When Wegelin & Co, the oldest Swiss bank, pleaded guilty in a US court to helping rich Americans evade tax and said it would shut down after more than 270 years, a tremor rippled through the Alpine nation's rock-solid banking system.
The admission last month by Otto Bruderer, Wegelin's managing partner, served as a reminder that Switzerland will have no choice in the end but to bow to international pressure to scrap its banking secrecy an institution as traditionally Swiss as chocolate and holed cheese but considerably less palatable to cash-strapped governments around the world.
That secrecy, which dates back to a 1934 law that made it a crime to reveal a client's identity, has helped to turn Switzerland into the world's biggest tax haven and asset management centre, accounting for US$2 trillion (Dh7.34tn) of funds managed out of a worldwide total $7tn.
But it has also left the country looking increasingly isolated and vulnerable as a global campaign to combat tax evasion gains momentum.
Western governments are desperate for revenue after five years of financial crises that have depleted their coffers, and the Wegelin case is the latest sign they are getting serious in their hunt for errant tax income.
Tax evasion costs the world's governments $3.1tn per year, according to the Tax Justice Network, a campaign group in the United Kingdom that estimates at least $21tn of unreported private financial wealth was held in tax havens at the end of 2010 - the size of the US and Japanese economies combined.
For international authorities, Switzerland is one of the main targets.
In its surprise plea, Wegelin admitted charges of conspiracy in helping Americans to evade tax on at least $1.2 billion of wealth from 2002 to 2010, and agreed to pay $57.8 million in restitution and fines.
"Wegelin was aware that this conduct was wrong," Mr Bruderer told a federal court in Manhattan.
"However, Wegelin believed that, as a practical matter, it would not be prosecuted in the United States for this conduct because it had no branches or offices in the United States and because of its understanding that it acted in accordance with, and not in violation of, Swiss law and that such conduct was common in the Swiss banking industry."
Wegelin was accused of poaching clients from UBS, the largest Swiss bank, which had agreed in 2009 to pay US authorities a $780m fine for offering tax-evasion services, and to hand over the names of 4,450 clients, in a major blow to Switzerland's tradition of strict discretion.
Wegelin, prosecutors said, had allowed some of its customers to deposit funds through shell companies and to open accounts using code names or numbers, devices that helped to shield them from US tax inspectors.
The case is a milestone in a US campaign to track down Americans who slipped under the cloak of Switzerland's banking secrecy. More importantly, Wegelin's admission that its conduct was "common in the Swiss banking industry" does not bode well for the 10 other Swiss banks under investigation by US authorities, including Credit Suisse and Julius Bär.
"Wegelin has put a burden on the entire Swiss banking industry because it's saying: 'Our behaviour was absolutely common for all Swiss banks,'" says Peter Kunz, a professor of business law at the University of Berne.
"One can assume that they were trying to buy themselves a smaller fine with this ominous statement targeting the Swiss banking industry."
Switzerland relaxed its bank secrecy law in 2009, along with other tax havens such as the European principalities of Andorra and Liechtenstein, in response to an initiative by the Group of 20 leading and emerging economies to crack down on tax havens.
The Organisation for Economic Cooperation and Development (OECD), which compiles progress reports on moves by tax havens to comply with international standards, says the international campaign is working. It is getting harder to evade tax and there has been a general change in attitude, says the OECD.
"Until 2009, countries said being more secretive is justified and fair. The change in the world is nobody says that any more, so that is a big change," Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, told Reuters.
But critics say the changes in many tax havens including Switzerland have not gone far enough. In 2009, Switzerland said it would make information on bank clients available - but only if it received detailed requests on individual cases from other countries. It still does not allow the automatic sharing of account information and has been pushing for a tax amnesty for its existing clients.
Switzerland's "widespread involvement in the administration and use of trusts, foundations and offshore companies remain a major barrier to tackling tax evasion and illicit financial flows", the Tax Justice Network said in a report that ranked it the world leader in financial opacity in 2011.
Swiss banks emerged in the 18th century when banks such as Wegelin were set up to store the wealth of the country's merchants. Secrecy was enshrined in law in 1934 to prevent Jewish assets deposited in Switzerland from being investigated by Nazi Germany.
But the rules on secrecy and the restrictions on access to accounts were so rigorous that billions of dollars deposited by Jews who were killed in the Holocaust lay dormant in Swiss banks for decades until the late 1990s, when more than $1bn was paid out to survivors and their relatives in settlement of a US lawsuit.
Pressure on Swiss banks has not just been building in the United States. The country suffered a setback last month when Germany, the biggest market for Switzerland's private banks, rejected a bilateral agreement that would have allowed German tax dodgers to pay back tax on their Swiss bank deposits without revealing their identities.
The upper house of the German parliament rejected the law because they said it was too soft on tax evaders. Under the deal, Swiss banks would have levied a charge on 150 billion Swiss francs (Dh600.41bn) in undeclared German funds and passed the proceeds on to the German authorities.
The row with Germany was exacerbated by German authorities purchasing CDs of Swiss banking data from whistleblowers to help pursue tax evaders, which provoked a war of words between the two countries. Peer Steinbrück, when he was the German finance minister, referred to the Swiss as Indians running from his cavalry. In return, one Swiss policymaker likened to him to a Nazi.
Despite Germany's rejection, Britain and Austria have gone ahead with tax agreements with Switzerland and other nations, including Italy, may follow suit.
But even such bilateral agreements will not save Switzerland's banking secrecy in the long run, say analysts.
"In three to five years the automatic exchange of information is likely to be the global standard," says Prof Kunz. "Switzerland will not be able to withstand this trend."
The example of Wegelin has shown US authorities are becoming increasingly aggressive.
"The Americans won't stop until they've squeezed Switzerland dry like a lemon," says Prof Kunz.
However, Switzerland's banking industry is expected to remain the world's biggest centre for offshore wealth - defined as wealth held by non-residents - for the foreseeable future, bolstered by some of the strictest capital rules in the world.
Chinese and Indian millionaires are taking the place of American and European savers who have been deterred from depositing their wealth in Switzerland by the increasingly aggressive stance of their countries' tax authorities.
A recent survey among Swiss banks conducted by the management consultancy Ernst & Young found that 70 per cent expected a positive or fairly positive business development this year.
"In uncertain times especially, the security aspects of Switzerland and of the Swiss financial system are in strong demand," says Patrick Schwaller, the manager of the Banking Barometer 2013 survey at Ernst & Young.
