The demise of secret bank accounts – Switzerland’s private banks face a new era of transparency | Wolters Kluwer Financial Services
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  • The demise of secret bank accounts – Switzerland’s private banks face a new era of transparency

    By Selwyn Parker

    Published February 25, 2016

    As Switzerland’s private banks systematically shut down or freeze thousands of undeclared bank accounts held by foreigners ahead of imminent tax-disclosure regulations, their compliance officers face a challenging learning curve.

    After more than 80 years of the secret bank accounts that made the country the world’s most popular tax haven, the private-banking industry must now embrace an entirely new era of transparency under pressure mainly from the OECD’s automatic exchange of information (AEI) and America’s Foreign Account Tax Compliance Act (FATCA). Between them these measures require full exchanges of tax-relevant information with more than a hundred countries as well as the US.

    So with the AEI applying from 2017, compliance departments are rapidly learning new regulations as well as new attitudes about privacy.

    Heavy fines

     

    But why are the banks shutting down or freezing undeclared accounts? The main reason is they fear heavy fines by justice authorities in other countries, and particularly in the US. As Zurich-based law firm Caputo & Partners points out, it’s a new ball game. “Swiss banking secrecy will no longer protect tax-neutral funds or undeclared accounts of clients who have committed tax evasion at home,” it warns.

    Other banks have sent letters to clients, warning them to become tax-compliant and disclose the existence of the account to their domestic tax authorities or, failing that, to shut it down altogether.

    Some banks are freezing accounts pending hefty fines or claims for back taxes that may be imposed on their clients. Although this is apparently illegal, they’re doing it anyway so they don’t fall foul of the US justice system.

    Whatever action is taken, the compliance pitfalls are considerable. As Caputo & Partners notes, “there is a big conflict of interest between clients with undeclared funds and his Swiss bank.”

    Understandably, bankers are concerned about prosecution – that’s of themselves as well as of their clients. That’s why most Swiss private banks have qualified for a non-prosecution programme developed by the US Department of Justice. This requires them to come clean and compliance officers may find themselves standing in the middle. Most are advising American clients to file full disclosure forms after the fact – better to file late than not at all – or qualify for an “offshore voluntary disclosure programme”.

    If clients drag their feet, some banks are making the disclosure for them, which of course puts the client in the worst possible light with the IRS.

    Pillar

     

    By any definition the demise of the secret – or numbered – bank account marks a turning point in the fight against tax evasion. Although other jurisdictions such as Lebanon, Liechtenstein, Luxembourg and Singapore have long enforced privacy laws in banking, Switzerland started it all off in 1934. Ever since then secret bank accounts have been a pillar of the country’s world-leading private banking industry.

    No other country enforced anonymous accounts so comprehensively. Swiss law prohibited the sharing of information about these accounts with any third party including foreign tax authorities, foreign governments or even Swiss authorities. The punishment for a violation of the law was severe. This curtain of secrecy could only be penetrated by a subpoena issued by a Swiss judge, and usually only in the case of significant criminality such as terrorism, racketeering or other heinous offences. Evasion of taxable income was not considered heinous enough to be included in this list.

    And for a long time it did not include racketeering either. In the mid-20th century American mobster Meyer Lansky actually bought a bank in Switzerland so he could channel ill-gotten gains into it through a complicated network of bogus companies.

    Cracks

     

    It was the UBS case that first opened a crack in anonymous accounts. (Although Swiss accounts were identified by numbers rather than names, they were always linked to the beneficiary in a way known only to the banker.) In a virtual admission that the giant Swiss bank had been aggressively assisting Americans to evade tax, in 2010 the Swiss parliament ratified a deal between the two countries in which UBS passed to the US authorities information about 4,450 clients suspected of underpaying the Internal Revenue Service.

    Thereafter the writing was on the wall. Simultaneously, under pressure from the G20 and the OECD, Switzerland was busy writing double-taxation agreements with one country after another. When a dozen of these had been signed, the country was taken off the grey list of dubious tax jurisdictions.

    Next, in late 2013 the government moved to align its banking practices with those of other western nations. Thereafter secret bank accounts were doomed despite Swiss president Ueli Maurer declaring in that year that in principle they were akin to medical confidentiality – “the state should not know what there is in your bank account.” The president was out of step however because the government would soon start working on a broad revision of its financial laws that among other things embedded transparency into cross-border banking relations.

    And now, having started with Australia, Switzerland is in the process of writing individual AEI treaties with different countries. (Despite its title, AEI is not an automatic measure but requires bilateral deals.)

    New reality

     

    After much grumbling and in the early years outright opposition, the private banks have bowed to the inevitable. In a perceptive speech last year the president of the Swiss Private Banking Association Christoph Gloor outlined the new reality, “Our financial centre can no longer rely on banking secrecy in fiscal matters, a competitive advantage that was bitterly criticised by many countries and organisations,” he said. “Provided the rules are the same for everyone, we can manage without that advantage.”

    Although Gloor described “a regulatory environment that is becoming steadily more onerous”, he also expects the industry will fight back on its own merits. Crucial in this will be the Federal Council, the seven-member executive authority that runs the country. As he said, private bankers expect the council to ensure there is a level playing field in banking matters around the world.

    At the moment however the president of the association is not convinced. “Yet there is currently no guarantee that there will be [a level playing field],” he warned. “We find this deeply preoccupying.”

    Catching up

     

    When the axe fell on undeclared accounts, it was a heavy blow for the industry. One prominent Swiss banker estimated they amounted to 80 per cent of some institution’s total assets before the financial crisis hit the industry. It’s not known how many of these were closed, frozen or repatriated, but Switzerland still retains top spot in wealth management with around $2 trillion in assets at the end of 2014.

    Now however Switzerland’s banks have to attract new assets in an entirely different regulatory environment, and without the advantage of secret accounts.

    About the author: Selwyn Parker is an author of books on finance and business topics, a specialist in financial history, and regular contributor to newspapers and magazines. Based in Spain, France and the UK, he focuses mainly on European developments. His latest book, The Great Crash, is a new history of the Great Depression that among other things explains the rise of regulation in the form of the SEC and related authorities. Selwyn is a regular contributor to Wolters Kluwer Financial Services.



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