Berlin bank data attack threatens Switzerland

Swiss Finance Minister Hans-Rudolf Merz points out his views to Merkel Keystone

Germany has confirmed that it intends to defy protests from Bern by paying for stolen Swiss bank data to help track down domestic tax evaders.

The latest diplomatic spat with another country places Swiss banking secrecy under even greater pressure and has left observers wondering if Switzerland will flinch first under the latest assault.

Just when Switzerland thought they had seen the back of one troublesome German finance minister (Peer Steinbrück), his successor on Tuesday confirmed Chancellor Angela Merkel’s earlier comments that a price may be paid to obtain stolen Swiss bank data.

“In principle, the decision has already been taken,” Wolfgang Schäuble told the Augsburger Allgemeine newspaper.

The revelation comes as another blow to Switzerland, which appears to be fighting a one-sided battle, lined up against the might of the G20 group of the most powerful nations in the world and the Organisation for Co-operation and Development (OECD).

France is already in possession of data stolen from HSBC’s private banking arm in Geneva that they will use to track down tax evaders despite Swiss protests. And Germany has a track record of seeing its threats through to the end.

Shot in foot

Two years ago, Germany paid a substantial sum for illegally obtained information from a Liechtenstein bank. The move netted some high profile tax evaders and forced a concession from Liechtenstein to amend its ways in future.

But Switzerland should not back down quite so easily, according to Arturo Bris, a professor of finance, law and economics at Lausanne’s IMD international business school.

Bris believes that Germany has “shot itself in the foot” after arguing for so long that Switzerland’s banking system encouraged criminal activity. By conspiring with criminals itself, Germany has now lost the validity of its argument and could be successfully challenged by Switzerland in its own courts, according to Bris.

“Thanks to the comments by Chancellor Merkel [and now Schäuble], the situation looks brighter in Switzerland than it did two weeks ago,” he told swissinfo.ch. “ I do not see any advantage in this illegal act which will surely backfire on Germany.”

“Switzerland should remain strong and put more effort into explaining that the problem lies not with its secrecy laws, but with criminals in other countries. The failure lies with other countries failing to prosecute criminals inside their own borders,” he added.

Red-handed and red-faced

Putting the latest German incident into isolation, Bris may have a valid argument. But Switzerland is fighting attacks against its system of banking secrecy from all sides.

Last year, Switzerland was forced to renegotiate a host of double taxation treaties with other countries to remove itself from an OECD “grey list” of uncooperative tax havens.

The Swiss government then had to strike a deal with the United States to hand over information on thousands of UBS clients after the bank was caught red-handed in a tax evasion probe. A Swiss court ruling that at least part of the deal was illegal may leave a red-faced government having to go back to the US authorities asking to re-negotiate.

If Germany goes ahead with its threat to use the stolen Swiss data to hunt down its own tax evaders, it could create a lucrative market for other disaffected bank staff to follow suit in the hope of legal protection and a windfall pay day.

Swiss banks already operate very tight levels of security to protect client data, according to John Ederer, Deputy Head of Forensic – a unit that advises companies on white collar crime risks – at KPMG Switzerland.

Security strategy

“Undoubtedly the rules of the game have changed in the last few years and people are becoming more aggressive. Technology is constantly updating, but it is very often the most basic controls that prove the most effective,” he told swissinfo.ch.

For example, banks routinely segregate different aspects of client information into separate servers and carefully restrict access while monitoring staff activities. Staff are also restricted on what they can print and the use of USB memory sticks is routinely forbidden.

However, any security system is only as strong as its weakest link, according to Ederer.

“The principle weakness of any environment is the human element. If you have one rotten apple in a barrel full of perfect apples, that could compromise the whole system,” he said.

“The strongest human element controls are a positive ethical environment, effective training, codes of conduct, good direction from senior management and leading by example.”

Matthew Allen, swissinfo.ch

Tax attacks

Switzerland has been under continuous attack in the past 12 months for helping foreign tax evaders hide their assets. The global crusade coincided with the devastation of the financial crisis leaving large holes in the budgets of many countries.

The OECD placed Switzerland on a grey list of uncooperative tax havens in April last year. The Swiss were removed in September after renegotiating several double taxation treaties, but they have refused to automatically transfer information to tax investigators without proof of crimes.

Former German Finance Minister Peer Steinbrück referred last summer to the Swiss resembling Indians running away from the cavalry. Italian Finance Minister Giulio Tremonti said that he wanted to “bleed dry” the financial sector in the southern Swiss canton of Ticino.

Several countries, including Italy, France, Britain and the United States launched tax amnesties last year in an effort to repatriate assets from tax cheats. These are forecast to damage the Swiss offshore banking industry.

Switzerland was particularly annoyed at the aggressive Italian amnesty that saw surveillance and tailing of cross border suspects going into Switzerland. The Swiss suspended talks on the new double taxation treaty in protest.

The most damaging tax evasion case involved the activities of UBS bank in the US. In February 2009, UBS was fined $780 million after admitting helping US citizens to dodge taxes.

In September, the Swiss government was forced to hand over the details of 4,450 UBS clients to the US – in effect violating Swiss banking secrecy to prevent a ruinous court case for UBS.

Canada and India have also issued warnings that they will not tolerate Swiss banks sheltering tax evaders’ assets.

A former employee of HSBC private bank in Geneva ran away with sensitive client data that he handed over to the French authorities last year.