Switzerland: Related Information
The Basis Of Swiss Banking Confidentiality In Law
The Swiss banking sector is regulated by the Federal Banking Commission (FBC) under the Banking Law of 1934, as amended most recently in 1999. Banking is defined to include all deposit-taking activity, in whatever corporate format, but does not include the issuance of bonds or securities trading. The offices, branches, agencies and permanent representatives of foreign banks are covered by the law.
Banks licensed by the FBC must report both to the FBC and to the Swiss National Bank, and the latter has considerable reserve powers under the Banking Law. Reports submitted are however to be kept secret.
The Banking Law imposes strict secrecy on Swiss banks, but the Money Laundering Law 1998 (MLL) responded to increasing international concern by clarifying the circumstances under which banks should breach secrecy.
Under the MLL, financial intermediaries were placed under a legal duty to report suspicious transactions and to retain clients' funds for a period of 5 days so as to give the authorities time to seize the assets should circumstances warrant such a response. Banks could be fined up to US$7m for non compliance with the money-laundering regulations. Other regulations included the requirement that customers be identified by way of adequate documentation, that staff be trained in money laundering detection techniques and that internal money laundering units be set up within institutions. Within 6 months of the law being passed US$124m of assets were seized.
Although in various ways the Swiss authorities have attempted to fall into line with the international campaign against money-laundering, they have not seriously dented the principle of banking secrecy. For instance, they refused to sign the OECD's declaration concerning 'Unfair Tax Competition' in late 1999, and in 2000, while they signed the OECD's 'Information Exchange' declaration, they stated that they considered they already conformed to its standards. And when the dust settled over the Savings Tax Directive battle with the EU in 2005, Switzerland had succeeded in preserving banking secrecy at the cost of a withholding tax on savings income and some enhancements to its mutual assistance regime (see below).
In June 2000, the Money Laundering Reporting Office reported that it had frozen SFr 1.5 bn ($909m) of suspected illicit funds in the previous year. Chief Daniel Thelesklaf said that it had received 370 tip-offs during the year, mostly from banks. The amount frozen was five times higher than in the previous year, he said. Criminal proceedings had been started in 63 percent of the 107 cases prosecutors followed up.
Many of them were related to alleged Russian money laundering and the Swiss bank accounts of Nigeria's former dictator Sani Abacha. "It shows that rules against money laundering are being taken seriously by actors in the Swiss financial centre," said Thelesklaf. "The numbers come closer to the importance of Switzerland as a financial centre than did last year's figures."
$670m of the money frozen related to funds found in 17 banks after the authorities began investigations in the Abacha affair. But they had to be pressurised to do so, and the accounts weren't frozen until two years after new, stricter laws changed the banks' responsibility from a voluntary to a mandatory duty to report suspicious transactions or accounts.
In September 2000, the Swiss banks formed a task force to tackle international issues, aiming to put the Swiss banking industry on a more agile footing amid changes in an increasingly international business. The International Swiss Financial Centre Executive Committee, headed by Swiss Bankers Association Chief Executive Niklaus Blattner, also included six senior bank executives, including two from giants UBS AG and Credit Suisse Group.
Whilst the task force meant to look at domestic issues, its main focus was to be on "where we stand in Switzerland compared to different countries, and what we want to achieve as standards," according to Swiss Bankers Association Chairman Georg Krayer. Speaking at a conference held by the Swiss Bankers Association, he said: 'We have to open our eyes. The playing field is broad and we have to react to this.'
The formation of the task force followed a series of road shows by the Bankers Association outside the country to promote understanding of Switzerland and its tight banking secrecy laws.
Government and banks alike were concerned that the banking secrecy for which it was so revered meant that the Alpine nation was constantly faced with money laundering allegations.
The attempts of the Government and the banks to present a better international image were dented in October with the rejection of a money laundering bill by the lower house of the Swiss parliament, which rejected by 89 votes to 55 a plan by left-wing lawmaker Christian Grobet to force banks to report any deposit of more than SFr1 million francs (US$578,000) made in the name of a person holding public office, especially a head of state or a government minister.
