Swiss become first to sign FATCA Model II accord with US chipping away at secrecy

Almost exactly 40 years ago, in May 1973, Switzerland became the first nation to sign a Mutual Legal Assistance Treaty with the United States. That bilateral accord had been pushed by the United States because of mounting evidence that organized crime figures, members of La Cosa Nostra, operating within its borders had found the ironclad safety of Swiss bank secrecy a useful tool to hide the billions of dollars they made from diverse nefarious activities, including money laundering, tax evasion, fraud and corruption.

That breach in the tiny country’s centuries-old barricade of bank secrecy did not do much to stanch the flow of dirty money to its financial institutions derived from all types of financial crime.

There are some estimates that Swiss financial institutions more than one-third of the total offshore assets under management at all financial institutions worldwide. Figures provided by the Swiss Bankers Association said that sum amounted to roughly $2.9 trillion dollars in 2011. More than half of all assets held by Swiss financial institutions originate outside its borders.

If any evidence was presently needed that Swiss financial institutions still are hungry for offshore deposits, the scandal that erupted in 2008 surrounding the brazen campaign of UBS, the largest Swiss bank, to attract US taxpayers to open secret accounts to evade US taxes provided it.

British launch ‘name-and-shame’ tax evasion campaign on website

The scandal ignited a new awareness on the part of nations, like the United States and Great Britain, to the scope and breadth of tax evasion by their citizens. In Great Britain, the fallout has caused a much heightened government effort to crack down on tax evaders. The government of Prime Minister Cameron has even started publicly “naming and shaming” citizens who are evading UK taxes by publishing their names on the website of the UK tax authority, which can be viewed here.

In the United States, the UBS global tax evasion conspiracy spawned passage of the Foreign Account Tax Compliance Act, commonly known as FATCA. This landmark law has caused cries of anguish by financial institutions worldwide because they now face the duty to inform the US IRS of their accountholders who are “US persons.”

FATCA has given rise to so-called Inter-Governmental Agreements (IGA) that the US Treasury Department has been pursuing with nations that would make the sharing of the names of taxpayers a two-way street.

The US IRS, which does most of the heavy lifting under FATCA, has devised two types of IGAs, called Model I and Model II, each with its own distinctive characteristics.

Now, Switzerland, perhaps in keeping with its four-decades tradition of being the first to reach agreement with the US on matters that reduce bank secrecy, has become the first nation to sign a Model II FATCA Inter-Governmental Agreement with the United States.

Historic US-Swiss FATCA IGA inked February 14

The two nations announced on February 14, they had signed a FATCA bilateral agreement, which, for the first time, will require Swiss financial institutions to collect information on US persons who maintain accounts with them and report this information directly to the US Internal Revenue Service. The agreement may open Swiss banks’ vault doors a little more.

The new FATCA IGA comes after four years of legal battering by the US government, led by waves of criminal prosecutions and investigations by the Department of Justice and IRS against Swiss banks and bankers stretching back to the UBS case, which was resolved in 2009.

Some knowledgeable experts speculate the IGA may help the Swiss government in its attempts to negotiate a global resolution of US requests for accountholder records arising from ongoing criminal investigations against some 11 Swiss banks, including Credit Suisse and Wegelin.

Switzerland is first nation to enter Model II FATCA accord

The US-Swiss IGA also represents the first time a country has signed the Model II version. The Model II and Model I IGAs are treaty templates proposed by the US IRS that can be customized by the signatory nation. They were designed in 2012 to help ease FATCA compliance by other nations and their financial institutions.

Under a Model II IGA, the nation that enters into the agreement gives its financial institutions permission to register with the IRS to report information on US accountholders. These non-US institutions must obtain consent from their US accountholders to begin reporting the names, addresses, and total balances on all accounts of US persons holding more than $50,000. Swiss law requires the notification of accountholders when account information is sought by another country.

Under the terms of the Swiss IGA, if a US person fails or refuses to consent to the reporting of their information to the IRS, Swiss institutions will not be required to close their account will report it to the IRS. Swiss institutions will also not be required to the withhold 30% withholding tax on income and payments from the US that FATCA prescribes on the accountholder who does not consent.

The IGA calls for Swiss institutions to report aggregate information on non-consenting, or “recalcitrant,” accounts to the IRS, but not specific details or names of accountholders. The Swiss IGA then allows the IRS to make group requests to the Swiss government for all the information about recalcitrant US accounts that Swiss institutions would have had to report if it obtained the consent.

The agreement also contains provisions not found in the IRS template Model II IGA. The article
shows how the Swiss tax authority will deal with US group requests for information on recalcitrant
accountholders and provides the Swiss government with a mechanism to manage these requests.

IGA may signal beginning of the end of secret US assets in Switzerland

Its unique aspects aside, this groundbreaking IGA may signal the beginning of the end of undisclosed assets of US persons in secret Swiss accounts.

“Today’s announcement marks a significant step forward in our efforts to work collaboratively to
combat offshore tax evasion,” said Acting Secretary of the Treasury Neal S. Wolin. “We are pleased that Switzerland has signed a bilateral agreement with us, and we look forward to quickly concluding agreements based on this model with other jurisdictions.”

Switzerland is one of eight countries that has signed or initialed an IGA with the US. Despite considerable opposition to FATCA from non-US and US institutions when the law was enacted in March 2010, the US Treasury obtained signed FATCA IGAs with nation-partners that also include the UK, Mexico, Denmark, Ireland and Spain.

US persons with accounts at institutions outside those countries have no cause for comfort. Treasury has said it is in “advanced” negotiations on similar agreements with more than 50 countries and that it expects to sign more of them in the near future.

IGA awaits Swiss vote as FATCA juggernaut gathers global steam

The Swiss IGA contains some significant departures from the US Treasury FATCA Model II. For example, Switzerland does not commit, as do signatories to the standard Model II and Model I agreements, towork with other countries to develop a common model for automatic tax information exchange.

It also differs from the template by providing a deadline on when Swiss institutions must report to the IRS the number and value of all non-consenting US accounts. The deadline is no later than January 31 of the year following full ratification.

On January 17, 2013, the IRS finalized the FATCA implementing regulations, which provide additional certainty for financial institutions of the process for US account identification, information reporting, and withholding requirements for foreign financial institutions, and U.S. withholding agents.

Because of a Swiss law requirement to ratify the agreement and the mutual desire to do so quickly, the Swiss Federal Council will expeditiously consult the country’s financial industry on the FATCA IGA and the corresponding implementing act that must be approved.

The Swiss government has said interested parties have four weeks to submit comments. The FATCA agreement may be subject to a national referendum in Switzerland, if at least 50,000 signatures in favor of a vote are received within 100 days.

Read US-Swiss Model II Agreement Here