Switzerland between Bank Secrecy and Automatic Information Exchange—A Change in Paradigm?
In recent years Switzerland has come under increased pressure to loosen its bank secrecy protection and allow foreign governments to obtain information on bank accounts held by its tax payers in Switzerland. After timid first steps initiated in 2009 to grant exchange of information in cases where the information is foreseeably relevant for the enforcement of domestic tax laws, under pressure from the OECD, the EU and the USA, Switzerland seems now to be defining a new strategy for its financial centre which may move away from a strict bank secrecy protection to enhanced transparency and even an automatic information exchange with foreign governments. This article discusses the current initiatives of the Swiss Government in its definition of a new strategy.
By René Bösch (Reference: CapLaw-2013-15)
For decades Switzerland is famously—or for certain people and foreign politicians—infamously renowned for its bank secrecy. What started as a well-intended special protection of the personality and integrity of customers of Swiss banks has over time more and more been used to hide away moneys of dubious origin or to shield moneys from tax authorities. As a consequence of these negative, but still not prevailing practices, Switzerland received quite some biased coverage. Hardly any bestselling crime fiction could do without a numbered account at a Swiss bank. Yet, all this international criticism did not bother Switzerland, its politicians and bankers. Until recently. Since about 5 years, Switzerland is in a move to gradually loosen its bank secrecy and take steps towards increased transparency and better cooperation with foreign governments in respect of tax matters. This development came in waves, and it is not yet clear where it will end.
1. After decades of resistance, in 2009 Switzerland effected a first turnabout—it allowed assistance in tax matters where this could be relevant to enforce domestic tax laws
Since 1934 it has been a crime for a Swiss banker to divulge the identity of a bank customer or any information relating to a Swiss bank account. The limited exceptions to that duty of confidentiality include, inter alia, the provision of information in connection with justified requests for assistance in judicial matters or in tax matters or assistance in legal matters where the alleged wrong-doing qualifies as “crime” (Verbrechen). Until March 2009, however, Switzerland in effect and boldly speaking upheld the distinction between tax fraud and tax evasion, and only granted assistance in cases of tax fraud or similar cases. That distinction was hardly understood internationally, deviated from the standard applied by the Organisation for Economic Cooperation and Development (OECD) and meant that most requests for international assistance in judicial and tax matters were not honored.
Having been criticized for years, in March 2009 the Federal Council finally decided to conform its practice for exchange of information in tax matters to the prevailing international standards, in particular article 26 of the model agreement of the OECD. Switzerland should not only grant assistance in tax matters in cases of tax fraud, but also in cases where the information is forseeably relevant for the enforcement of local tax laws. As a result, the unique and hardly ever understood distinction between tax fraud and tax evasion was dropped in the international context, allowing foreign governments to obtain information about their taxpayers’ Swiss bank accounts also in mere cases of tax evasion. Since then it has negotiated numerous new double-taxation treaties (DTAs) on that basis. Moreover, gradually Switzerland also moved to accept group requests, a standard that is now also embedded in a new Swiss Act on International Assistance in Tax Matters.
2) New Financial Market Strategy announced in February 2013 — The White Money Strategy
Whoever thought that the move towards internationally accepted standards for exchange of information in tax matters could do away with the pressure on Switzerland in respect of its financial centre saw himself deceived. Following a series of highly publicized cases of tax evasion and tax fraud, most notably in respect of US, French and German taxpayers, the Swiss Government came under increasing pressure to react and to seek measures that would deter and eventually stop the acceptance and maintenance of undeclared moneys.
Following a first report in December 2012, by the end of February 2013 the Federal Council announced its proposal for the future strategy for the Swiss financial market. While in the press hailed as the “white money strategy”, conceptually the proposal consists of a package of several distinct measures that can be categorized as follows:
a) White Money Strategy: As a result of the discussions and disputes about untaxed legacy moneys in Swiss bank accounts, the Federal Council announced a so-called “white money strategy” (Weissgeldstrategie), pursuant to which Swiss banks shall ensure that going forward they only accept duly declared moneys. By way of an amendment to the Anti-Money Laundering Statute all financial intermediaries shall be obliged to exercise particular duties of care when accepting a new customer or funds from existing customers with respect to the tax status of such funds. While the proposed legislation favors self-declarations by customers regarding the declared nature of their funds, this is not a strict requirement; financial intermediaries have other means to ascertain that they only accept declared funds. Should the intermediaries have reasoned suspicions or know that funds to be deposited or already deposited with them are not declared, they must not accept such funds or even terminate the client relationship.
