Swiss bank secrecy laws have become blurred after the US arrested a UBS banker for tax evasion. Could this be the beginning of the end of the country's secret banking code? Stephanie Jarrett and Cindy Chambaud discuss

It is a popular view that Swiss bank secrecy attracts undeclared, illegal money – that it exists only for this purpose and that the need for its removal is self-evident. Many believe that the first steps to achieve this have been successfully taken, with the US Justice Department's attack on UBS.

However, first a reminder before you read on: in 1934 Switzerland enacted specific legislation to make divulging bank secrets a criminal offence, partly in response to a law introduced by Adolf Hitler that any German with foreign capital should be put to death.

Is bank secrecy being eroded?

Bank secrecy affords no protection to criminals. Under Swiss law, both domestically and in furtherance of international mutual assistance, secrecy will be lifted in the investigation of a criminal offence. Tax fraud (which involves the use of falsified documents) constitutes such an offence, but tax evasion (the non-payment of taxes) does not. The Swiss Finance Ministry's mandate is to review individual requests and, when satisfied that the issue is one of tax fraud, order the bank in question to lift secrecy in respect to that account.

This is the legal position and, theoretically at least, nothing has happened to change it. However, recent events have led many to believe that Switzerland has agreed to lift secrecy for what is basically tax evasion rather than fraud.

In the summer of 2008, former UBS private banker Bradley Birkenfeld was arrested while in the US, and later charged with assisting US taxpayers (his clients) to evade taxes. Birkenfeld worked in Switzerland, and so was bound by the bank secrecy code. Presumably due to the advantages offered by plea bargaining, Birkenfeld agreed to cooperate with US prosecutors. It is thought that he agreed to provide names of clients and bankers allegedly involved in similar activities, and in doing so was in breach of his confidentiality duties.

Next, the US Department of Justice served UBS with a summons, requiring it to provide identity information and other data on US account holders in Switzerland who were potentially guilty of what the US describes as 'tax fraud'.

However this 'fraud' was most likely tax evasion, and so is not a criminal offence under Swiss law; therefore bank secrecy should not have been lifted.

Then in November 2008, Raoul Weil, the chairman and chief executive of UBS global wealth management in Zurich at the time, was indicted in Florida on a single charge of conspiring to commit tax fraud on behalf of the bank's US clients. He was recently declared a fugitive from US justice when he failed to surrender himself to authorities.

Notwithstanding the fact that there is no reason to suppose that Weil – a Swiss national who worked in Switzerland – contravened any Swiss law, he now risks extradition to the US from any country to which he might travel. Switzerland itself will not extradite its own nationals, nor will it extradite anyone on tax-related charges, but many other jurisdictions will.

There can be little doubt that the Justice Department has targeted UBS, and it would seem its efforts are paying off. Following an examination by the Ministry of Finance, the bank has announced that it will provide data on the Swiss-based accounts of two US clients, on the basis that there is evidence of tax fraud. The clients have made an application to the federal administrative court in Switzerland to block this, stating that there is no evidence of anything that constitutes tax fraud under Swiss law.. All of this suggests that the Swiss Government is adopting a new, more flexible approach. Whether the judiciary will follow suit remains to be seen, and the court's decision in the case will be crucial in either restoring or fundamentally shaking confidence in Swiss bank secrecy.

If access to account information in these cases is allowed, US authorities will almost certainly target more Swiss banks and banks in other jurisdictions with similar bank secrecy legislation, and other countries are likely to follow suit. There is a current trend on the part of governments to attack bank secrecy, the removal of which is presented as a key element in the global fight against the proceeds of crime, the use of terrorist funds and tax evasion. New and far-reaching European Union legislation on anti-money laundering and terrorist financing, along with the exchange of banking information and the provision of mutual assistance in criminal matters, will facilitate any such ongoing attack by providing more specific leads about individuals whose affairs in Switzerland might be scrutinized-logically, this will result in an increase in requests to lift secrecy on particular accounts.

Although it did not affect Swiss accounts, the LGT affair (in which a former bank employee in Liechtenstein stole information that he then sold to a number of governments) provided a further reminder that secrecy is only as sound as its guardians, and those guardians are human beings who will often act in their own best interests.

If clients no longer have faith in the value of bank secrecy, the Government may decide that the cost and difficulty of resisting international pressure no longer outweighs the benefits. However, we are not there yet. For the time being, the economic value of bank secrecy to the Swiss economy (which holds approximately one-third of the world's offshore assets) seems to be considered enough to justify the fight. So even if recent events suggest erosion is a reality, and it seems that they do, the process is likely to be a slow one.

In the end, the complete removal of bank secrecy may not prove necessary. Bankers have watched recent events closely, and are likely to be unwilling to shoulder excessive personal and institutional risk. There is evidence of a change in mindset, and it is likely that bankers will increasingly require assurances that funds in accounts under their management are compliant and have been properly declared and, where necessary, they may begin to push harder for their clients to come clean.

Is it a good thing?

While anything that discourages tax evasion and makes hiding the proceeds of crime more difficult is a good thing, as far as the removal of bank secrecy is concerned, there is also another side to the story.

The lessons of history should not be disregarded without very careful consideration. Today's hot topics are countering terrorism, money laundering and tax evasion, and many governments' intense, coordinated and commendable efforts to achieve this has meant that attacks on Swiss bank secrecy are considered fair game.

Yet the bank secrecy code, far from being a modern invention to facilitate any kind of criminal activity, is more than 300 years old. Since being introduced it has made Switzerland a safe haven for the funds of individuals suffering persecution under particular regimes, including the French revolution and Nazi Germany. Dangerous and abusive regimes persist, and persecution for political, civil and religious beliefs is still rife in many parts of the world. Even leaving this aside, governments are sometimes corrupt, misguided or fixated by a particular ideology. In a world in which countries are increasingly able, and even required, to exchange extensive information about their citizens' affairs, whereabouts and finances, it may be naive to dismiss bank secrecy as having no legitimate role to play.

Whether or not it is a good thing, the secrecy shield appears to have been dented, if not pierced.

What happens next will depend on a number of factors, including how aggressively the US and others continue to pursue the issue, the ruling of the federal administration court as to whether UBS can hand over Swiss-based account information, and the willingness of banks and other financial institutions to set the bar higher, by consistently showing the rest of the world that they adhere to the spirit, rather than the letter, of the law, making sure all due diligence and reporting requirements are rigorously undertaken, and by systematically encouraging clients to put their affairs in order.

If Switzerland and other countries (such as Luxembourg, Austria and Singapore) wish to maintain the bank secrecy shield, those governments will need to put an end to the attacks on their institutions by foreign governments.

We should expect to see a more proactive and strategic approach on the part of the Swiss Government to these issues that are fundamental to the health of its financial services industry, which is estimated to make up approximately 15% of the gross domestic product and employs around 6% of the working population not counting the spending power of clients when visiting Switzerland.

The Swiss Government will have to work tirelessly and quickly to change international perceptions.

Stephanie Jarrett is a partner and Cindy Chambaud an associate at Baker and McKenzie's Geneva office.