The bill which had gone to the lower house was an obvious product of the Sani Abacha debacle. Mr Grobet's proposal followed criticism by Switzerland's banking regulator of six Swiss banks for failing to take sufficient care in accepting millions of dollars linked to the late Nigerian dictator. The Swiss Federal Banking Commission (SFBC) had said that the six banks' acceptance of money from Abacha and his entourage - whom Nigeria suspects of pillaging the Nigerian central bank and squirreling as much as US$3bn abroad - was "disturbing and damaging." Mr Grobet told the Swiss parliament that banks should no longer be exempt from criminal responsibility if they handled stolen money.
Mr Grobet's proposal met strong opposition from then finance minister Kaspar Villiger, who rejected the suggestion that banks were accomplices to money laundering and insisted that current regulations were already enough to deter foreign government officials from stashing stolen money in Switzerland. He added that the naming and shaming of the banks involved in the Abacha case was a strong motivation to banks to act responsibly in the future.
In fact, the bill, put forward by left-wing deputies, had not been supported by the Government, and after the vote, Villiger stated again quite categorically that Switzerland would not give up its age-old banking secrecy, sticking to the party line that doing away with banking secrecy was not necessary as Switzerland was doing all it could not to encourage financial crime through confidentiality.
Speaking in Geneva, Mr Villiger expressed anger at the cliched view of Switzerland as a money laundering paradise and repeated that banking secrecy was not negotiable. Mr Villiger said: 'There’s no chance of Switzerland being forced to abandon this principle, at least as long as we’re cooperating in an efficient way to solve the real problems. The confidentiality of banking should never be an instrument for abuse, tax fraud or criminal activities. Today we have all the instruments for fighting money-laundering and tax evasion.'
Villiger added that the withholding tax system, which has been in place in Switzerland for the past 50 years, was much more efficient than any other.
For Villiger, the crux of the matter was that the Swiss people simply do not want to give up their cherished banking secrecy. He explained: 'A person’s confidentiality is a very important principle, especially at a time when new technology allows you to draw up detailed profiles of everyone. Every person has a right to be protected. We have all the tools necessary to avoid abuses, and that is why it is legitimate to maintain this special professional secrecy. I’m convinced that even if the government proposed moving away from this system, the people would never say yes.'
Towards the end of October of that year, Switzerland’s largest bank, UBS, announced that 12 major banks had agreed a package of measures to combat money laundering, called the Wolfsburg guidelines after the UBS training centre in Switzerland where they had been agreed. The measures had been drawn up in conjunction with the anti-corruption pressure group, Transparency International.
Banks involved in the guidelines included Credit Suisse, Citigroup Barclays, the UK's HSBC, Deutsche Bank, Societe Generale of France, ABN Amro of the Netherlands and Banco Santander Central Hispano of Spain.
During 2001 the Money Laundering Control Authority (MLCA) was dogged by controversy, with its director, Niklaus Huber handing in his resignation after bemoaning a lack of support from the Swiss finance ministry.
His departure did not help to quash rumours, rife at the time, that the MLCA was under-staffed and under-funded. And the MLCA branch which is the first port of call for the banking industry when reporting suspicious transactions, the Money Laundering Reporting Office (MLRO), was not free from difficulties either. During the year, four employees resigned including senior official, Daniel Thelesklaf, who declared that he had not been awarded the necessary authority to deal effectively with financial criminal activities.
But Judith Voney, Mr Thelesklaf's replacement, told the local press that the office was indeed making headway. She said: 'We are investigating suspicious cases and the fact that we can forward them to the investigating authorities is a success in itself.'
James Nason of the Swiss Bankers Association informed Swissinfo that the MLRO had mastered its brief. 'The Office only sets the ball rolling,' he said, 'then they hand [cases] over to the cantonal authorities.'
