|Wealth professionals and their clients can be forgiven for feeling confused about what is happening to Swiss banking secrecy, particularly now that the socalled 'Rubik' solution adds further complexity to the debate.
This should not distract us from the fact that now is a very crucial time for negotiations by the Swiss government and some of its most senior diplomats, on a number of fronts.
The debate rages across a multitude of fora and institutions. The list is quite long: G20, OECD - and its recent emanation, the 'Global Forum on Transparency and Exchange of Information for Tax Purposes' – the EU and ECOFIN, Switzerland's large neighbours, France, Germany and Italy, the US Government and its Justice Department, the FATF (not to mention the other discussions going on in the international banking arena, such as IMF, FSB, etc).
Each of these entities emits sporadic announcements, generating a flood of media traffic and press comment, but journalists rarely seem to connect the dots, preferring to focus on the usually alarmist statements of one or other of the many self-appointed demagogues who abound on both sides of this battlefield.
For the readers of this journal, whom I assume to be defenders of legitimate, virtuous 'financial privacy' (let us abandon the controversial and emotive term 'banking secrecy'), the news has not been good, and prima facie, has been getting worse, since 'Black Friday', 13 March 2009. This was the fateful date on which, under intense pressure from G20, the US Justice Department and the OECD, the Swiss government finally withdrew its reservations to Article 26 of the OECD Model Tax Convention and agreed to comply with OECD standards of tax information on request with existing and new treaty partners.
Bad news – in terms of erosion of privacy - continued to flow, all through 2009 and 2010. Some of the main developments, discussed below, unfolded roughly in parallel.
Switzerland and the OECD
Switzerland has demonstrated impressive zeal in rapidly concluding tax information agreements (TIEAs) to include the Article 26 standard. The Federal Department of Finance (FDF) website, as of its last update on 2 March 2011 (see chart below) lists 32 countries with which double tax agreements (DTAs), including clauses for extended administrative assistance, have been signed. Ten of these are already in force, and more are in the pipeline.
The deadline for a referendum – which might have slowed this process – passed in October 2010.
A new ordinance concerning administrative assistance in respect of double tax conventions (in French, referred to as OACDI) entered into force on 1 October 2010. It sets out
the new regime for accessing information, in line with the OECD procedures for administrative assistance on request.
Recent further concessions were agreed, in February of this year, in response to G20 insistence on relaxing some of the pre-requisites for standards of identification demanded of requesting states. These were agreed by Switzerland, to align itself with the generally favourable tone of findings of the Global Forum Phase 1 Peer Review (see below); predictably this unleashed more diatribes from prophets of doom.
Situation with the US
Following the UBS debacle, the government was forced to agree with the US Justice Department to hand over 4,450 UBS client files; while there was huge resentment and opposition in Parliament, and in Federal Court, the agreement was finally implemented, and UBS paid penalties of USD780 million after which the case1 against UBS was dropped, but prosecutions of the clients, of course, continue apace
(not all successfully, see below).
New arrests of former UBS employees, and a slew of announcements about new rules for securities businesses, Foreign Bank Account Reporting requirements (FBAR) and FATCA – the US attempt at a unilateral, automatic information exchange, globally – have added further complications.
All of this has discouraged Swiss institutions from contact with any US business because of legal risks. In the words of Secretary of State Michael Ambühl, head of the recently created State Secretariat for International Financial Matters, "it cannot be that everyone doing business with the US already has one foot in prison without knowing it".
Situation with EU and Ecofin Council:
In decisions during December 2010 and February 2011, Ecofin continues to review and tighten directive 77/799/EEC, reconfirming their intent: a) to take steps to weaken the safeguards available to non-member states under OECD rules for administrative assistance upon request: the information required by the requesting state is now being whittled down to the barest minimum of identity and purpose, avoiding the need to name any specific institution; b) to proceed with the objective of gradual introduction of 'automatic tax information exchange' between members of the EU (starting with partial implementation in 2015), bullying Luxembourg and Austria into gradual submission – although, to date, they continue to hold out, thanks to Switzerland's outright refusal to contemplate automatic exchange (and the hopes raised by Rubik – see below).
The long term aim of ECOFIN is to ensure "unconditional exchange of information for eight categories of income and capital…." meanwhile, "…from 2015, member states will communicate automatically information for a maximum of five categories…"
This is also bad news for the Swiss on other fronts, in the context of important Swiss-EU trade and economic agreements ('accords bilatéraux'), and the desire of Swiss financial institutions (particularly big banks, insurers and fund companies) to extend their activities in the EU and achieve Europe-wide distribution of their products.
Use of information stolen from banks
Germany, France and other EU countries are making extensive use of data stolen, chiefly from LGT and HSBC, for threatening and prosecuting taxpayers. Periodically, names of celebrities drop into the news (most recently in Spain) as having been cornered on tax offences revealed by
the stolen data communicated across borders by the French and Germans to other countries.
