15 February 2010 | By James Swift
28 October 2013
21 April 2014
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7 October 2013
21 October 2013
Switzerland’s banking secrecy is coming under increased pressure as US and European countries target tax evaders to plug deficits in their economies. James Swift asks: is the country’s resistance futile?
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Switzerland has never been a harbour or a tax haven like the Caribbean has,” says Serge Calame, a partner at Pestalozzi in Geneva. “But it’s interesting to see how it’s still portrayed like that in James Bond movies when it hasn’t been like that for more than 25 years.”
The days of Switzerland being a haven for dirty money may be long gone, but the country’s financial services industry still manages around $6tr (£3.84tr) of wealth, and at least part of the country’s lure is its culture of secrecy, with as much as a third of the wealth managed in Switzerland estimated to be undeclared.
It is an arresting statistic at the best of times, but in the aftermath of a recession, when governments are desperate for every tax dollar/euro/pound they can get their hands on, the prospect of losing billions through tax evasion really sticks in their craw.
And the crackdown on offshore jurisdictions that followed the recession has meant that Switzerland, with its traditions of discretion and neutrality, has come under pressure to stop looking the other way when it comes to what is in its banks’ vaults.
Unclear and present dangers
How the country will respond to the international pressure to disclose information on tax cheats has caused ruptures between its legal and political institutions, which are torn between upholding secrecy as a matter of law while trying to maintain international relations and reposition Switzerland in light of a new era of banking.
“There is, of course, a sea change going on,” says Dunja Koch, managing partner at Froriep Renggli’s London office. “It started in the US, but was followed by Europe and so on, and the old regime of tax we can all now call dead.”
One of the most obvious signs of change came in March 2009, when the Swiss government announced that it would comply with Article 26 of the Organisation for Economic Cooperation and Development’s Model Tax Convention on Income and Capital, which abolishes the distinction between tax fraud and tax evasion in international information exchange relationships. The announcement has no bearing on domestic situations and must be incorporated into renegotiated double tax treaties before taking effect. Nevertheless, it was a big step.
“Until now Switzerland didn’t get involved in other countries’ legal disputes,” says Koch. “If people [with Swiss accounts] didn’t abide by their own countries’ tax laws, this was not our problem. But now they have to think whether a client is locally tax-compliant or not, and to consider this is very far from the traditional Swiss mentality.
“But the main doubt is over what the future will look like. Are we moving towards automatic exchanges of information, or even further with the criminalisation of lawyers and bankers who help clients evade tax?”
So far the biggest casualty of the increased vigilance towards tax evasion has been the Union Bank of Switzerland (UBS).
In February 2009 UBS agreed to pay $780m in the US to settle claims brought against it by the Internal Revenue Service (IRS) for allegedly helping 17,000 clients defraud the IRS of $20bn, breaching the terms of the Qualified Intermediary Agreement (QIA) the bank had with the US through the ’improper activities’ of some employees in the US.
Although it concerned a relatively small number of employees at an international arm of a single bank, the case was the catalyst, and perhaps one that was a long time coming, for prompting Switzerland to distance itself from its decades-long practice of banking secrecy (although Zurich’s prosecutors have so far stopped short of filing a criminal action against UBS in Switzerland).
“Banking secrecy was a great competitive advantage Switzerland had secured for itself,” says Edmond Tavernier, name partner at Tavernier Tschanz. “But when UBS decided to go and play in the courtyard of the big boys, like the US, and bought investment banks, that’s when we lost our freedom and it became clear that we had something to lose.
“So when the US said it wanted to kill banking secrecy it was too late to take a stand because the consequences of UBS losing its licence in the US were not something we wanted to think about.”
Others look at it more positively.
“My take on this is that it’s a good thing for the country,” says Francis Rojas, a tax and trusts partner at Withers Worldwide’s Geneva office. “It’s about time that we done away with the old way of banking, helping clients hide their money away from tax authorities.”
“Some bankers and asset managers used to provide clients with legal advice on a regular basis,” says Alexander Troller, a banking and finance partner at Lalive. “But given the pressure on lawyers and bankers, this will now likely to give certain bankers and asset managers cold feet in proposing advice concerning structures; so maybe one trend will be that bankers mainly bank and lawyers will just practise law.”
While a great number of people, including the Swiss government, it would seem, agree that the only way for Switzerland to move forward is to abandon its practice of secrecy, the political will to do so, and the legal reality of making it happen, have been at loggerheads.
The seeds of disaccord arose when the US Department of Justice, not content with the cash settlement it received from UBS, asked the bank - contrary to the very foundations of Swiss secrecy law - to disclose the names of 4,500 of its US clients who were suspected of tax evasion.
The US’s leverage was to threaten
UBS with criminal sanctions and the revocation of the bank’s licence to operate in the US.
While for most Swiss banks the prospect of losing its US arm is no great threat - indeed, since the scandal broke Swiss banks Wegelin & Co and Julius Baer no longer offer offshore services in the US - for UBS, which had to be bailed out with a government loan during the downturn, the loss of its US arm could have led to its failure. This would have been a disastrous event for the Swiss economy, with Hans-Rudolf Merz, the country’s minister of finance, estimating that UBS’s collapse could cost the country as much as $250bn.