The task of enforcing regulation in the non-banking sector also proved to be an uphill struggle for the new Money Laundering Control Authority.
According to the Swiss Money Laundering Reporting Office's annual report for 2001, of the 311 reports of suspicious transactions, only 75 came from the country's 7,000 non-bank financial intermediaries. Of those 75, very few resulted in prosecution.
Among the challenges faced by new MLCA chief Dina Balleyguier was that of deciding if any other sectors should be brought, doubtless unwillingly, under the umbrella of greater supervision and reporting. 'There are about 10...open-ended questions,' she explained in November 2001: 'One is whether commodities traders must have a license with us; another is whether asset traders with one-man offshore companies should be included. Another is whether someone doing asset management for their family should be included. It's very complicated.'
The Swiss government was also considering extending existing money laundering laws to cover art and jewellery trading companies. Following the introduction of enhanced legislation on traditional financial institutions and banks in Switzerland, laundering funds through non-traditional channels such as art dealers, jewellery traders, and money changers has become an increasing problem for the authorities.
Although Swiss-based asset managers were already overseen by the country's anti-money laundering unit, the goverment also announced that it was considering whether the sector should be put under the authority of the Swiss Federal Banking Commission, which oversees banks, brokers, and investment funds.
Ultimately, the inconsistency of the system across the cantons is unhelpful to implementation of the money-laundering control law, so in mid-2001 parliament decided to try a different tack, by removing the responsibility for prosecuting cases from the cantons and giving it instead to a new central authority which is now also responsible for notifying and investigating cases. The new authority is located in Bern and employs around 450 staff in total.
In addition to the forming of the new body, a new law centralised Switzerland's attempted to effectively tackle money laundering, organised crime and corruption. Under the new law, the Federal Police Office received a mandate to investigate cases with an international dimension. 'This will allow experts with specialist know-how to be more efficient in their investigations,' said Judith Voney.
Also in October, the Swiss Supreme Court demonstrated its willingness to co-operate internationally by approving the overriding of the country's banking secrecy laws in order to provide the US authorities with information regarding the financial activities of a Saudi computer expert with suspected terrorist links.
It had been alleged that the Idaho-resident expert (thought to be Sami Omar Al-Hussayen) used bank accounts in Switzerland and the United States to launder cash for the Islamic Assembly of North America. The Assembly has been accused of using the internet to incite anti-US violence and to recruit volunteers for acts of terrorism.
The Swiss Money Laundering Control Authority (MLCA) revealed in April, 2005, that money laundering investigations in the non-banking sector rose by 74% in 2004, an increase attributed to high compliance levels by financial intermediaries with the country's money laundering laws. Explaining that such professionals had become more willing to submit to inspections, the MLCA announced that it had investigated 452 financial institutions last year, up from 259 in 2003.
The report praised the increasing levels of cooperation from intermediaries who are "voluntarily moving from the shadows into the light", and revealed that many financial firms are now using self-regulatory bodies, or seeking MLCA authorisation. The Authority additionally explained that: "The MLCA's practice of taking more stringent action against illegally active financial intermediaries is also sending a clear signal. For the first time the finance ministry issued a fine of SFr40,000 based on a complaint by the MLCA."
In September, 2005, the Swiss Banking Association urged the Swiss authorities to be more selective in the granting of requests for judicial assistance from foreign powers which, it argued, are becoming increasingly politically motivated and unjustified.
The call by the Swiss bankers came after a spate of high-profile cases where account details were surrendered and monies frozen under legal mutual assistance procedures to which Switzerland is a signatory. Perhaps the most notable example of this was in the case of Russian oil firm Yukos, which had more than $1.6 billion frozen by Swiss banks in 2004.
"In the last few years, Switzerland has made great efforts to combat money laundering and funds linked to potentates, and it has proved too that the relevant laws can also be applied very strictly in the financial sector and that banking confidentiality protects neither drug traffickers nor terrorists," observed Urs Roth, chief executive of the Bankers' Association.
