Under pressure in global tax evasion crackdown, Swiss havens begin stripping away secrecy layers

For seven decades, Swiss financial institutions have been synonymous with secret bank accounts holding hidden assets for clients averse to paying taxes and financial criminals averse to having their loot discovered. Swiss bank accounts are said to hold almost 30% of the world’s private banking assets under management, a staggering sum that is estimated at $2.1 trillion dollars.

Switzerland bank secrecy laws provide strict confidentiality to accountholders. They have earned a well-deserved reputation as a safe haven for tax evasion and criminal proceeds, including those that come from all types of financial crime, including fraud, money laundering and corruption. Switzerland does not deem tax evasion a criminal offense and does not honor requests for assistance from nations pursuing tax evasion by their citizens. The profits for Swiss banks from this long-standing confidentiality are enormous.
Swiss bank secrecy encountering first major breach since 1934
Now, for the first time since its secrecy laws were enacted in 1934, the era of strict bank secrecy in Switzerland may be nearing an end. Swiss institutions are facing unprecedented legal pressure from the US Department of Justice in the civil and criminal realms.

At the same time, Switzerland is confronting demands for new tax treaties from its European neighbors, who seek agreements to detect citizens who hold accounts at Swiss institutions to evade their home state taxes. Under the weight of a global crackdown on tax evasion, Swiss bank secrecy is imperiled.

As a result, tax evaders are scrambling to find new safe secrecy havens, which they may not have trouble finding. About 60 offshore secrecy havens around the world think money has no odor, irrespective of provenance.

“Switzerland is certainly getting less attractive,” says Jeffrey Neiman, a former federal prosecutor at the Justice Department’s Tax Division, who helped lead the 2009 case against UBS for opening secret accounts for 52,000 tax-evading US citizens. “The money is leaving, and a lot of it is going to places in Asia, like Hong Kong.”

Facing lawsuits and political pressure, some Swiss bankers are even admitting that it may be time to give up some of the secrecy from which they benefit. “Switzerland got rich through black money,” said UBS CEO Sergio Ermotti in an October 2011 interview with Swiss newspaper SonntagsBlick. “That will change in the future.”

Swiss tax treaties with Germany and UK signed, but US pact lags

On April 5, the German and Swiss governments signed a treaty that levies taxes on accounts of German citizens at Swiss institutions. Last year, Switzerland struck a similar accord with the UK, which takes effect in 2013.

Representatives of several US agencies and the Swiss finance ministry have conducted long-running negotiations on a treaty to tax US accountholders. Swiss media reports say an agreement may be close.

“This is the end of Swiss bank secrecy the way it used to be,” Bruce Zagaris told ACFCS. He is a partner at the law firm, Berliner, Corcoran and Rowe, in Washington, DC, and publisher and editor of the respected International Enforcement Law Reporter.

“But it doesn’t mean that it is the end of the Swiss commitment to financial confidentiality. There’s still a strong culture in Switzerland that wants to protect confidentiality as a main tenet of the country’s financial system,” he adds.

US Justice Department tests Swiss commitment by indicting Swiss bank
The Swiss commitment to banking secrecy is being tested by the US Justice Department, which has aggressively pursued Swiss banks since the groundbreaking UBS case in 2009.

That case, in which Neiman and other US prosecutors obtained a Deferred Prosecution Agreement against the financial giant and indictments of some employees for conspiring to assist thousands of US persons evade US taxes, led to UBS revealing the accounts of 4,450 US persons and paying $780 million in penalties.

Meanwhile, the US has stepped up legal pressure on Swiss financial institutions. Reports published in The New York Times say the Justice Department is investigating Credit Suisse and 10 other Swiss banks.

In recent months, the Justice Department has brought civil and criminal cases against other Swiss institutions and investment managers on tax evasion charges. Most notably, it obtained a grand jury indictment of Wegelin, Switzerland’s oldest private bank, on February 2, 2012.

The fraud and conspiracy charges in the 59-page indictment accuse Wegelin of facilitating the evasion of US taxes by US persons on an estimated $1.2 billion in assets the bank held. The indictment also accused bank executives and managers of advising their US customers to not disclose information about their accounts to the IRS.

Novel charge of ‘aiding and abetting US tax evasion’ against Wegelin bank
Wegelin is one of the first foreign financial institutions to be indicted for aiding and abetting US tax evasion. It has not answered the indictment, but has chosen to avoid the confrontation. Its owners chose to effectively dissolve the bank and sell it days before the indictment was returned.

“When you look at the facts of the Wegelin case, if the US didn’t formally charge Wegelin, there’s not a bank on the planet it would not go after,” says Neiman. “This gives the US credibility as it pursues other Swiss institutions.”

“The Wegelin case is significant because of the timing,” says Zagaris. “The indictment came one or two days after the Swiss said they had the tax information the US was looking for, but that it was encrypted, and they wouldn’t turn it over until there was a global agreement” covering all Swiss financial institutions.

As part of the wider agreement, “the Swiss want the US to not prosecute its institutions and individuals,” says Zagaris. “In response, the US issued the Wegelin indictment. The US hasn’t formally said anything, but it’s done something.”

Swiss court, politicians battle to preserve confidentiality

Despite the mounting US legal pressure, some Swiss financial institution and political officials are still willing to fight to maintain bank secrecy. On April 11, the Federal Administrative Court in Bern rejected an IRS request for information on US accountholders at Credit Suisse. The judge called the request too vague, and said it violated a 1996 US-Swiss tax treaty by not including the names of accountholders. The decision cannot be appealed.

The Swiss have maintained a level of anonymity for foreign customers in their tax agreements with other European nations. The deal struck with Germany this month calls for taxation of investment accounts of German citizens at Swiss institutions but does not require the names and personally identifying information of accountholders to be disclosed to German tax authorities.

The treaty faces an uphill battle in the German Bundesrat, which must approve it. German opposition parties have criticized the arrangement as too lenient and are demanding higher tax rates and the collection of more information about German accountholders.

The agreement last year between Switzerland and the UK also allows for taxation of UK citizens at Swiss institutions without gathering the names of these accountholders. This treaty also awaits approval by the British parliament.

So far, the US seems unwilling to accept any agreement that would allow similar anonymity for US account holders.

Foreign money slipping away from Switzerland to Asian havens, says expert

Notwithstanding these negotiations and US legal efforts, it may be too late for Swiss institutions to salvage many of the foreign assets they had under management. Foreign assets in the nation’s financial institutions have declined in each of the past three years, according to figures released by the Swiss National Bank.

“Money has gone to places like Singapore, Malaysia and Hong Kong, but it’s going there for a variety of reasons” beyond confidentiality, says Zagaris. He notes that these Asian destinations for hiding “alleged dirty money” do not have the codified secrecy laws or reputation for discretion cultivated by Swiss institutions.

For the US Justice Department, the decline of Switzerland as a tax haven can be counted as a victory in its global combat against tax evasion, even it if drives some tax evaders farther underground.

‘Disclosing assets and paying taxes may become the easier option,’ says prosecutor of UBS
“The Department of Justice recognizes that there are always going to be places to hide money,” says Neiman. “They want to make it as difficult and unpleasant as possible to do it.”

For US persons looking him to hide assets, “instead of a six-hour flight, it’s now a 14-hour flight,” Neiman says. “Instead of meeting with a banker from UBS, you’re now meeting with a guy with an eye-patch, handing over a briefcase full of money to someone you’ve never met before.”

“At some point,” Neiman continues, “disclosing assets and paying taxes becomes the easier option.”