It says something about a traditionally reticent nation such as Switzerland that a US Senator such as Levin – who has famously banged the drum against tax evasion – should have so rattled the Swiss that someone decided to create a FB page about it. It may seem a bit silly, but even so, it is a sign of how strained US-Swiss relations have become.

It is not hard to see why. Switzerland is a nation where tax evasion is not a crime, as in many countries (tax fraud, however, is treated as a crime in Switzerland, not an easy distinction to make). The US government, meanwhile, is short of funds, as are many other G20 nations, and naturally wants to stem revenue “leakage”. And so Switzerland, along with other international financial jurisdictions, has come under pressure. The most prominent banking example to date has been the plight of UBS, the country’s biggest bank, which in 2009 paid a $780 million fine to settle criminal charges of aiding US tax evaders; in a separate, civil case, the US and Switzerland agreed that UBS client data be handed over. As a partial breach of bank secrecy, it was an historic moment.

Defensive

But the conclusion of the UBS case has not lowered temperatures by much. Part of the problem is that the Swiss, by and large, have played the defensive approach. By contrast, in neighbouring Liechtenstein, the tiny state has decided to go for a more proactive stance through agreements such as the Liechtenstein Disclosure Facility between the UK and the state. The result seems to have been positive for Liechtenstein. But with Switzerland, its government and banking sector has, arguably, been far too slow to see where the wind was blowing. By defending bank secrecy as it has, there is a danger the country could lose out.  

"The Swiss banking and finance industry owes it to the families they serve to take a position of leadership in this area. I do not believe that Switzerland is yet showing a strategic approach and showing such leadership,” said Philip Marcovici, who is now retired from the practice of law and now consults with families, financial institutions and governments globally.

A danger, he argues, is that if Switzerland does not take a positive approach in handling matters about tax, that other countries will be forced into taking increasingly aggressive approaches that could harm not just Switzerland, but other wealth management centres. He explained that Switzerland was by no means the only jurisdiction with bank secrecy laws. He gave as an example the LDF - which Marcovici initiated - as an example of how jurisdictions (the UK and Liechtenstein) could co-operate. (Marcovici is on this publication's advisory board). 

In any successful agreement involving a country such as the US or the UK, whose tax systems respect privacy and are free of corruption, there needs to be, on one side, a realisation that transparency is vital and on the other, an understanding that change can require time and a sensitive and pragmatic approach to the issues involved.

Angst

Such an approach may prevent the kind of worries now in evidence. As an example of banker angst, Raymond Baer, chairman of Julius Baer, the Swiss private bank bearing his surname, recently called for Switzerland to resolve a long-running tax dispute with the US. "It is surprising to see the US escalation against the Swiss financial centre. Such hostility is not diplomatically tolerable with a friendly country," Baer was quoted as saying. "A solution must be found, because we cannot change the past. Swiss banks have understood they must change," Baer said.

Michael Ambuehl, top Swiss negotiator for international financial affairs, has been burning up the air miles between Berne and the US, talking to policymakers and officials about a number of cases, most recently after the arrest of a Credit Suisse employee accused of helping wealthy US citizens evade taxes. Top Swiss banks such as UBS, Wegelin and Julius Baer now don’t provide offshore banking to US citizens.

The difficulty in making any change to Swiss banking laws that might placate foreign countries is the Swiss themselves: they are proud of their banks. The bank secrecy laws that cause so much ire date back, in their modern form, to 1934. That is a year after Hitler came to power in neighbouring Germany and many Jewish families used Swiss banks, and the protections of secrecy, to conceal their wealth (a point which foes of bank secrecy would do well to remember). But of course the world has moved on since then. Even before 9/11, Swiss banking laws have had to change to make it harder for crooks and terrorists to salt away funds. It was notable, for example, how Swiss authorities recently moved pretty fast to freeze the assets of former Egypt president Mubarrak.

But the Swiss authorities, as Marcovici argues, need to do more. It would be great, for example, if the Swiss government could make itself more accessible to journalists here in London and other capitals so that some of the misconceptions about Swiss banks, if they exist, could be confronted and challenged. If the Swiss authorities don't take a more proactive approach in engaging the media, then it is not hard to see why so many journalists, including specialists in finance, might write endless "banker-bashing" tales about "tax havens" and the like. For instance, why is not Anton Thalmann, the Swiss ambassador in London, for example, regularly pushing to make the Swiss case to folk in the City and Westminster? The Swiss banking industry does try to present a more coherent case for itself than in the past: the Swiss Bankers Association, for example, has a pretty vigorous profile. But there needs to be more of this.

But perhaps the biggest problem is the Swiss electorate itself, and this is something that needs to be understood, given the country’s famed cantonal system of government and its requirements for referenda to approve key legislation. The SBA, for example, recently showed how determined citizens are to protect banking privacy. More than nine out of ten (91 per cent) of Swiss citizens across the Alpine state want to protect banking privacy, with 73 per cent favouring support for confidentiality in banking, according to a recent SBA poll of 1,000 people.

Even so, the SBA itself is showing signs that it realises that the country cannot ignore world opinion, irksome though it may find it. Consider this statement from the SBA sent to me:

“Over the past few years, the revelation that  accounts in Swiss banks were used by certain US taxpayers to avoid paying taxes created difficulties between the US and Switzerland that were uncharacteristic of what historically has been a collaborative and mutually beneficial relationship between our two countries.  With regard to these activities, the SBA did not condone the actions of certain employees of Swiss banks that violated both Swiss and US law.  At the same time, however, we were disappointed by the departure from established avenues between our two countries for providing mutual assistance in tax enforcement cases.”   

And the wording of this paragraph is pretty sharp:

“Swiss banks do not condone that clients hide assets from home country tax authorities.  At the same time, Switzerland is a country that, like the US, adheres to the rule of law.  Protection of financial information and personal privacy is a concern that is shared equally by citizens of Switzerland and the US, and both governments have an obligation to balance law enforcement objectives with legitimate privacy concerns both domestically and with respect to exchanges of information.  Swiss privacy laws do not prevent the Swiss government from providing assistance to other jurisdictions in prosecuting those suspected of engaging in criminal acts.”

Some final thoughts. It is fair to say that the tax evasion/privacy issue has raised what perhaps are profound philosophical, as well as legal and economic issues. On one side of the argument, is the view, put by the Carl Levins of this world and many others, that citizens are not entitled to evade their democratic responsibilities by paying the taxes their fellow citizens have voted for, however harsh those taxes may be. On the other, is the view put around by the likes of the Washington DC-based CATO Institute, that competition between different jurisdictions is good as this drives down taxes overall. At CATO, for instance, the free market think tank has warned that what we are seeing is an attempt by G20 nations to “harmonise” taxes into an oppressive cartel. Cartels are usually frowned upon by legislators if they are made by private companies. Why not take the same approach to tax?

However these debates are resolved, it is clear that, without a major change in direction, Switzerland is going to be seen as an awkward country by revenue-hungry neighbours for years to come. With about 12 per cent of GDP produced by its banking sector, this is not an issue that this independent-minded country can afford to get badly wrong. Marcovici's warning on the need for strategic thinking needs to be heeded.