On this matter the Swiss, however, have been very firm and excluded administrative assistance if it can be traced to the use of data obtained by illegal means. An instance of this is the decision, by the Paris appeal court on 15 March 2011, to annul a search warrant in the home of a taxpayer whose name appeared as one of the 3000 listed in the HSBC data.2
In November 2010, the FATF – of which Switzerland is a member – decided, against Swiss opposition, to adopt the 'all crimes money laundering ' principle, whereby any but the most trivial tax offences are assimilated to moneylaundering and subjected to the same draconian rules for reporting, tipping off and waivers of privilege, etc., as are already applied to serious and organised crime (terrorism, drugs and arms trafficking, prostitution etc).
Whereas this is now the norm in many English speaking countries, Switzerland and some others, including Luxembourg, believe that strong anti-money laundering provisions already exist and including tax offences is not consistent with their domestic law, which treats certain tax offences, not involving manifest fraud, as administrative and not criminal matters.
The longer term significance of FATF's decision and how things develop from here are probably bad news. This certainly adds to the pressure on Switzerland and other finance centres. However, fortunately, the definition of what is criminal and what isn't will remain, for the foreseeable future, a matter for each jurisdiction to decide.
Now for some surprisingly good news for the defenders of financial privacy in three areas:
1. Rubik: bilateral withholding tax agreements on track for success with Germany and UK, and others likely.
- Recognition of trusts
- Global forum peer group review
At this very moment, we hold our breath in expectation of further news from Bern, and the German Finance Ministry, about the outcome of their bilateral discussions which began in October 2010, on the so-called 'Rubik' proposal.
Rubik refers to the assessment, collection and payment by Swiss banks, of a final flat lump sum tax due to the home - countries of their private clients, where these are known to have evaded tax, and who shall thereby achieve legal tax compliance but remain wholly anonymous. The French term describes it succinctly: "impôt libératoire à la source". A good
|idea, adapted from previous amnesties, but a challenge to implement, and a historic milestone in support of legitimising privacy.
It emerged in early 2009, from the Association of Foreign Banks in Switzerland, and its vigorous Ticinese chairman, Alfredo Gysi, head of BSI (part of Generali group) and certainly an expert on the workings of the Italian tax amnesty. After months of acrimonious debate, he succeeded in convincing the Swiss private banks and their new progressive chairman Patrick Odier and, ultimately, the rest of the banks (against considerable opposition from domestic banks and others with conflicting agendas). On that basis, the bankers associations were able to appeal to government to propose Rubik as a brake on tax information exchange in bilateral negotiations, both with the EU and with large neighbouring countries, in particular Germany.
In October 2010, clever Swiss diplomats, led by the brilliant Michael Ambühl, emerged with the triumphant news that, not only Germany but also the UK had decided to negotiate with Switzerland for a 'Rubik' deal. The announcement also carried the rider that, in exchange, those countries would consider improving access by Swiss institutions to their home financial markets.
The FDF have recently confirmed that discussions, details of which are kept tightly under wraps, are on track with both countries, and that announcements on the outcomes will be due shortly ('before the summer vacation'), with implementation being scheduled for the year end.
Rumours have emerged in the Swiss- German press on the possibility that the flat rate agreed for taxing existing capital sums would be as 'low' as 20%, and for capital gains 26%.
The really good news is that this proves there is good reason to fight the principle of automatic exchange. Rubik flies squarely in the face of the EU Commission's dogmatic (indeed fundamentalist) insistence on automatism and will, we hope, facilitate discussions on future EU agreements with their rich and troublesome Helvetic neighbour.
There are ironies aplenty in this debate on principles and practices - where governments and politicians (not least some demagogic Eurocrats and MPs) reveal double standards. The German and UK governments were among the zealots for automatic exchange. But the lure of quick and huge dollops of cash (estimated by some to be worth between EUR20 and EUR40 billion for Germany) tempers the inquisitional verve. Somewhat surprisingly, the two big Swiss banks, and some domestic institutions were initially reluctant to back Rubik, citing the high costs of implementation and seeming keener to achieve agreement on Europe-wide
distribution for their products, rather than to protect their clients' privacy.
Rubik is thus a tender plant, at a critical stage of development (now sometimes referred to as Rubik II), with both friends and enemies in high places. Its name is well justified: reaching a solution is certainly an arduous and complex task, covering a range of challenging technical issues, not least of which will be formulating practical definitions for the taxable persons, and the structures and 'paying agents' they may be using, and how to assess and compute the amounts due after years of evasion.
So let us wish the negotiators in Bern, Bonn and London well. It looks like the Athenians will soon be joining them, and we hope others.
2. An important legal decision: trust beneficiaries in the light of TIEAs
On 23 March 2011, the Tribunal Administratif Fédéral made a historic judgment in favour of trust beneficiaries.3
The case involved a request for administrative assistance by the IRS about US taxpayers who were alleged to be clients of UBS, with signatory rights over or ultimate beneficial ownership of accounts at that bank.
