A Famous Loophole Closes Thanks to the IRS, the era of the secret Swiss bank account is over for Americans.
By Paola Hjelt

(FORTUNE Magazine) – The banks of Switzerland provided discreet lending to the kings of France as far back as the 18th century. More recently the secret Swiss bank account was de rigueur for late-20th-century movie villains. But for Americans the era of access to this elite banking status symbol is coming to an end.

The culprit is a regulation imposed by the IRS in January 2001--and enforced with an audit this spring--that targets tax evaders. It requires any foreign financial institution investing in the U.S. from abroad to offer a fuller disclosure of the investing activities of its American clients. The net effect of the rule is that it requires banks operating from abroad to reveal the identity of American clients that invest in the U.S.

That poses a big problem for nations like Switzerland, Austria, and Luxembourg that have bank-secrecy regulations. Though most countries prohibit banks from divulging a client's name, the Swiss are particularly strict. Civil legislation regarding banking secrecy has been in place in Switzerland since 1783. And a section of the Swiss Banking Act introduced in 1934 makes it a criminal offense to improperly disclose confidential information. So rather than be forced to defy either country's laws, the Swiss have been quietly asking American deposit holders to come clean or take their money elsewhere.

Though U.S. clients can technically get around the law by choosing to invest only in non-U.S. equities or declare their accounts, many banks prefer to refrain from having American clients altogether. Says Charles Hermann, a partner at KPMG in Switzerland: "Having U.S. clients is just becoming too cumbersome." --Paola Hjelt