b) Implementation of the 2012 recommendations of the FATF: With a second package of proposed legislative measures the Federal Council seeks to implement the revised recommendations of the Financial Action Task Force (FATF) of February 2012. Among the proposed measures are: the increase of transparency on legal entities, in particular such entities that still have bearer shares (bearer shares will not be prohibited, but instead strict reporting requirements will be introduced, the violation of which may be sanctioned severely); the increase of the duties of financial intermediaries in ascertaining the identity of the beneficial owner, in particular in the case of politically exposed persons (PEPs); the extension of the scope of the anti-money laundering laws to the real estate sector and other business activities; and the elevation of severe tax evasion to the status of tax fraud and thereby to a crime, which becomes a base crime in relation to the money laundering statute.
c) Increase of protection of customers in connection with the distribution of financial products: As a third measure the Federal Council announced that it will present a proposal for a new law on financial services (Financial Services Act, or Finanzdienstleistungsgesetz) that shall enhance the protection of buyers of financial products. That law shall implement measures similar or equivalent to those provided in the Markets in Financial Instruments Directive (MiFID), as amended, shall give regard to the other standards developed internationally, and shall extend the scope of supervision over financial intermediaries.
While the Federal Council has presented concrete legislation for the first two areas, it has announced that it is expected in the fall 2013 to potentially present a draft proposal for the Financial Services Act.
3) Federal Council redefines Strategy for the Financial Market in June 2013—Automatic Exchange of Information becomes an option
Already by the end of May 2013 the Federal Council announced another step in its redefinition of the financial market strategy: in a report for public consent it also proposed to introduce powers of Swiss national and regional authorities to obtain information about a Swiss taxpayer’s bank accounts in Switzerland. If enacted this proposal would result in a further watering down of the distinction between tax evasion and tax fraud, this time in a purely national context.
In mid-June 2013 the Federal Council presented a study commissioned from a group of experts on the regulatory challenges for the cross-border asset management business in Switzerland and the options for that industry. The report analyzes the various options and strategies and arrives at several recommendations, the most striking being that Switzerland should move to and accept the automatic exchange of information as the new global standard. It encourages politicians and the government to work proactively towards the development of such a global standard for the automatic exchange of information and even holds that under certain conditions (inter alia the granting of direct access to its markets for Swiss banks) Switzerland should offer the automatic exchange of information to the EU even if that standard were not yet globally accepted.
This report came as a big surprise, marking yet another turning point for the Swiss financial market strategy and for a true change of paradigm. It may be all the more surprising that the report was well received by a large portion of the banking industry, but leading industry leaders have already for some years argued that Switzerland should overcome its banking secrecy legacy, open up and become a truly transparent marketplace. However, admittedly not all industry participants arrived freely at such new insights and positions. Rather, the pressure from the EU to move for equivalency requirements for non-EU financial institutions to do business in the EU and the challenges of MiFID II put so much pressure on the Swiss financial industry to change its strategy, that Switzerland would offer the automatic exchange of information against the quid pro quo that the EU grants Swiss banks the access to its markets.
The Federal Council was not willing to adopt all recommendations of the report. It accepts the move to the automatic exchange of information, but only if and once this has become a global standard and only in respect of such countries that are willing to enter into an agreement with Switzerland regulating the tax legacies of the past. Effectively this means that the Federal Council is not willing to offer the automatic exchange of information swiftly to the EU before that standard has been adopted by the OECD and the G-20.
4) Swiss Financial Market Strategy— Quo Vadis
The steps taken by the Swiss government since 2009 towards a new financial market strategy are striking—in particular in light of Switzerland’s refusal for more than 70 years to discuss efforts to loosen its strict banking secrecy laws. However, developments in the last 6 to 12 months do not seem to be fully coordinated within the government and with the industry. Significant issues remain to be solved and significant uncertainty exists as to which of the proposed or discussed measures will eventually make it to law. A group of renowned politicians has already launched a counter-attack against the proposal of the Federal Council, proposing an amendment to the constitution that would anchor the bank secrecy in its traditional form in the constitution. On the other hand, the EU has already signaled its unwillingness to accept discussions about granting market access to Swiss banks under MiFID II as a quid pro quo for the automatic exchange of information between Switzerland and the EU.