Offshore: Switzerland - The white stuff
6 November 2011
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7 October 2013
With a raft of new legislation and a strict attitude towards tax evaders, Switzerland is shrugging off its secretive image, argues Paul Douglas
Swiss banking secrecy has been subjected to a barrage of attacks over the past few years, but these attacks are not always justified. The most common misconception, fuelled by the high media attention of some cases, is that it serves mainly to facilitate widespread tax evasion, or far worse the sheltering of dictators’ and despots’ wealth derived from dubious dealings and the concealment of the proceeds of criminal activity.
Such generalised allegations are refuted by reality. Switzerland’s recent adoption of the Organisation for Economic Cooperation and Development (OECD) standard in relation to granting international administrative assistance in tax matters is just one example of the government and financial sector’s response to global calls for tax transparency and honesty.
Financial privacy is still available to those prepared to play by the rules and pay the high price of accepting the imposition at source of withholding taxes, as provided for under the latest arrangements reached with Germany and the UK.
Those holding non-declared assets in personal or offshore accounts with Swiss banks risk disclosure of the account records under tax information exchange provisions, despite the fact that they are not known by name to the requesting foreign tax authority but meet quantitative and other identifying criteria.
The US Foreign Account Tax Compliance Act is another example of ’comply or get reported’. A growing number of Swiss banks are endorsing the spirit behind the ever-increasing collection of new and revised agreements and treaties incorporating the OECD model and committing to a strategy and ethos of managing solely tax-compliant business.
Switzerland also has robust anti-money laundering laws, with severe penalties for non-adherence. Banks, asset managers and other financial intermediaries, including trust companies, are obligated to carry out thorough due diligence on the source of wealth and on the people behind the accounts that are opened.
Swiss authorities also take a rigid approach towards accounts connected to wayward dictators and criminals, reacting to suspicious activity reports with freezing orders and criminal investigations and prosecutions where necessary. Also, the opportunities for voluntary disclosure, the public vilification of high-profile tax evaders and the policy shift of many banks to shun tax evaders as customers have resulted in Switzerland ceasing to be an attractive banking destination for non-declared funds.
Even so, the country has seen an increase in the assets held with its banks. The past 12 months have been extremely turbulent, both politically and economically. The Arab Spring saw a flight of capital to the mountain state. Similarly, wealthy Russians have also been relocating their assets, and in some cases themselves, to Switzerland.
These decisions are not tax-motivated - their local tax rates are typically non-existent or low by international standards. What is being sought - and provided - is political stability, independence, professional expertise and quality of service.
As high-net-worth individuals (HNWIs) are unsettled by the present market uncertainties, they need to be able to rely on the relationships they have with their bankers, advisers and trustees. They need independent counsel that is pragmatic and specific to them, their family and their business.
Bonus-hungry bankers pushing products with short-term outlooks have damaged the reputation of other major financial centres in the world, but Swiss banking has historically been built on multigenerational investment strategies with the emphasis on trusted relationships. This has come to the fore again.
As a result the profile of banking clients considering Switzerland differs to that of two or three decades ago. The country’s international, multilingual and multicultural flavour is attractive to investors who have family members, investments and businesses spread around the world. They are well-advised, compliant and more discerning, if not demanding. The quality and complexity of investment reporting, the need for an extensive network around the globe and a skilled and experienced workforce are all attributes that Switzerland can offer.
This extends to its strong fiduciary services capabilities. A growing number of single and multi-family offices are locating themselves in Geneva and Zurich. Established trust companies are developing their capabilities in those cities and it is becoming common for foreign trust groups to have presences in Switzerland. Likewise, an increasing number of London private client law firms have opened offices in the country or have lawyers regularly shuttling back and forth.
It is therefore not surprising that the assets of these individuals are being housed in trusts, foundations and companies administered from the same jurisdiction where the bankable assets are located and managed.
Truly international families face an exceedingly complex web of tax laws, prompting them to select their banks and trustees partly on the basis of their ability to help them manage this complexity and maintain their tax compliance. Significant investment has been, and continues to be, made by such banks and trustees in their people and systems to ensure this is achieved. This reflects the intention to not only receive compliant funds, but also to keep them compliant.
Today’s collaborative and active approach of the authorities, banks, asset managers, advisers and trustees towards ensuring that the wealth that is managed is compliant and legal means that certain ill-informed and prejudiced perceptions about Switzerland and its banking secrecy laws will soon be relegated to the status of myth.
Paul Douglas is managing director at Investec Trust in Switzerland