The swiss bank account, long the cliched secret hiding place the rich and famous would allocate their nest eggs to in order to avoid overblown taxation (today it would seem to be the ‘Caymans’).

With the western banking world seemingly in chaos, it should come as no surprise that those who learnt how to adapt business, adapted their finances and followed suit to overseas investment. However, a recent scandal regarding Switzerland’s largest banking institution, UBS, as reported by Charles P. Wallace on TheBigMoney.com, has the potential to destroy the world’s wealthiest tax haven.

A growing assault by the U.S. government on secret offshore bank accounts has focused on bankers and clients of UBS, Switzerland’s largest bank. The ultimate goal? An end to Switzerland’s long role as the world’s principal tax haven, with an estimated $2 trillion under lock and key. And European countries, whose citizens have stashed billions in Switzerland for decades, are “licking their chops at the prospect of getting billions in new tax revenue from the hidden accounts, thanks to the U.S. assault“.

Please read on for the article from Charles P. Wallace.

As excerpted from The Big Money.com:

The case against UBS began in 2008, when a billionaire U.S. real estate investor named Igor M. Olenicoff pleaded guilty to hiding $200 million in secret accounts outside the United States. Olenicoff managed to escape jail time by paying the government $52 million in back taxes and fines. But he also gave the government an opening to attack the Swiss.

The next domino to fall was Bradley Birkenfeld, an American who worked as a private wealth adviser at UBS. Birkenfeld and a Lichtenstein investment manager named Mario Staggl were accused of helping Olenicoff evade payment of $7 million in taxes. Birkenfeld pleaded guilty, while Staggl never came back to the United States.

Birkenfeld painted a dramatic picture of UBS using secret codes and smuggling gems in toothpaste tubes to aid its private-banking clients in the United States. As result of the information from Birkenfeld, the Justice Department brought a criminal prosecution against UBS, which the bank settled in February by paying a $780 million fine and turning over to the United States the names of 250 clients who had set up offshore accounts, which included Moran and accountant Steven Michael Rubenstein, who has yet to enter a plea.

There are believed to be another 100 criminal cases being prepared on accounts containing up to $100 million in assets. In an effort to rachet up pressure on UBS, the government also indicted Raoul Weil, chairman and CEO of UBS Global Wealth Management, for aiding tax evasion. He is considered a fugitive.

While the settlement was hailed in the United States, the reaction in Switzerland was one of horror. The Neue Zuercher Zeitung called the deal  a “capitulation.” Geneva lawyer Charles Poncet, a former member of the Swiss parliament, told the local-language radio, “For Switzerland, it is a true catastrophe for the country’s first industry.”

The day after the deal with UBS was announced, the Justice Department went back to court and got a “John Doe” subpoena in a civil suit seeking the records of 52,000 American clients of UBS, who it said had $20 billion stashed away in the Alps. IRS Commisioner Doug Shulman called on U.S. clients of UBS who had undisclosed accounts to come forward voluntarily or face harsh justice. “It’s better to come clean now instead of waiting and facing a heavier price later,” he said.

In response to the U.S. subpoena, the Swiss government has offered to negotiate a new tax treaty with Washington if the U.S. government will agree not to go after those 52,000 names. The implication is that the Swiss would promise to be good about tax cheats in the future, if not the past. The Swiss reportedly warned that the treaty might be rejected in a referendum if the U.S. government didn’t soften its approach. But U.S. officials made clear that President Obama was intent on tackling tax cheats.

Meanwhile, international pressure has mounted from other countries for Switzerland to relax its strict laws on bank secrecy or face coordinated sanctions. On March 13, the Swiss government announced that it was prepared to cooperate more on tax evasion by adopting rules established by the Organization for Economic Cooperation and Development on sharing information in evasion cases. “Banking secrecy does not protect tax crimes,” said Swiss President and Finance Minister Hans-Rudolf Merz. “International cooperation on taxes has become more important given the globalization of financial markets.”

But Merz also said that the Swiss would not end bank secrecy and would pass on information only after foreign governments presented detailed requests involving individual cases, not blanket information requests such as the one in the UBS case. “There will no automatic exchange of information,” Merz said. The Swiss government also hired a law firm to defend the country’s position in the U.S. government’s attempt to get the 52,000 names out of UBS.

Switzerland continued to be the focus of international frustration with tax havens. The issue was raised at the G20 meeting of world leaders in London earlier this month. As a result, Switzerland’s name was added to a “gray list” of countries that have committed to the internationally agreed tax standard but have not yet substantially implemented the accords.

The Swiss government was furious at the move. In a fit of pique, it blocked payment of $180,000 it owed the 30-nation OECD and hinted it might not pay annual dues of $8.65 million.

The Swiss are believed to be negotiating dual taxation treaties with a number of countries, but haven’t reached a deal with any of them. OECD Secretary-General Angel Gurria said Switzerland should be aware that “there’s a new, much harder climate” against tax havens, and the Swiss must come to terms with that.

There are already reports that the Swiss government might submit a tax treaty to a popular vote in a referendum, which could lead to the treaty being rejected. But the U.S. government has an enormous advantage it can play in its own game of high-stakes poker: UBS’s status as a qualified intermediary in the U.S. market, where it has 8,000 wealth advisers and recorded inflows of$14 billion in just the first quarter of 2009. A threat to end that arrangement if the names are not turned over could hit the Swiss where it really hurts: their wallets.