There will be no breakdown in relations between the United States and Switzerland after all. This week the two countries announced a settlement of their dispute over U.S. access to information on thousands of Swiss bank accounts believed to have been set up by U.S. tax cheats. That's the good news; the better news is that the agreement promises to secure for the Internal Revenue Service much of the information it legitimately seeks, including about 4,450 names of the worst violators — while poking a potentially durable hole in the shroud that has traditionally enveloped Swiss banking.
The Swiss take pride in that discreet tradition; they live off it, too, since secrecy has helped build banking into an industry that supports a tenth of the tiny country's economy. In truth, though, the Swiss did not occupy the moral high ground in this case. It began when an American employee of the largest Swiss bank, Zurich-based UBS, told U.S. authorities of UBS's massive covert scheme to help wealthy U.S. citizens and legal residents park their taxable cash in secret accounts, in flat violation of U.S. law. UBS pleaded guilty in federal court, agreed to pay $780 million in fines and turned over the names of 300 U.S. clients. Individual criminal convictions followed, as did a U.S. civil lawsuit seeking data on thousands more American-held UBS accounts. It was this demand that the government of Switzerland denounced as a fishing expedition — but which ultimately forced it to the bargaining table on behalf not only of UBS but, in effect, all of the country's banks.
The precise impact of the agreement is still impossible to gauge. Details are being withheld by mutual agreement, for two apparent purposes. The first is to sow uncertainty among U.S. tax evaders, thus encouraging them to come clean voluntarily while an IRS offer of leniency is still available, rather than risk harsher penalties if their names turn up on the UBS list later on. In this sense, the agreement cleverly maximizes the information — and money — the IRS can obtain while minimizing costs to the agency.
The second purpose, undoubtedly, is to help Switzerland save face. The Swiss don't have to spell out the terms under which they will agree to surrender U.S. names to the IRS, at least not immediately, so the magnitude of their concession remains obscure. But it is not trivial. Essentially, the Swiss appear to have accepted real teeth in a new tax treaty between the two countries, so that it can be used to pursue a wider category of alleged offenders than was possible previously. The Swiss government has also agreed to cooperate on similar requests for disclosure involving other Swiss banks. It is, perhaps, not the full disclosure the United States demanded. But tax cheats thrive in the dark, and now that darkness is no longer total.