"Swiss Banks And The End Of Privacy".

Swiss Banks and the End of Privacy
Disclosure is the new social imperative.
By L. GORDON CROVITZ

Since the Middle Ages, Switzerland has stood for bank secrecy -- or bank privacy, as the Swiss would insist. In the past month, this foundation of Swiss banking has collapsed under calls for transparency, making Swiss banks seem as outdated as cuckoo clocks. The nearly universal condemnation of Swiss banking is a sign of how quickly our expectations about privacy have changed.

Under pressure from the U.S., Germany, Britain and other high-tax countries, the Swiss agreed to abandon their longstanding protections for depositors accused by their home countries of tax evasion. Until now, countries had to present evidence of fraud, a more serious accusation, before Swiss banks would turn over information about their clients. Switzerland has long been the preferred location for private banking, with more than $2 trillion of the $7 trillion in all offshore deposits located in the country.

The law that the Swiss authorities agreed to change was passed in 1934 but had codified generations of previous practice ensuring confidentiality. For many years, the global consensus was that the benefits of banking secrecy outweighed the clear vices. It took almost 50 years before Swiss bankers agreed to look into deposits left by Jews killed by the Nazis, eventually creating a $1.25 billion fund for their heirs. The Swiss have taken other steps, including against terrorists and money launderers, but the hard line against tax complaints from other countries was considered unmovable.

Try as they did, the Swiss could not hold out in an era when the presumption is becoming that information once considered off-limits to others, including personal financial information, is fair game. Regulators such as the Securities and Exchange Commission mandate that compensation for top executives at public companies is made public. The bailouts of financial services firms have made transparency even greater for bankers and traders.

More broadly, online services from LinkedIn to Facebook and MySpace are built on our newfound enthusiasm for disclosing details about ourselves. Hundreds of millions of people now use these services, creating an expectation of transparency. We expect to be able to learn details online about people we haven't met. We may be approaching a time when we become suspicious of those who don't contribute to these kinds of social media, wondering what they have to hide.

In this environment, the Swiss adherence to confidentiality seems quaint. Lost in the rejection of financial privacy has been the important role Switzerland played for many years in the development of Europe. Bank secrecy gave citizens from countries such as France, Italy and Germany a safe haven for their earnings during times when their governments pursued policies of currency devaluations and controls, expropriation and confiscatory tax rates.

No one supports tax fraud, and Swiss banks have also long been the refuge for tyrants and criminals. Still, Switzerland has been a public-policy safety valve, limiting the tax rates that countries could impose without their people finding ways to park their funds in confidential accounts in Switzerland. The head of the Swiss Bankers Association had argued that rather than blame private banks, governments should look in the mirror: "Chronic tax evasion is a symptom of illness in a state's relationship with its citizens."

The U.S., where tax rates are high and going higher, lobbied hard alongside the Europeans for these changes. The largest Swiss bank, UBS, last month agreed to pay a fine and to disclose the names of several hundred American holders of Swiss accounts. Washington has now asked for many more names.

Privacy got little respect in the debate over bank secrecy. The leader of Germany's Social Democrats threatened the Swiss, warning that "in the olden days, one would have sent in the troops." Swiss politicians lost their cool, with a lawmaker from St. Gallen saying that pressure from the German finance ministry reminded him of Germans "who walked the streets in leather coats, boots and armbands 60 years ago." The Swiss foreign minister twice summoned the German ambassador to complain about "insulting and aggressive" language by the German government and politicians lobbying for change.

Confidentiality remains part of the Swiss ethic, even now. Opinion polls suggest the Swiss strongly oppose the changes, saying that lowering the bar on secrecy undermines the core of what makes Switzerland different. Swiss President Hans-Rudolf Merz had to assure his country that Swiss banks still have advantages. "Protecting the private sphere against unjustified government encroachment is deeply rooted," he said.

Still, changes in Swiss banking are another sign that the increasingly free flow of information is redefining our view of fundamental concepts such as confidentiality. As the Swiss have learned, what was once considered a right to privacy seems to be transforming into a duty to disclose. We can know more, so we expect to know more.