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
"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.
"The UBS case will be the end of a private banking model based on tax evasion," said Andreas Missbach from the Berne Declaration, a rare Swiss group that campaigns to lift bank secrecy for tax evasion.
Meanwhile, the financial crisis and slowing world economy is putting added pressure on these banks as cash-strapped European Union countries look to cut tax evasion to boost their revenues.
MOVING ON
Swiss banks administer about $3.7 trillion of assets. Of this, $2.2 trillion is offshore money, or cash owned by non-residents who often do not wish to declare it at home.
British and Irish offshore centers such as the Channel Islands and Dublin hold $1.7 trillion. Singapore, with stricter secrecy rules than Switzerland, is a rising star with $0.5 trillion.
Private bankers in Switzerland and other centers would not say openly that much of the offshore money is untaxed and do not go on the record on tax evasion matters.
But in private they admit this has been a major source of income for many years. In Italy, where some consider tax evasion a national sport, wealthy professionals in cities like Milan occasionally boast over dinner about how they have hidden money across the border.
"People don't go to Switzerland for the weather -- they go there for tax sheltering," said Jonathan R. Macey, Deputy Dean and Sam Harris Professor of Corporate Law at Yale Law School.
Bankers say the lawsuit and the pressure from the financial crisis is just bringing to a head what has been already for a few years a distinct move toward on-shore banking.
Large private banks have been the first ones to court rich clients on their doorstep in places like Austria, Germany and Italy.
Smaller players will have to follow suit to survive as relying on undeclared money becomes a losing game in the face of mounting pressure from western governments.
These may be particularly true for Switzerland's traditional private banks, niche players that trace their roots back into the 18th century and before that cater for the ultra wealthy.
"The traditional Swiss private banks are totally dependent on untaxed money and it is difficult to figure out how they will cope," Missbach said. "For the big banks, like UBS and Credit Suisse, untaxed money is not everything and they will more and more move toward an on-shore strategy."
Growth in offshore assets was already stagnant, as tougher regulations on money-laundering, to which Switzerland fully complies, and border controls barring visitors from carrying more than a few thousand euros, take hold, private bankers say.
The pressure will mount as a younger generation, who have inherited money brought quietly into Switzerland by their parents in recent decades, realize they cannot access the cash without facing sanctions at home.
"The days of the leather suitcases full of cash are long gone. The road is getting narrower," said a long-term private banker, on condition of anonymity.
Many may take advantage of the first available tax amnesty at home to get hold of the cash.
But bank secrecy will remain attractive for wealthy citizens of unstable countries in Latin America, Africa or the Middle East wishing to diversify their risk and seeking to prevent criminals from learning of their wealth.
"Each and every honest customer needs protection of privacy," said Urs Roth, CEO of the Swiss Banking Association.
"Swiss bank secrecy keeps its role as an important aspect of the Swiss financial marketplace," Roth said. "But it is not the only one."
(Reporting by Lisa Jucca; Additional reporting by John O'Donnell in Frankfurt and Bob Margolis in New York; Editing by Eddie Evans)
