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Last updated: June 8, 2010 7:45 pm
Switzerland and the US were on a collision course over tax evasion on Tuesday after the lower house of the Swiss parliament rejected a crucial bank secrecy deal hammered out between the two countries last year.
The parliamentary vote was a key step in approving a settlement giving the US access to the names of thousands of rich Americans with undeclared accounts at UBS, the world’s second-biggest wealth manager.
Swiss bankers and politicians warned of a potential crisis for the bank, one of the world’s biggest, and for bilateral Swiss-US relations if parliament did not reverse its decision soon.
“A rejection would be taken by America and neighbouring countries in only one way: Switzerland values the protection of – and business with – tax dodgers more highly than the observance of a state-to-state treaty and more highly than its promised co-operation on tackling tax evasion,” said Martin Naville, chief executive of the Swiss-American Chamber of Commerce.
Switzerland’s bankers’ association, which had lobbied for approval to prevent a political and financial crisis, said: “The national interest is more important than political games.” The same sentiments were echoed by the Economiesuisse industry federation.
UBS itself declined to comment. However, shares in the bank, recovering only gradually from the credit crunch, closed down 2.2 per cent on Tuesday.
The deal with the US was seen as a key element of Switzerland’s willingness to dilute bank secrecy and work more closely with neighbouring countries in tracing tax evaders.
But in recent weeks, the UBS deal became increasingly bogged down in domestic party politics, culminating in Tuesday’s rejection.
A crisis may yet be averted because the deal has already been accepted by the upper house of parliament. Rejection by the lower house means discussion will move to a reconciliation committee comprising members of both chambers, which will try to reach a compromise.
But the issue has turned into a cliffhanger, with a final vote only likely on June 18, the last day of the current session of parliament.
The parliamentary vote was required after Switzerland’s top administrative court this year overturned the bilateral agreement signed last August between Bern and Washington. The court did not reject the accord in principle but said the government should have sought parliamentary approval first.
That tossed the highly emotive issue into the political arena and left it subject to the differing agendas of Switzerland’s main parties. The centre left Social Democrats made acceptance subject to new limits on bankers’ bonuses and tougher regulations on bank failures. The ultranationalist Swiss People’s party, the biggest group in the lower chamber, rejected such conditions, seeing the bonus legislation as an unnecessary form of taxation.
Matters were further complicated by demands from some politicians for the settlement to be made subject to a referendum. In the end, the legislation did not even reach the floor of the house, with debate being sidetracked by votes on the fringe issues.
“This is playing with fire. The SVP and the Social Democrats are indulging in brinkmanship. But we are still positive that in the next 10 days before a final decision is due, reason will prevail,” said Philipp Müller, spokesman for the pro-business Radicals.
The US has avoided commenting on Swiss domestic politics but emphasised the importance of the deal being implemented as agreed. US officials have stressed privately that Washington would not tolerate any changes to the deal, requiring Switzerland to transmit the 4,450 UBS client names by the end of August.
If the agreement was killed in parliament, Washington would almost certainly restart the civil case against UBS that was frozen when last year’s deal was struck. Analysts warned this would leave the bank open to uncertainty at a time when it needs stability and possibly cause further disquiet in jittery world financial markets.
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