Swiss preparing to protect banking secrecy

BERN, Switzerland —

This week, when the world's economic powers meet in London to address the global financial crisis, the agenda will include a crackdown on tax havens — places such as Switzerland, where tax-dodging investors can safely and anonymously hide their assets.

Swiss lawmakers and bankers, despite making recent concessions on tax policy, are worried about being placed on a blacklist or slapped with sanctions. Even worse, they fear investors could panic and withdraw some of the estimated $2 trillion in foreign assets deposited here, threatening the economic fabric of the Alpine nation.

President Hans-Rudolf Merz, who is also the country's finance minister, predicted a domestic political revolt if Switzerland is blacklisted. "This would cause very, very violent reactions in our country," he said in Bern, the capital. "People here would consider it a humiliation."

Unlike in most countries, tax evasion is not a criminal offense in Switzerland. The confidentiality of financial transactions is strictly protected, with bankers obligated to safeguard information about their customers, akin to attorney-client privilege in the United States.

Banking secrecy is such an integral part of the national character that the normally peaceful Swiss turn to combative rhetoric if they sense a threat. Merz compared the Swiss right to secrecy to the Second Amendment to the U.S. Constitution, which guarantees the right to bear arms.

"We have a tradition of privacy. I don't want the state to sniff into my bank accounts as long as I'm paying my taxes correctly," he said.

Swiss officials have taken what they consider revolutionary steps to avoid being named on the tax-haven blacklist.

On March 13, the government announced it would yield to pressure from the United States, Britain, Germany and France by adopting a model tax convention drawn up by the Organization for Economic Cooperation and Development, a group of 30 leading democracies.

The tax code would require Switzerland to share banking records with other countries when individuals are suspected of tax evasion at home, something the Swiss have refused to do for years.

Tax evasion — failing to declare income or assets — is a civil offense in Switzerland. It is viewed in the same light as jaywalking: a commonly overlooked offense that can result in a fine if you happen to get caught.

Switzerland does supply bank records to other countries in cases of tax fraud, a criminal offense that involves actively lying to authorities, instead of just neglecting to report income. Few other countries recognize the distinction, however, and had prodded the Swiss for years to cooperate more.

The Swiss government's announcement that it had changed its mind on tax evasion prompted a fierce political backlash, with some legislators accusing Merz and his Cabinet of betrayal and even treason. But most political parties and commentators have grudgingly gone along, arguing that Switzerland had little choice, particularly after places such as Singapore, Luxembourg and Liechtenstein agreed to similar changes.

"The world has had enough of con artists," Bernhard Weissberg, editor in chief of Blick, a popular Swiss tabloid, wrote in a recent column. Many lawmakers and bankers said that pressure had been building for years on Switzerland but that the global financial crisis gave other countries an excuse to turn the screws.

"We're in an economic war," said Pierre Mirabaud, chairman of the Swiss Bankers Association. "The whole question is about dividing market share among important financial centers. When the whole cake becomes smaller, the fight becomes more fierce."

Mirabaud said most investors who have shifted assets to Switzerland in recent years were attracted by the country's political stability and financial expertise, rather than its tax advantages.

Surveys show about three-quarters of the Swiss public support banking secrecy. A similar percentage, however, say they do not approve when the law is exploited to avoid paying taxes.