investing

The end of bank secrecy?

Wednesday, Aug. 12
Posted 3 p.m. EDT

The U.S. government has reached an agreement with Swiss bank UBS AG in a closely watched bank secrecy case. In exchange for dropping a civil suit, the bank will provide the U.S. with names of American clients suspected of tax evasion.

The number of names to be disclosed remains unclear at this point. The U.S. had asked for 52,000 names of wealthy Americans thought to be sheltering nearly $15 billion from taxes. Back in February, the bank agreed to hand over 250 to 300 clients it determined had committed tax fraud under Swiss standards, and to pay a $780 million fine.

The hearing today to settle the case lasted only minutes, but the impact is huge. We're entering an era of increased financial transparancy, and offshore banking has had a solid and sexy past shrouded in mystery and wealth. Its high-stakes entry fee is such that if you have to ask, you don't belong.

UBS, which obtained a presence here with its purchase of PaineWebber in 2000, has admitted to soliticiting rich Americans seeking to hide money. The Swiss government supported the decision to turn over the 250 to 300 names and the fine against UBS, but has been fighting the wholesale disclosure of 52,000 clients, citing its bank secrecy laws that date back to 1713.

It remains to be seen whether clients turn around and sue UBS because it broke those laws, but it seems more likely that everyone will fall in line because of the groundswell for increased bank transparancy. The latest IRS scuffle with UBS is not the only ding to the armor of confidentiality. The Paris-based Organisation for Economic Cooperation and Development -- a watchdog group of industrialized nations -- is seeking to pressure offshore banking locales to disclose information. So far, 38 jurisdictions have committed to the OECD.

Switzerland, with arguably the most famous reputation for offshore accounts and about a quarter of the world's offshore wealth, has in the past agreed to exchange information with the U.S. in an effort to deter clients suspected of tax evasion. But they view the latest U.S. intrusion as a fishing expedition and want more proof before being required to violate client privacy on such a large scale.

Indeed, the reasons for offshore banking don't always include tax evasion. Many clients are from countries where the currency and the government are unstable, and the offshore havens provide safety.

In the end, offshore banking could continue to thrive even under stricter disclosure rules. According to an article in Economist.com, perhaps a third of offshore funds in Switzerland are from places where the wealthy may not pay much tax anyway. If clients want to legitimately harbour assets, they just have to realize there is no safe haven from taxes owed.

Questions? Comments? E-mail Your_Wealth@bankrate.com

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