Cracking the Vaults Germany Attacks Swiss Banking Secrecy Practices

German Finance Minister Peer Steinbrück wants to weaken Switzerland's notorious banking secrecy laws. Now it looks like he might get his way as negotiations begin on a new tax cooperation treaty between the two countries. And if that doesn't work, Germany has a secret Plan B.
Von Beat Balzli

For accountant Rainer Krieg, appointments like the one he had last Wednesday afternoon are a purely routine affair. A Swiss asset manager had phoned him up and asked him to make a "home visit" as soon as possible. Krieg is something of an emergency doctor for tax evaders who don't know what to do.

Somewhere in Zurich, in the meeting room of a private bank, Krieg eventually met up with a German businessman and his wife, both around 70, who had sweaty palms -- and over €500,000 ($725,000) in illicit earnings in their bank account.

Thirty years ago, the man had secretly diverted the money into Switzerland. Now his two children want nothing more to do with it. They don't want to inherit the sins of their parents, and they're demanding that they -- as Krieg puts it -- "get things straight."

Nowadays, there are more and more of these types of cases. "I am called to Swiss banks practically every day," Krieg says. There, he faces frightened clients, and he explains to them the "option of turning yourself in to the German tax authorities."

Panicking Clients

There is rising panic in the tax paradise. More and more tales of doom are rocking the executive suites of Swiss finance houses, which between them manage over 2 trillion Swiss francs (€1.3 trillion or $1.9 trillion) -- a quarter of all private foreign assets worldwide. Some of their less honest clients are panicking because finance ministers around the world have lost patience with the country's supposedly watertight banking secrecy practices.

Two weeks ago, the US reached an agreement with Switzerland on the disclosure of more than 4,400 UBS bank accounts belonging to US tax offenders. A week ago, the French budget minister made it known that with the help of informants he had acquired over 3,000 sets of records from Swiss banks.

The latest blow came on Tuesday when negotiations began between Germany and Switzerland at the Swiss Federal Tax Administration in Bern to hammer out new rules governing the exchange of information.

From the German perspective, the goal is clear: Tax authorities' investigations should no longer end at the border. In any future event of suspected tax evasion, the relevant authorities will obtain account details from Switzerland via official channels. For foreigners, this means the de facto end of the secret bank account.

Working Harder for Their Money

The end of hush-hush dealings is hitting Switzerland's private bankers, who have grown used to success, at an extremely inconvenient time. The financial crisis has seen the assets being managed shrink sharply; everywhere managers are slashing expensive privileges and outsourcing entire departments. "We will need to work harder for our money in the years to come," said Julius Bär chief executive Boris Collardi last week at a banking conference in Zurich.

It's possible that Collardi has recently been painfully reminded of a statement once made by the bank's former board chairman. Banking secrecy makes you "fat," but also "impotent," Hans J. Bär once wrote in his memoirs. German tax sinners alone have around 300 billion Swiss francs stashed away in Swiss accounts, according to estimates by the German Tax Union. The business model is now under acute threat.

A few months ago, the German Finance Minister Peer Steinbrück voiced regret that he couldn't send in the cavalry  to his neighboring country. Now, "Peer the Whip," as the Swiss like to call him, is going for the negotiated settlement, a strategy that seven years ago ended in failure for Steinbrück's predecessor Hans Eichel.

These days Eichel, who is now retired, likes to rail against Swiss banks on television talk shows. However he was less harsh on them while in office. During 2002 negotiations on the so-called double taxation agreement (DTA), the Swiss refused to provide information on simple tax evasion. Switzerland would provide help through official channels only if German authorities had been defrauded with counterfeit accounts and documents.

Moreover, the Germans paid a high price for this concession. As a trade-off, Eichel's negotiators had to agree to exempt Swiss parent companies from tax payments on profits paid out by their German subsidiaries. The concession costs Germany some €160 million per year.

Hunting Down the Tax Evaders

The DTA poker game started again this Tuesday, and this time Berlin is beginning with a markedly better hand. Switzerland is under intense pressure and will find it difficult to avoid making concessions.

