Under pressure, private banks move onshore

By Lisa Jucca

VADUZ, Liechtenstein (Reuters) - Foreign-registered cars dot the underground car park of Liechtenstein's biggest bank, where elevators sweep visitors to top-floor corridors of private meeting rooms.

Liechtenstein, a tiny principality of 35,000 people nestled between Austria and Switzerland, still discreetly advises the very wealthy around mahogany tables, even though it recently relaxed its bank secrecy laws under pressure from the United States.

Now, thanks to a U.S. tax probe into Swiss bank UBS (UBSN.VX)and other pressure, a quiet revolution is brewing in the $7 trillion world of offshore banking, as banks realize that holding untaxed money can ultimately sting them.

"Some countries have decided that they want to make it more difficult for Switzerland, Liechtenstein and other centers to serve their client base," said Prince Max, who oversees about $80 billion in client assets at LGT Group, owned by Liechtenstein's ruling family.

"Our response to that is simple: if they do not allow us to serve our clients here, we go there," the prince, the second son of the ruling monarch, said in an interview in an exquisite wood-paneled office overlooking the snow-capped Alps.

In Liechtenstein, Switzerland and elsewhere, private banks like LGT -- with its blue logo emblazoned with a golden crown -- are evolving and moving on-shore to compete for client money in their home turf.

"We decided a long time ago to get into Germany. It is a viable strategy, although a little more costly," Prince Max said at LGT's headquarters, which stands at the foot of his family's medieval castle.

Washington has already pushed Liechtenstein to help in tax evasion cases by threatening to shut its banks out of the U.S. market, and with the UBS investigation it may persuade Switzerland to do the same.

The United States indicted UBS wealth management chief Raoul Weil last month, accusing him of helping Americans hide $20 billion from U.S. tax authorities, a warning shot for banks who provide offshore services for wealthy clients.

Bradley Birkenfeld, a former UBS banker, has pleaded guilty to helping clients avoid U.S. taxes. On one occasion, he smuggled diamonds into the United States inside a toothpaste tube for a client, according to a grand jury indictment against him.

Weil, the highest-ranking UBS executive hit by the U.S. tax investigation, says he is innocent and has stepped aside to fight his case in court. UBS has in the meantime admitted that tax fraud occurred in a limited number of cases at the bank.

As a result of the case, banks inside and outside this landlocked nation are watching the UBS case unfold and rethinking how to do business with rich individuals.

"This does send the message to other banks: you have to get your house in order if you want to work with Americans and American residents," said Stephanie Jarrett, a tax expert at law firm Baker & McKenzie.

"Banks have to adhere to the law and accept clients that are compliant in their home country. They will start to say no to non-compliant clients."

Some are even looking to sound the death knell on such practices.