However, Roth went on to comment on a growing awareness among the legal community that judicial assistance treaties with Switzerland are being abused by foreign powers, and that the Swiss authorities are turning a blind eye to possible injustices in a foreign prosecution by simply deciding on the basis of procedural criteria.
"Quite recently, legal experts and practitioners have been increasingly critical of the judicial assistance practice of the Swiss authorities. There are suspicions that the judicial authorities in foreign countries may start a prosecution just as a pretext to get at financial information through judicial legal assistance or to put companies under economic pressure by having their accounts blocked. This clearly would be an abuse of judicial assistance. Judicial assistance cannot be allowed to serve domestic political goals by being misused to exert pressure on influential or politically unpopular persons or companies," Mr Roth noted.
He went on to add that: "Switzerland, it is true, bears no responsibility for foreign proceedings but it has a duty not to be simply a willing provider of assistance in cases that are clearly politically motivated. The protection of personal financial privacy is part of the bedrock of the Swiss legal psyche and is the right of every respectable bank customer in Switzerland, whatever his or her nationality. Switzerland must not be pushed by the judicial assistance process into becoming simply a purveyor of information."
"Suspect or at least doubtful requests should be refused or additional information sought, despite any fears that this might cause diplomatic friction."
Mr Roth concluded by arguing that: "It is absolutely necessary and right that Switzerland should comply with international standards and conventions in the field of judicial assistance. But even these noble aims and the desire of our authorities for greater international cooperation cannot justify the use of any means to achieve them. This applies particularly to the guaranteeing of those fundamental individual rights that continue to be very highly regarded in Switzerland."
Switzerland's International Agreements
Switzerland has passed its own mutual assistance law, and is also a party to a number of international mutual assistance treaties, some multilateral and some bilateral, including the following:
- The European Convention on Mutual Assistance in Criminal Matters, 1959;
- Treaty on Mutual Assistance in Criminal Matters with the USA, 1973;
- The Federal Act on International Mutual Assistance in Criminal Matters, 1983, as amended in 1997;
- The European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, 1993.
The Federal Act, particularly since the 1997 amendments, enables the transmission of documents and information abroad for the purposes of criminal proceedings. From the point of view of banking secrecy the following can be said about the situation at the time of writing:
- According to a recent decision of the Federal Supreme Court the transmission of such information requires the permission of the Swiss police authorities who must inform the customer about the order and give him a right to appeal;
- It is not permitted to forward information on persons who are not the subject matter of the investigation;
- Information will not be given if:
- The foreign authorities might use the information for purposes other than those for which it was requested;
- The offence alleged is not equally punishable in Switzerland;
- The requesting state does not offer Switzerland reciprocal treatment in these matters;
- The offence is related to tax, politics or military matters.
The Swiss authorities now grant administrative assistance as well as judicial assistance. Administrative assistance is regulator to regulator contact as opposed to judicial assistance which takes place between judicial authorities within the scope of civil or criminal legal proceedings.
The Swiss Federal Banking Commission which regulates banks, mutual funds, stock exchanges and security dealers, is the regulator charged with rendering administrative assistance. A number of conditions attach to the granting of administrative assistance by the Swiss Federal Banking Commission namely:
- The foreign authority must be recognized by the Commission as a supervisory authority authorized to request administrative assistance;
- The foreign authority may only use the information for the purposes of direct supervision of the institution concerned;
- The foreign authority must be bound by official or professional secrecy;
- The foreign body can only re-transmit the information under very restrictive circumstances. This is called the principle of specificity and means that information that was given for the purposes of a criminal offence such as drug dealing cannot be used in proceedings for tax evasion. In practice the foreign authority must confirm that it will not so transmit the information unless required to do so by a competent court against whose decision it will appeal. Since the grant of assistance by the commission is discretionary if specificity cannot or was not guaranteed future assistance may be denied though in practice the commission is always eager to be seeing to play its part;
- If the information requested gives the name of a client he must be notitfied and given time to contest the decision;
There is a right of appeal to the Federal Supreme Court.