The largest post-war financial crisis has in recent months led to international condemnation of tax havens. US President Barack Obama has vowed to "pursue tax evaders," and even Jean-Claude Juncker, the prime minister of tax paradise Luxembourg, has already capitulated. "It can't be the task of European financial centers to enrich themselves at the cost of their neighbors," he said.

Any country that blocks efforts at transparency in the future risks inclusion on a so-called "gray" list. From now on, the standards on the exchange of tax information drawn up by the Organization for Economic Cooperation and Development (OECD) will be regarded as a minimum requirement.

The time for "banking secrecy as a shield for tax evaders is coming to an end," said an OECD statement from last week. In March, the Channel Islands and the Isle of Man declared themselves willing to cooperate with Germany. Last week, it was Liechtenstein's turn to buckle.

Not Quite the Same

Now it's Switzerland turn. They will have to conclude a total of 12 such double taxation agreements to avoid the ire of the OECD. Countries such as Austria, Norway, Luxembourg, Denmark and France have already been ticked off the list.

However, although these agreements are supposed to facilitate the exchange of information, they don't always do what it says on the tin. The relevant passages in the agreements which have already been signed are indeed nearly identical -- but only nearly. Whereas diminutive Denmark must possess the exact name and address of the Swiss bankers it suspects of abetting tax evasion if it wants to get information from Switzerland, no such conditions apply for powerful France. The French, according to their agreement, can supply the names and addresses "as far as they are known."

The United States will be getting even more from the Swiss. The largest Swiss bank has supplied the names of American clients on its own initiative following tough negotiations with the US government and a confession by an ex-analyst on the methods used at UBS. The selection of names followed fixed criteria.

For Konrad Hummler, an associate at Wegelin & Co., Switzerland's oldest bank, UBS's compromise is tantamount to the fall of man. He talks of "betrayal" and claims customers have been deceived.

Hummler regards bank secrecy as a kind of human right against the greed of the state, whereby he considers the Americans to be especially dangerous. "The USA is one of the most aggressive nations there is," he says.

Many Germans now expect Finance Minister Peer Steinbrück "will make the same demands of the Swiss as the Americans did in the UBS case," says accountant Rainer Krieg. Most of his clients have already reached retirement age. For this generation, "Switzerland was a safe place, far away from the risk of war and inflation." Krieg's clients had not reckoned with the risk of Steinbrück, however.

Clever Trick

The German Finance Ministry is keeping quiet about its strategy for the coming negotiations. The diplomatic path is not the only means of obtaining the coveted account details. As it happens, Steinbrück's experts are tinkering away in secret on a second means of access to the Swiss vaults.

Some months ago, a survey by the German Federal Financial Supervisory Authority (BaFin) revealed the extent of German banks' commercial interests in tax havens such as Switzerland or Liechtenstein. Deutsche Bank's subsidiary in Geneva stood out as being particularly enthusiastic when it came to the creation of non-transparent trusts.

But how can the government force German banks to give up shady businesses in another country?

The answer involves a clever trick. Alongside drug trafficking, tax evasion is also considered a predicate offence to money laundering. Thus, the Finance Ministy has tightened provisos on the "group-wide implementation of due diligence against money laundering."

BaFin specialists are now working on the regulations to be precisely implemented in the banking corporations. Under the new rules, a company's money laundering-prevention officer "will be granted full access to foreign subsidiaries' data, which he can pass on to supervisory authorities if necessary," said one Frankfurt insider, who did not want to be identified by name. There is already speculation that this approach will enable the German authorities to avoid having to request assistance from their Swiss counterparts. When contacted by SPIEGEL, BaFin refused to comment on the matter.

'Rapid Emigration'

In any case, things can only get riskier for German tax evaders. But not everyone is considering turning themselves in. Some are choosing to take the risk in the hope of not being discovered, while others are looking into "whether rapid emigration to Switzerland is a possibility, and how much this would cost," says Zurich-based business lawyer Daniel Fischer.

As for the tax accountant Rainer Krieg, he and his family have been living in the canton of Zurich for the past eight years. But homesickness is still a problem for the tax expert -- something he cures with a trip to Frankfurt every other weekend to see his beloved soccer club Eintracht Frankfurt play.

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