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Sunset over Swiss Banking Secrecy

Switzerland’s bank secrecy laws forbids financial institutions and intermediaries from transmitting to third parties information about customers. The law dates to 1934 — Article 47 of the Federal Law on Banks and Savings Banks, punishing transgressions with sentences ranging up to 3 years in prison and fines of up to 250,000 francs. Bank secrecy is also a part of contract law, transgressions liable to civil action.

In March 2009 a minor revolution took place with the federal council of Switzerland — its executive — changing the juridic landscape and and modifying the legal framework to conform to Article 26 of the Model Tax Convention of the OECD. The Swiss people have not yet had an opportunity to vote on and ratify or reject the changes made by the executive council of federal government.

Late last month, the Swiss federal government also announced its intention to prohibit the filing in Switzerland of foreign funds not registered with their authority to regulate and tax ‘gray’ money, by which is usually meant undeclared funds.

Banking secrecy exists in several other jurisdictions besides Switzerland, such as the Cayman Islands, Bermuda, Virgin Islands, …,the State of Delaware in the United States, the Bahamas, Andorra, Liechtenstein, and Singapore. Historians claim that Switzerland’s 1934 banking secrecy law was motivated by commercial interests and the interests of tax competition.

Up until its recent repudiation, banking secrecy laws were lifted in some cases, particularly in the context of criminal proceedings, and requests for mutual administrative or judicial. Such requests originated from foreign authorities and targeted a specific customer identified in a designated bank. They were motivated usually by investigation for fraud or money laundering. The recent upsets in Swiss jurisprudence now allow for routine requests from foreign authorities for simple tax evasion or undeclared funds on account.

The lines in the sand have been in continuous movement, with a bewildered, unfocused and irresolute Swiss government currently holding out for a non-automatic exchange of information. At this point Switzerland has agreed to communicate information on request to foreign authorities, but not to send it ‘automatically.’ Similarly, Switzerland has not yet agreed to provide information in transactions known as “fishing expeditions,” where a foreign authority asks for a list of customers without any particular criminal suspicions.

Prior to 2009, Swiss law distinguished between tax evasion and fraud. Therefore administrative assistance was granted only for cases in which fraud was at issue. The simple concealment of funds was not considered a pursuable offense. However, part of the enormous changes that have taken place in Switzerland over the past 12 months are the abolition of this distinction: now the simple neglect to declare funds to a taxing authority, whatever the amount, is considered to be actionable.

Many Swiss-based financiers comment that Switzerland has missed a golden opportunity to strengthen itself as a global financial center, arguing that the OECD’s placement of Switzerland on a ‘gray’ list would be toothless, and would have the added advantage, opposite the intentions of its drafters, of driving great quantities of funds into Switzerland. Most of Switzerland’s banking and financial community does not understand why the government rushed to comply with the OECD’s directives; and many are openly calling the competence of government leaders into question, with councilor Hans Rudolf Merz in particular being singled out for ridicule and contempt in many Swiss newspapers.

Under pressure from the OECD, Switzerland undertook in March 2009 to revise its double taxation agreements with states asking for administrative assistance in accordance with Article 26 of the Model Tax Convention of OECD. Negotiating 12 revised conventions have allowed Switzerland to be removed from the OECD’s ‘gray list’ and receive the gold star of their approval. In fact Switzerland she has renegotiated more than this number of conventions. Additionally, within the generally cloudy juridic context and a weak, uncertain Swiss government, many other scandals have shaken the Swiss banking environment.

In December 2009, an employee at HSBC in Geneva gave French authorities bank data on taxpayers with hidden accounts in Switzerland. Thus France obtained through espionage a list of some 3,000 alleged tax evaders, which it intends to prosecute. It is also free to transmit this data to other States. In February 2010, Germany purchased for Euro 2.5 million another stolen list, containing the data bank of 1500 German taxpayers with accounts mainly at Credit Suisse, apparently stolen by a German national working at the Bank.

Meanwhile, the banking and finance sector in Switzerland has suffered a massive exodus of funds and general panic as the legal environment appears to change from week to week.

The Swiss Bankers Association (SBA) has tried to counter the government’s concessions with a proposal for a “final tax, or withholding tax that the banks would levy and disburse to foreign tax authorities, while ensuring the anonymity of their clients. Compared to existing bilateral agreements with the European Union, this proposed system would extend the tax base to dividends and capital gains. The European Union is not interested in this, but rather seeking the automatic exchange of information.

Seeking to avoid at all costs an automatic exchange of information but apparently unable to formulate such a stance on generally accepted notions of national sovereignty, the government said just recently in late February that it intended to prohibit the placement in Switzerland of foreign funds that had not been duly reported to their country’s tax authorities and that going forward ‘gray’ money would be strictly regulated. The methods for achieving these new goals were not elaborated.

With each new successive demand, the Swiss government has given in and renegotiated previous accords and treaties in place.

Automatic exchange of information would effectively remove the last vestiges that remain of Swiss bank secrecy.

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One Response to “Sunset over Swiss Banking Secrecy”

  1. YvesTarchini Says:

    You are correctly putting the finger on our big Swiss problem — a federal government completely overpassed by the dossiers. The system should be changed to 3 or 4 councillors in a hierarchy, like president, prime minister, etc. And they should be elected by the people.

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