Consequently, in February the Swiss Financial and Markets Supervisory Authority (Finma), which had only been established in January 2009, ordered UBS to comply with the US’s request for information on 285 account holders suspected of tax fraud in the US. Finma based its decision on Articles 25 and 26 of the Swiss Banking Act, which the authority claimed gave them the right to take preventative actions to avoid serious liquidity problems that could affect the economy.
As a result of these names being handed over to the US, prosecutors say they have opened 150 criminal tax investigations of UBS clients, with six so far having pleaded guilty.
On top of this, in August the Swiss government made a deal with the US that seemed to validate Finma’s decision. Acting on behalf of UBS, the Swiss government agreed to give the US the names of 4,450 UBS clients who were suspected of committing ’tax fraud or the like’. The agreement represented a compromise - the IRS got the names it was after and Switzerland got to preserve its banking secrecy.
The bank with no names
But in a ruling released this year on 5 January the Federal Administrative Court of Switzerland threw a spanner into the works.
The court declared that Finma did not have the right to order UBS to release information concerning its clients to the US under either the Swiss Banking Act or any rights of “constitutional necessity”; it also held that the government’s August agreement did not permit the exchange of client information regarding UBS in all but around 250 cases.
“The government said it would give away secrets contrary to everything in Swiss law,” says Tavernier, “and they tried to fit this into Swiss legislation, but it became clear that they couldn’t. We were violating Swiss law.”
Furthermore on 21 January, the Federal Administrative Court upheld an appeal by a UBS client who was fighting against the transfer of client data under the August agreement.
“The customer had opened an account in her own name without recourse to offshore companies or other ways of hiding her identity,” says Troller. “So it was what I’d say was an unsophisticated client relationship, with relatively small sums. What we’ve is one decision of the court affecting one case, but most of these 4,500 names that are potentially in the UBS basket, ready to be sent to the US, could be similar instances to the one in this decision.”
The crux of the decision came down to the ’tax fraud or the like’ provision in the August agreement, which defined clients’ behaviour as fraudulent when they either hid ownership through trusts or other methods or failed to complete and hand to UBS a W-9 tax form. This was found to be too wide, according to Switzerland’s traditional definition of fraud.
Traditionally under Swiss law, tax fraud - that is to say, actively pursuing a course of action to defraud by, for example, falsifying documents - is a crime; while tax evasion - ie merely neglecting to come forth with information - is a civil matter.
The court has yet to decide on what happens when clients are found to have committed tax fraud, but its decision so far has put the Swiss government in the potentially embarrassing situation of not being able to fulfil its obligations to the US, with the result that the US may resume its civil case against UBS.
The options now available to the Swiss government appear to be to adopt a new treaty, bridging the gaps between the double taxation treaty with the US and
the August agreement, or for the Swiss parliament to retroactively approve the August agreement.
Both options, however, must potentially pass the test of a national referendum. And right now the public opinion is not in its favour.
“Parliament might put it to the vote of the people, or the Swiss people might demand to get to vote on it,” says Calame at Pestalozzi. “It probably won’t be for at least another six months yet, but the mentality is that privacy is still paramount. There’s trust in the state, but we don’t think we should be dependent on it; and bearing in mind some of our neighbouring countries, it’s not the view of the man on the street. In Switzerland discretion remains a highly regarded trait.”
Everybody needs good neighbours
Not likely to help the situation has been the threats from France and Germany to buy stolen information regarding tax cheats with Swiss accounts. France acquired information concerning several thousand private banking clients of HSBC in Geneva, while Germany has stated that it intends to pay as much as e2.5m (£2.19m) for a list of German tax evaders at an unnamed bank, which, reports say, could yield as much as e200m in back tax for the country.
The issues with France were resolved when the French government decided to give back the information and not use it after Switzerland threatened to freeze talks to renegotiate its double taxation treaty with France in December. But negotiating with Germany has been more difficult. And Germany’s willingness to exploit illegal means to pursue tax evaders has left lawyers with a bitter taste in their mouth.
“What you see in Germany, with the country being willing to pay for information, is very shocking if you’re in the business of law and principles,” says Tavernier. “We’ve seen two governments saying they don’t care - that the results are more important than the system.”
But as countries become increasingly desperate to plug their deficits, principles may not count for much, and Switzerland may be swimming against the tide in trying to preserve its banking secrecy.
Even countries such as Liechtenstein have signed up to information-sharing treaties and tax amnesties, and in December 2009 an Italian tax amnesty saw as much as e18bn withdrawn from Swiss banks in Lugano, Switzerland’s Italian-speaking region, hitting the already weakened offshore banks hard.
Show and tell
Such is the feeling of inevitability surrounding the move away from Switzerland as a place to keep undeclared money hidden, that finance minister Merz said recently in an interview that Switzerland must, at least, consider automatic exchanges of information with other EU countries if Switzerland is to maintain its presence in the European market.
Thus whatever comes of the political machinations behind the drive to eradicate secrecy, 2010 will be a year of change for Switzerland.
“This year there’s going to be a reorganisation of the financial market - a lot of activity in terms of banks,” says Tavernier. “Banks will merge because they have no choice due to pressure being put on Switzerland from abroad and the competition within the market - so it’s all change.
“Banking secrecy is dead, but that doesn’t mean we’re dead. We’ll just have to compete in other fields.”