Switzerland was one of a number of countries to sign the United Nations Convention Against Transnational Organised Crime in Palermo, Sicily, in December 2000, to demonstrate the country's commitment to stamping out money laundering. Jack Blum, co-author of the 1998 UN report, "Financial Havens, Banking Secrecy and Money Laundering," says the treaty is 'a breakthrough - a first real assault on the secrecy problem by the international community as a whole.'
The new treaty followed the OECD Fiscal Committee's recommendation in April of that year that its members ban anonymous accounts and require identification of customers. Under the treaty, countries must also require banks to keep accurate records of accounts and report suspicious transactions. In addition, accounts must be open to inspection by domestic law enforcement officials. Money laundering is criminalised, with sanctions against the people who do the laundering, counsel it, or acquire the ill-gotten gains.
However, the treaty did not go as far as the OECD's recommendation that countries re-examine existing practices - presumably with a view towards changing them - that prevent tax authorities having access to bank information for purposes of exchanging it in criminal tax prosecutions. In addition, the treaty didn't deal with correspondent accounts, These accounts pool funds from numerous bank branches and customers, which means they remain anonymous and can come in quite handy to move funds around discreetly. Millions of dollars stolen by Raul Salinas, the jailed brother of Mexico's ex-president, moved from Mexico to Switzerland through a Citibank correspondent account in New York. "Shell" companies will also still get away with concealing the names of true owners and instead list nominees, whose names are often supplied by banks and company registration firms.
In April 2002, the Federal Banking Commission announced that it wanted to introduce provisions to make information exchange with foreign securities regulators easier in order to prevent the misuse of the Swiss banking sector.
The banking watchdog made the announcement at a press conference in Bern, explaining to reporters that the recommendations had come about partly as the result of international pressure from the OECD, the EU, and the International Commission of Securities Commissions. The federal regulator revealed that it would be sending its proposals to Finance Minister Kaspar Villiger, the government, and parliament for consideration.
Director of the Banking Commission, Daniel Zuberbuhler, explained that although banking secrecy is an integral part of the country's financial sector, certain provisions can be overly restrictive when dealing with international securities regulators:
'Our legal provisions are too narrow and make it very complicated and recently as we've seen in the case of the Federal Supreme Court impossible even to grant information to the United States Securities and Exchanges Commission, which is clearly not what the legislator had intended.'
In March, 2003, the Swiss government announced that it had ratified a legal co-operation agreement with Italy. Although the accord had been agreed four years before, legislation introduced by the Berlusconi government giving Italy the right to dismiss the findings of investigations carried out in other countries, meant that the Swiss authorities were reluctant to ratify the agreement. However, according to a government statemen, a series of rulings in Italy's High Court had clarified the situation and allowed the two parties to resolve their differences over legal cooperation.
In parallel with the process of developing stronger international accords with individual foreign countries, Switzerland was also developing its links with the EU through a process known as 'the bilateral accords'.
Surrounded by the EU since Austria joined, and about to be even more thoroughly surrounded as the enlargement process proceeds, Switzerland had no choice but to develop commercial, transport and human links with its neighbours - and hence reached a series of 'bilateral accords' in 1999 with the EU, which dealt with some of the more urgent economic issues raised by the country's increasing integration with the single market.
Despite voting for the 'bilaterals', a high proportion of voters rejected EU membership in March 2001. In fact, much Swiss anger had been caused by EU Commissioner at the time, Chris Patten's hint that the EU's willingness to ratify the bilateral agreements was dependent on the Swiss making progress towards a resolution of the EU's information-exchange demands.
