Bill threatens Swiss bank secrecy model

Author: Danielle Myles | Published: 4 Jun 2013
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  • A Swiss bill unveiled last week would allow banks to provide non-client information to US tax authorities, to settle disputes regarding US offshore accounts;
  • Irrespective of whether the bill passes, the US is winning its fight against Swiss style secrecy, meaning the country’s bank model will change;
  • Client due diligence will now include confirmation of home-country tax compliance and damages for breach of contact;
  • The developments jeopardises Zurich’s future as a banking hub, with some predicting the sector’s funds under management to decline by up to one quarter, or even one third;
  • The bill also jeopardises other banking centres that had agreed to become more transparent if Switzerland, the bank secrecy benchmark, does so.

Last week’s bill permitting Swiss banks to share certain information with US tax authorities will prompt a new Swiss banking model – even if the bill is not passed.

It also marks an inflection point for global bank secrecy policies, which are based on the Swiss benchmark.

Unveiled on Wednesday, the federal bill will help Swiss banks by allowing them to settle tax disputes regarding US depositors. But it compromises other bank secrecy centres, many of which had agreed to become more transparent if it created a level playing field.

"That presumption that the Swiss would never fold, and other countries would not have to live up to their commitments, has obviously now come unstuck," said Griffith University Professor Jason Sharman, who specialises in offshore finance.

For Swiss banks, a new and strong focus on customer due diligence – especially in relation to tax evasion – is inevitable.

"Irrespective of whether the bill is passed, the new banking model will concern itself with clients’ home-country tax issues," said one Zurich-based partner.

"Swiss banks will not be as prepared to take foreigners’ money without the client confirming that they are in compliance with their own tax laws," he added.

Banks are looking to ensure clients comply with their national tax laws. This includes confirmations by new clients in their relationship agreement (with yearly confirmations thereafter) and penalties including damages for breach of contract.

"These kind of compliance issues are now being discussed among the banks, with some having already changed policies," the partner added.

Swiss style secrecy under threat

The controversial bill has become highly politicised, and partners in Switzerland note the many hurdles to its passage. But the proposal in itself will prompt banks to change back secrecy practices.

Laws that forbid banks to share client details have helped Zurich become the world’s fifth biggest financial centre. But these same laws have prevented its banks from negotiating settlements with the US Department of Justice (DoJ), which has undertaken a five-year criminal probe of the sector to obtain information on US depositors.

The Swiss government’s May 29 bill represents a solution. It creates a new law that temporarily relaxes criminal sanctions in the Swiss Penal Code to allow its banks to cooperate with the US DoJ. This includes revealing information about 'business relationships concerning US persons and details on people who were involved in the US business of the respective bank.’

Contrary to reports by other media outlets, the bill does not change the country’s bank secrecy laws, which are contained in the Banking Act. The bill expressly excludes information about clients.

"Bank secrecy has nothing to do with the announced bill. Bank secrecy legal provisions do not relate to any these discussions," said Swiss Bankers’ Association spokesperson Sindy Schmiegel Werner. She believed there has been some confusion of which legal provisions last week’s bill will amend.

According to Schmiegel Werner, it is too early to know if the proposed changes will impact Switzerland’s future as a banking hub. She said this couldn’t be assessed until the 'programme’, pursuant to which banks can settle claims with the US DoJ, is known.

But within the context of mounting US pressure on Swiss banks, Sharman predicted the sector’s funds under management to decline by up to one quarter, or even one third.

Since the 1990s, offshore banking participants have often claimed that certain global regulatory initiatives were the death knell of their industry. These include exchange-on-request and then automatic-exchange under the OECD’s Harmful Tax Competition initiative.

These concerns, however, generally proved to be groundless.

"That means my initial response is to think that predictions of doom and gloom for the Swiss banking industry are overblown," he said. "But it does seem like the Swiss banking industry is running into a pretty serious problem now."

"The combined effect of the pressures applied to Switzerland and the concessions it has made will do significant damage to the Swiss banking industry in a way that these other regulatory initiatives have not," Sharman added.

Domino effect

Given Switzerland is the historical benchmark for bank secrecy, last week’s bill and subsequent changes to the country’s bank model will impact other offshore centres that boasted bank secrecy benefits.

A number of governments had agreed to relax their bank secrecy laws on the condition that Switzerland did so as well. Many did this to gain credit for cooperating, without actually having to make changes because they presumed Switzerland would not cave to international pressure.

The Swiss bill stipulates that settlements will be 'based on a framework specified by the DoJ’. The Swiss government agreeing to, in effect, US-imposed changes jeopardises these other countries’ policies.

Singapore, another bank secrecy centre, has already taken steps to make banks responsible for ensuring the money they hold complies with the relevant client’s home-country tax laws.

Given the US authorities’ hard line tactics have worked against Switzerland, other national enforcement agencies are tipped to follow.

Changes under last week’s bill are just the latest assault. US authorities’ first big success against Swiss secrecy was the 2009 settlement with the Swiss cabinet, which forced UBS to hand over the names of 4,500 US account-holders.

"That model showed how to hold Swiss banks’ feet to the fire to get information, and it’s a precedent not just for the US but also European countries too," said Sharman.

The Zurich-based partner noted that many European governments are in need of funding, and so tracking down citizens that hold money in overseas accounts could now be a greater focus.

It’s thought the bill would comply with the US Foreign Account Tax Compliance Act (Fatca).

The Swiss Federal Department of Finance did not respond to IFLR’s request for comment. Its press release is available here and the bill is available here.

See also:

Switzerland’s success as an investment hub http://www.iflr.com/Article/3210351/Search/Results/Switzerlands-success-story-as-an-investment-hub.html

The end of banking secrecy http://www.iflr.com/Article/2452766/Search/Results/The-end-of-banking-secrecy.html

The Austria-Switzerland tax treaty http://www.iflr.com/Article/3039425/Search/Results/The-Austria-Switzerland-tax-treaty.html

BITs: easing the pain of Fatca compliance http://www.iflr.com/Article/3145801/Search/Results/BITs-easing-the-pain-of-Fatca-compliance.html

How China’s state secrecy laws challenge HK independence http://www.iflr.com/Article/3084094/Search/Results/How-China-state-secrecy-law-challenges-Hong-Kong.html