G-20 leaders to target nations harboring tax dodgers

Under threat of sanctions, Switzerland and other tax havens are starting to rethink their secrecy laws.

Matt Dunham/AP
British police officers stand guard outside the Houses of Parliament ahead of the G20 summit in London, Monday. World leaders gathered in London for the Group of 20 summit amid an unprecedented security operation.

In Switzerland, Peer Steinbruck has become "The Ugly German."

The German finance minister, a Social Democrat, is known for his brash and biting remarks. But when he slammed the Swiss over their obsession with banking secrecy, the usually placid Swiss erupted. Some even called him a Nazi.As leaders from the Group of 20 Nations meet in London this week, the row between Germany and Switzerland may be just the warm-up. The G-20 is determined to put on a show of unity in the fight to heal the broken global economy. But when it comes to stopping tax dodgers, major powers like the US, Germany, France, and Britain are getting ready for a fight with the countries like Switzerland that aid them.

Steinbruck led the charge when he said at a recent preparatory meeting for the G-20 summit that the Swiss might have to be coerced into cooperating in the battle against tax evasion. "The cavalry in Fort Yuma doesn't always have to ride out. Sometimes it is sufficient just for the Indians to know that they are there," Steinbruck said.

The Swiss went ballistic. The German ambassador in Bern was summoned to comment. The tabloid "Blick am Abend" dubbed him "The Ugly German." Thomas Müller, a Christian Democratic, told the Swiss parliament, "He reminds me of that generation of Germans that walked the streets in leather overcoats, boots and armbands 60 years ago." Accelerated 'progress' after years of pressure

Governments of the world's biggest economies have applied moral pressure for more than a decade on Switzerland, Liechtenstein, Luxembourg, Singapore, Monaco, and a host of countries that allow the well-heeled to park their money out of the sight of tax authorities at home.

Now, they are threatening to replace the tough talk with strict sanctions on those countries that continue to shelter tax evaders with bank secrecy rules. One by one, the tax havens are caving in.

"We have made more progress in the past 13 days than in the last 13 years," says Jeffrey Owens, head of the tax policy unit of the Organization for Economic Cooperation and Development (OECD), a group of 30 democracies that is seeking to establish a global standard for tax cooperation.

The OECD recently placed Switzerland on its list of uncooperative tax havens, joining the ranks of Andorra, Austria, Hong Kong, Liechtenstein, Luxembourg, Monaco, and Singapore.

In London, G-20 leaders are expected to push for those countries that refuse to sign up to the OECD tax agreement to be put on a black list and face possible sanctions, including revisions to bilateral tax agreements and economic penalties, such as restrictions on a country's banks operating abroad and on any foreign banks operating in the country on the black list.

Bowing to the pressure, Switzerland agreed on March 13 to adopt the OECD's definition of tax evasion and to be more cooperative with other countries seeking information about their citizens who may be hiding money from tax authorities in Swiss accounts. Liechtenstein, Austria, Andorra, Singapore, and most recently Monaco have now all agreed to adopt the OECD guidelines.

"This sea change creates a positive environment for debate. But now we want to see rapid implementation," says Mr. Owens.

Estimated $7 trillion in off-shore accounts

Movies such as the Bourne spy thrillers romanticize the use of anonymous numbered bank accounts in Switzerland, where cash, jewels, weapons, and documents can be safely stashed away from the prying eyes of governments. While Bourne may ignite imaginations, the reality is not always so glamorous.

Secret bank accounts are often used to stash drug money, the proceeds from organized crime, funds for terrorists, as well as slush funds from political parties and corporations. Of course, wealthy individuals also use them to hide income.

And the economic impact is significant. The OECD estimates that at least $7 trillion is tucked away in secret off-shore accounts, a third of that believed to be in Swiss banks. That's more than enough to finance the stimulus plans and bank bailouts of the world's major economies.

UBS pays $780 million to settle case brought by US

The US brought charges against UBS, Switzerland's largest bank, and the bank agreed last month to pay $780 million to settle the case. The US alleged that UBS helped 17,000 American citizens stash billions of dollars in assets to avoid paying income tax. UBS still refuses to hand over details on another 52,000 anonymous accounts.

An industry has grown up in the US around publishing books and manuals on how to hide your money legally from tax authorities such as "Secrets of Swiss Banking: An Owner's Manual to Quietly Building a Fortune" by Hoyt Barber.

Banking a lifeline for Liechtenstein, Switzerland

Switzerland is not the only country under scrutiny. Last year, a former employee of a bank in Liechtenstein sold the German intelligence agency a CD with bank records of thousands of German citizens. The case resulted in the high-profile arrest, trial, and guilty-plea of the former CEO of Deutsche Post, the leading German postal company, for tax evasion.

But countries like Switzerland and Liechtenstein say their citizens feel as strongly about banking secrecy as Americans do about the Bill of Rights.

"Banking secrecy is in our DNA," says Gerlinde Manz-Christ, spokeswoman for the Liechtenstein government.

In the end, it's about economics. With such a small country – you can literally drive past it if you're not paying attention – Liechtenstein has little industry and turned to banking as a source of income. Its banks managed about $52 billion in assets in 1995, but that figure has grown to more than $150 billion recently.

The Swiss created their banking secrecy laws in 1934, in the uncertainty and upheaval before World War II when investors and wealthy individuals were looking for a way to safeguard fortunes. Swiss banks now have more than $2 trillion in foreign assets under management, which makes managing foreign investment a key pillar of the Swiss economy.

That's why Pierre Mirabaud, chairman of the Swiss Bankers Association, calls the whole debate an economic war. Mr. Mirabaud told the Washington Post: "The whole question is about dividing market share among important financial centers. When the whole cake becomes smaller, the fight among financial centers becomes more fierce."

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