Switzerland has a long tradition of banking secrecy, which, until recently, made it very easy for the wealthy to store their financial secrets away from the tax authorities. Over the last few yea
Switzerland has a long tradition of banking secrecy, which, until recently, made it very easy for the wealthy to store their financial secrets away from the tax authorities. Over the last few years however, Switzerland has been under pressure to conform to international tax regulation and, despite its adamant desire to maintain its principle of banking confidentially, it has relaxed its rules to certain extent. For how much longer can Switzerland protect the privacy of its banking clients?
Swiss bank UBS, which has been locked in a long dispute with the US over tax evasion, wants the government to finalise a treaty with the US to prevent the US from pursuing more Swiss banks in its quest to flush out US tax evaders. This could further undermine Switzerland?s reputation as a financial centre where banking secrecy is held as sacrosanct.
In February the Swiss government said it would put before the Swiss parliament a settlement it brokered last year between UBS and the US for UBS to disclose details of 4,450 accounts of US citizens who were possible tax evaders in return for the US judiciary to halt legal action against UBS. The government wants parliament to vote against objections raised in a Swiss court that the agreement was not fully enforceable because it conflicted with an existing international treaty which distinguishes between tax evasion and tax fraud. Switzerland recognises tax fraud as a crime but, currently, not tax evasion. If parliament approves, the agreement would become a treaty and take precedence over earlier agreements affecting banking confidentiality.
UBS warned Swiss lawmakers that failure to back the agreement could incite the US authorities to hasten its pursuit of about 20 other Swiss banks on which they have gained information through a voluntary disclosure programme.
Stolen data breaches banking secrecy
Over the last few years several scandals involving stolen data on offshore account holders have come to light and Switzerland has had its slice of the abuse.
One hot topic currently under discussion is the 24,000 names taken from private bank HSBC Holdings in Geneva, stolen by a Herve Falciani in 2006 and 2007. Falciani attemped to sell the data disc to several governments and was discovered following a tip off from Lebanon. Information was offered to France and other countries are also interested, including the UK which is eager to acquire details of 6,600 wealthy British suspected of evading tax.
Switzerland protested about stolen data being used by tax authorities as it was illegally obtained. France returned the disc to Switzerland and agreed not to use the information to request further details from Switzerland. However, it may pursue French tax offenders based on information in the stolen data and also pass on data to other governments requesting it.
Germany has been offered similar data and several German states have been approached offering a disc with the names of potential tax evaders. So far two states have agreed to buy the data and there may well be more to come. It shows that although there is controversy over the ethics of governments purchasing stolen data, the willingness of some governments to do so further weakens Switzerland?s former solidness as a financial centre where banking secrecy is thought to be impenetrable.
There have been several voluntary disclosure facilities or ?tax amnesties? which have also impacted upon Switzerland?s banking confidentiality. Disclosure facilities in the US, the UK, France and Italy have invited tax evaders to come clean about their unpaid tax held in offshore financial centres in return for reduced penalties. Information disclosed would include details of the banks where offenders had hidden their wealth.
The Swiss banking industry has been affected by the Italian tax amnesty, and in particular the city of Lugano where Italians have traditionally deposited their offshore assets. Cash has streamed from Lugano banks and funds have also been repatriated to France and Germany.
European offshore financial centres have lost more than ?368 billion over the past two years. It is not just the disclosure facilities which are emptying the banks, but account holders? fear over the crackdown on offshore accounts and the tougher financial climate causing some of the funds to be repatriated to prop up cash-strapped businesses.
Switzerland manages approximately 27% of the world?s offshore privately held wealth. It is the world?s largest offshore centre by assets, and it has lost about a fifth of its offshore assets in the last two years. The worst global financial crisis for decades has forced governments to target offshore financial centres like Switzerland and the citizens who hold their untaxed wealth in them, in order to squeeze out as much unpaid tax as possible, plus interest and penalties, to help compensate for their budget losses.
The world of offshore banking is going through some painful changes in order to conform and survive. Switzerland along with other leading financial centres will have to think of ways to attract back investors while complying with international tax standards. Experts suggest that only a few financial centres of excellence will survive per region in the years ahead.
One of the key reasons why centres like Switzerland have been popular is the ability for some affluent individuals to maintain their wealth by not paying the tax due on it. Those days have gone. In any case there is no reason to hide assets from taxation as effective tax planning arrangements mean tax liabilities can be legitimately minimised, sometimes with confidentiality remaining uncompromised, unless there is a legal obligation to disclose information. A tax and wealth management specialist like Blevins Franks can advise you on your specific needs.
By Bill Blevins, Managing Director, Blevins Franks
25th March 2010