Between 2009 and 2010 a number of agreements and protocols were made between the two countries which closely defined criteria for admission of a request for assistance and what constituted beneficial interest. Look-through rules are in place to pierce the veil of entities where there is a lack of substance, but there is a clear insistence in the agreements on the need to consider all the specific facts and circumstances of each case.
In this instance, the case involved an irrevocable discretionary trust. The highest Swiss court held that the trust beneficiaries were not to be considered as beneficial owners under the terms of the TIEA. Hallelujah! The request was denied, based on the careful analysis of a wellstructured estate plan, where the trustees were validly empowered to act in a discretionary manner and not on the instructions of related parties. (One hopes for the clients and trustees that they all complied with their FBAR and other reporting obligations, which are not the subject of the TIEA).
Unfortunately for most of the UBS clients whose files were handed over (and for a majority of Swiss bank clients under the pre-2009 regime), such fully-fledged, well-structured (and probably rather expensive) estate plans were the exception, for larger, better advised clients, rather than the rule for the hoi polloi. The good news is these will now become the rule. All TIEAs afford the alleged taxpayer an ultimate right of appeal against disclosure. Good structuring, as in this
case, provides the legitimate client with the arguments required to halt disclosure.
Diligent trustees and estate planners always knew that they could insist on obtaining a complicated "Form T", from their Swiss private bankers – i.e. one which accommodates full details of relationships within a proper trust arrangement – instead of the simple "Form A", which merely names individuals as 'beneficial owners'. Now is the time for clients to appreciate the benefit of engaging diligent estate planners and trustees – and for the latter to reap the rewards of their hard work, previously passed over by cheapminded clients in favour of less scrupulous advisors and fiduciaries.
3. Switzerland passes Global Forum 'Peer Review Report' with flying colours
In February 2010, the Federal Council confirmed that policy for the financial industry would henceforth be a "white money strategy", to be oriented toward the handling of taxed assets.
To quote the eloquent Michael Ambühl, in a recent speech to the American Chamber of Commerce:
"On the one hand, countries have a legitimate interest in tax revenue, including from the income of their citizens' capital deposited in Swiss bank accounts. On the other hand, bank clients have an equal legitimate interest in the protection of their privacy. Additionally, banks have an interest in being competitive. For a long time, the management of untaxed assets was seen as such a competitive advantage. This has now changed. The understanding has won out that untaxed assets are in the interest neither of Switzerland, nor the banks, over the longer term".
This is progress. Additionally, on 1 June this year, the OECD Global Forum came out with its Phase One 'Peer Review Report' on the legal and regulatory framework in Switzerland4. The process is being carried out with 30 countries, which will facilitate the drawing of comparisons and will surely nourish debate for years to come.
It makes interesting detailed reading, both for the background it gives on the Swiss financial sector and as an example of the intricacy and range of issues covered. (Beware demagogues and automatic exchange zealots, who don't usually acknowledge the complexity of the subject matter.)
The report has, overall, acknowledged and endorsed the high level of sophistication of Swiss law and institutions, and the fast pace of Switzerland's progress towards tax information exchange on request according to the OECD standard.
There are predictable objections about bearer shares, and some intriguing details about the lack of transparency in the way ownership can be organised for Swiss
|companies with foreign shareholders. These matters will have to be dealt with by proposals to be submitted within six months and will be a prelude for the Phase 2 Report, due to start at the end of 2012. The issuing of the report also prompted a compromise by the Swiss on the details required to identify a client (already mentioned above), which are now reduced to a minimum, while nevertheless maintaining strict safeguards against fishing expeditions.
On balance, this report is good news – in parallel with the surprising success of Rubik - because of the positive effect it is having on the Swiss wealth industry and the political parties, and the level of sophistication of the debate.
The voice of reason and legitimacy "politique de l'argent propre" has come. Gone, finally, are the days when - until quite recently - much of the industry, and its clients, kept heads buried in the sand and went on using cheap, unplanned, solutions, which achieved nothing for the longer term interests of client families.
The focus on 'clean money', which used to be referred to as 'complex', in contrast to 'simple' money (code for black), must be good for the defence of legitimate financial privacy and for Swiss wealth managers as a whole.
The playing field is levelling – slowly. Singapore and Hong Kong, inter alia will no doubt be able to offer unrivalled advantages for a while, but these are disappearing, even in Panama. The new era of clean money and legitimate clients will be conducive to attracting and keeping more institutional players and to bringing in the best of foreign professionals who may have had concerns previously about reputational issues. There are huge advantages for private client advisers in taking advantage of Switzerland's specific rules for independent managers under its notably enlightened self-regulatory regime. While getting stricter, this is still one of the best adapted and least onerous jurisdictions for independent asset managers and wealth professionals, with over 3,000 independents offering highly individualised services, not easily accessible in the larger institutions, to private clients and entrepreneurs from all over the globe.
In particular, it is to be hoped, Rubik and TIEAs will take the wind out of the sails of the demagogues and automatic exchange activists.