Illustration: Lu Ting/GT

One of the oldest traditions in banking is crumbling in the face of American determination to tackle tax evasion.

Secrecy is the principle on which the Swiss banking industry was built. Now, however, under American pressure, the Swiss will have to open their account books and turn over tax dodgers or risk trouble with the US Internal Revenue Service (IRS) and the Department of Justice.

US lawmakers have repeatedly accused Swiss banks of complicity in tax evasion by accepting money from Americans hiding their income. With negotiations between the two countries dragging on, a December 31 deadline was imposed to seek amnesty with US authorities for helping its citizens evade tax collectors.

The Swiss banks that don't cooperate could be barred from the American market or slapped with heavy penalties. They could also face criminal probes like those already launched into Credit Suisse Group AG, HSBC Holdings Plc and Basler Kantonalbank, which reportedly have no opportunities to dodge legal action. Banks that acknowledge a role in helping clients break US tax laws will have to pay fines in accordance with the value of undisclosed assets on their books - in return, they will be spared potential prosecution. As of December 28, some 40 institutions had reportedly agreed to go along with this program. Institutions can also claim innocence, although the number that does so is expected to be small.

A precedent had already been set in 2009, when UBS, the country's largest bank, admitted to helping Americans avoid paying taxes and agreed to hand over a $780 million fine and turn over client names to the US authorities.

Last January, Wegelin, once Switzerland's oldest private bank as well as the first Swiss bank to plead guilty to tax evasion charges in a US court, was driven out of business after paying a $57.8 million fine for helping over 100 American citizens hide $1.2 billion from the IRS over nearly 10 years, according to BBC reports.

On the American side, the Foreign Account Tax Compliance Act forces banks to name their US citizen clients or to apply a 30 percent withholding tax on unnamed American accounts. Financial firms are obliged to inform American regulators if they have non-compliant accounts or funds.

With the global economic crisis having brought the activities of offshore tax havens under the spotlight, the Swiss had fought a determined rear guard action to try and limit the scope of any action violating the principle of banking secrecy.

The government has now conceded that the names of US clients can be handed over automatically. However, their account details will not be disclosed unless the American side makes a specific request under rules related to the pursuit of tax dodgers.

The American tactics have won it few friends on the Swiss side. The banking industry is lukewarm, although it concedes the agreement does provide a legal basis for settling all the outstanding issues.

However, the US was bitterly condemned by the right-wing Swiss People's Party, whose 54 seats make it the dominant force in parliament. A party statement accused the government of "surrendering" to an American "diktat," claiming the whole thing was really a strategy to boost the US financial industry.

Another part of the agreement is that the Swiss banks have agreed to hand over to US authorities the names of all their employees who have dealings with American citizens. The banks will have to set a special fund to help protect any employee accused of abetting tax evasion.

Switzerland's banking secrecy laws were actually only codified in 1934 out of fear that Nazi Germany was targeting the bank accounts of affluent Jews as part of the mounting campaign against the Jewish community.

However, this inherited a centuries-old tradition representing the fact that banks originally emerged from trading companies where client secrecy was a vital business interest. Switzerland eventually emerged as the world's largest offshore banking hub, with more than $2 trillion in assets.

Switzerland is not alone. Infuriated by revelations that many American companies are using European tax havens to avoid corporate taxes at home, US regulators have been stepping up their pressure elsewhere.

Luxembourg was the first to consent to share information with foreign tax authorities about deposits in its banks.

The European Commission has been engaged for some time in talks with Switzerland, Liechtenstein, San Marino, Andorra and Monaco in an effort to break down their banks' secrecy to bring them in line with the banking standards in more open EU nations.

The US is also targeting tax havens closer to home. It has indicted Costa Rica's Liberty Reserve, a digital currency exchange, for allegedly laundering as much as $6 billion in illicit funds for more than a million individuals, including at least 200,000 Americans. The Department of Justice also gained federal court approval to subpoena the correspondence accounts of FirstCaribbean International Bank in a similar investigation.

With regulators around the world cracking down on secrecy, now may be a good time for banks to fess up and turn over their tax evaders.

The author is a lecturer with China Foreign Affairs University.

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