Gnomes of Zurich face their time of reckoning

The gnomes of Zurich have over the years performed heroically. They have succeeded in protecting from the world's tax authorities nearly a third of the world's US$7 trillion of privately held wealth.

But against their will, Swiss bankers are being dragged from subterranean vaults into the light. The fairytale that has delivered a standard of living envied by the rest of the world is slipping away. And the country's power brokers know it.

Last week, as Switzerland's biggest bank, UBS, saw its share price sink to an all-time low, the country's President, Hans-Rudolf Merz, himself a former UBS banker, suggested for the first time that bank secrecy - his country's most precious commodity - is no longer non-negotiable.

A historic moment, it was followed by the sudden resignation of the chief executive of UBS, once its richest institution. The departure of Marcel Rohner, who lasted just 20 tempestuous months, is yet another calamitous milestone in the collapse of what is arguably Europe's most powerful bank.

For Switzerland, these are dark days. Private banker to the world, the country - and in particular its shadowy financial elite - has suffered a wave of unprecedented humiliations.

No European bank has suffered bigger write-downs than UBS. Its reputation for risk-free sobriety in shreds, UBS has dumped US$40 billion ($79.6 billion) worth of toxic sub-prime mortgages and CDOs into a "bad bank" and required a US$3 billion Government bailout.

It has even been forced to order bankers to hand back bonuses after the traditionally phlegmatic Swiss public reacted with fury when it realised UBS was doling out US$2 billion to loss-making money-men.

Even more damagingly, UBS is embroiled in a multimillion-dollar tax evasion scandal in the United States that has led to the bank being sued by the US Department of Justice, which is demanding the identities and details of 52,000 of its American account holders. The future of Swiss banking hangs on this case.

Two weeks ago, UBS paid a US$788 million fine and handed details of 250 private accounts to US investigators after court documents revealed that UBS wealth managers smuggled diamonds in toothpaste tubes, deliberately destroyed offshore bank records on behalf of clients and assisted wealthy Americans to conceal ownership of their assets by creating "sham" offshore trusts.

Misleading and false documentation was routinely prepared to facilitate this.

The motivation, according to a former senior UBS executive who last year entered into a plea bargain to reduce his sentence, was to ensure the bank managed a staggering US$20 billion of assets owned by wealthy US individuals, which generated the bank US$200 million in fees each year.

The scandal has seen a huge outflow of funds from UBS since it broke last northern summer and sparked a wave of litigation against the bank from wealthy clients furious at having their identities revealed.

The problems have led the country's Justice Minister, Eveline Widmer-Schlumpf, to fly to Washington next week to talk to her US counterpart in a desperate bid to resolve the escalating legal dispute between the two countries.

Johann Schneider-Ammann, a board member with many of Switzerland's leading firms, an industrialist and an influential political figure, said last week that tax evasion should be treated as a crime.

In Switzerland, this is a revolutionary statement. What makes it unique as a major European country is its distinction between tax evasion, which is legal, and tax fraud, which is not. The Swiss will only co-operate with tax officials if the issue they are pursuing is also a crime in Switzerland.

But the future of Switzerland lies in US President Barack Obama's hands. He has promised a crackdown on tax havens.

If he convinces fellow world leaders at the G20 that bank secrecy cannot be tolerated at a time when the world needs every penny to haul itself out of the mire, then Switzerland will be done for.

This was not the way the fairytale was meant to end.

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