Wednesday's agreement by Swiss bank UBS to divulge details of 4,450 accounts to the US Internal Revenue Service has put a crowbar into the door of Switzerland's long tradition of bank secrecy. But it's just a small opening. The amount of global wealth stashed in tax-haven nations is staggering and largely uncontrolled, financial experts say. Here's a brief backgrounder:
How did Switzerland become bank-secrecy central?
Maintaining a strong record of client confidentiality helped to pave Switzerland's way to financial success, becoming a lure for financial assets. Coupled with the Swiss franc's reputation as a reliably firm currency, this has made Zurich a world banking center – with UBS and Credit Suisse among the best-known firms. The tradition of secrecy gained a firm legal rooting in 1934, as part of broader Depression-era bank regulations. Under the provision on secrecy, bankers could face criminal sentences for divulging client information.
It's a controversial practice – and never more so than during the era surrounding World War II. Many German Jews were able to protect assets in Swiss accounts, but bank secrecy also played a role in Switzerland's economic cooperation with the Nazi regime, historians say.
Defenders say the policy allows individuals to guard against government intrusion in private affairs. But finance experts say secrecy has served to shield lawbreakers and tax evaders.
So is Switzerland the main place for the IRS to look for tax cheats?
Ever heard of the Cayman Islands, Nevis, Monaco? Switzerland may be the best-known place for client confidentiality, but cracking down on tax dodgers is a truly global issue. In recent decades, a host of nations have aspired to lure global wealth. Generally, the enticement is not just secrecy, but the related opportunity to shelter assets from taxes. The trend has pitted large nations – where most wealth originates – against smaller nations that become tax havens.
How big is the problem of secret money flows?
It's huge, according to Raymond Baker, who tracked the issue in a 2005 book titled "Capitalism's Achilles Heel: Dirty Money and How to Renew the Free-Market System." He defines dirty money broadly to include both the flow of criminal money laundering (such as drug-lord or terrorist money) and other lawbreaking activity, often tax evasion. Together, the flows could total $1 trillion or $2 trillion a year.
By one estimate, money laundering alone reached nearly $1 trillion in 2005. And Baker's book cites Merrill Lynch surveys of wealthy individuals worldwide: These individuals, with some $27 trillion in wealth, had put 31 percent in offshore accounts – with the total rising by about $600 billion a year.
For comparison, global economic activity (gross domestic product) is about $60 trillion a year.
What's the solution?
Implementing fixes is tricky, in part because so many parties – from powerful bankers to governments and wealthy dictators – see themselves as gaining from the status quo. One nongovernment organization, the Task Force on Financial Integrity and Economic Development, says Step 1 is to improve transparency in the financial system. Among the task force's proposals:
• Require public disclosure about who reaps the ownership benefits of companies or trusts that can be used to hide or transfer wealth.
• Require governments to gather data on income paid to nonresident individuals, corporations, and trusts – and then share the information with governments where the nonresident entity is located.
• Harmonize penalties for money laundering across international borders. In the United States, for example, according to the task force, banks can accept funds tied to overseas activities (including sex trafficking and racketeering) that could lead to money-laundering charges if those activities occurred within the US.
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