deal involved a typical political compromise, keeping in mind the larger bilateral relations between the two countries. UBS will now have to disclose account details of 5,000 American accounts in which tax evasion is almost certain, but Switzerland can keep its banking secrecy intact. According to grapevine, the US side agreed to seek information of these 5,000 cases via existing agreements between the two countries rather than seeking legal changes that would usher in a new era of transparency in Swiss banking.
It is not clear what the fate of the other major Swiss bank, Credit Suisse, will be in the account disclosure drive of the US government. Thus far, Credit Suisse has escaped scrutiny of US justice officials, and has even posted a net profit of 29% in the second quarter. UBS, on the other hand, is suffering from billions of dollars of client withdrawals and capital flight on account of being the target of the US government probe.
In 2008, the former head of UBS?s wealth management business was charged with conspiring to help thousands of Americans hide $20 billion in assets from tax authorities. Should Credit Suisse be brought into the dragnet, the amount of money being sought for return to the US government might multiply and prove more than a handful at a time when the Obama administration is struggling with skyrocketing budget deficits.
Offshore havens are of course just one item in a gigantic marketplace called global financial regulation, which will witness countless bargaining, give-and-take and pay-off games within each country and between nation states. In agreeing to the ?outline? deal, Switzerland has had to calculate the costs of not only pressure from Washington and Brussels but also wider cold-shouldering. The fact that it was deliberately not invited to the last G-20 summit meeting in London in April rankles at Berne.
The UBS-US saga has also further worsened Switzerland?s image as an unrepentant host to sleazy banking institutions. Swiss banks have a dubious reputation as unscrupulous parking lots for ill-gotten cash from around the world. The phrase ?Swiss bank account holder? is a universal euphemism for describing corrupt politicians, media celebrities, arms dealers and speculators.
In the name of ?wealth management? for their American clients, UBS personnel devised sham companies and even smuggled diamonds in toothpaste tubes through customs. In 1998, both UBS and Credit Suisse admitted that they received and stored gold and other assets looted from victims of the Nazi Holocaust despite being aware of their provenance. Many other scandals of this nature remain shrink-wrapped in legendary Swiss bank vaults.
Why has Switzerland gotten away thus far with unethical banking by granting token concessions? The answer lies squarely in the laxity of global financial regulation and the continued lobbying capacity of elite clients of Swiss banking in the corridors of power. But with Liechtenstein? the other major European tax haven?also giving in to stricter disclosure requirements demanded by various governments riddled by the economic meltdown, the noose around Switzerland may just be tightening.
The author is associate professor of world politics at the Jindal Global Law School in Sonipat