Senior economist at Credit Suisse, Fritz Stahel, explained that the Swiss viewed the bilaterals as an economic issue, whereas the issue of joining the EU clashes with Switzerland's traditional political identity. He said: 'The bilaterals are a useful step-by-step approach to economic integration. But the question of joining the EU is a political one which raises issues of protecting Switzerland’s direct democracy, neutrality and federal system, and Swiss voters aren’t ready to take this step yet.'
The general opinion of the banking industry was that the referendum was called too close to the bilateral accords. It was likely a case of too much contact with the EU and too soon, given Switzerland's phobia of large multilateral organisations.
Marcel Ospel, head of UBS, Switzerland's largest bank, suggested at the time that the bilateral agreements should be ratified with a 'wait and see' clause to see how they well they worked before Switzerland entered into more talks with the EU, saying: 'They should now be ratified [by the EU’s member states] and then these agreements need to be implemented. This process should not be disturbed. We have to be pragmatic.'
In fact, nearly a year after they were approved in a referendum, only five out of the fifteen EU member states had ratified the seven agreements, and it wasn't until early 2002 that the process was finally concluded.
Yet in a dramatic display of its lack of understanding of Swiss sensibilities, or you might say in a typical display of super-power arrogance, the EU responded to the vote against joining the EU by promptly indicating that it was willing to enter into negotiations with Switzerland concerning more bilateral agreements. And immediately after the vote, a letter was sent to the Swiss government by Sweden's Prime Minister, Göran Persson, urging Switzerland to discuss the Schengen Agreement which deals with the free movement of people in the EU and the Dublin Convention on asylum seekers and immigration.
Although he was still smarting from February's letter from the EU's foreign affairs commissioner at the time, Chris Patten, Switzerland's then President, Moritz Leuenberger, described the letter as a 'breakthrough' in setting up talks on on new bilateral agreements to complement the seven agreements already established by Switzerland and the EU.
Mr Leuenberger was no doubt hankering after a quiet continuance of diplomatic relationships, but the Swiss position on banking secrecy had been made more than plain on numerous occasions during the previous few months, and it was hard to see what there was to negotiate. Swiss Economics Minister, Pascal Couchepin, reiterated the country's stance during a visit to Singapore, saying that Swiss secrecy laws were - wait for it - "not negotiable" and that they did not hinder free trade.
The powerful Swiss Bankers Association, representing the country's key economic interest, clearly didn't want to get further into bed with the EU on the terms being proposed. The SBA commented before the vote on the EU:
'The SBA believes the bilateral treaties must first be ratified within the EU so that Switzerland and the EU can both gather experiences. Furthermore, in the run-up to the vote on the bilateral agreements it was pointed out that they did not represent a first step towards EU membership. Rather, they were meant to regulate economic relations between Switzerland and the EU. A "No" would therefore serve to maintain political credibility. Furthermore, it is up to the Federal Council to choose a suitable time to begin negotiations with the EU and it should not be forced to do so as would be the case should the initiative be accepted.'
The SBA concluded that any future entry of Switzerland into the EU would be an "eminently political decision" based on political considerations rather than having any correlation to bank customer confidentiality, which the SBA deemed to be "economically important". The Association also raised concerns about Switzerland's position should it abandon the Swiss franc in favour of the Euro, saying such a move would result in the loss of the country's low interest rates.
The OECD, The FATF And The EU
For the first time, in 1999 the OECD used its annual country report on Switzerland to warn the country that its banks were still being used by non-residents to evade taxes. The report said that Switzerland would come under increasing pressure to provide more information about depositors. In April, 1998, Switzerland and Luxembourg had been the only two European countries which refused to endorse the OECD's guidelines on harmful tax competition.
In April 2000, though, Switzerland did associate itself with an OECD report on improving access to bank information for tax purposes. Introducing the report at a press briefing in Berne, Gabriel Makhlouf, Chairman of the OECD's Committee on Fiscal Affairs, emphasised that the report had been approved by all 29 of the organisation's member states, unlike the Committee's previous report on unfair tax competition, from which Switzerland and Luxembourg had publicly disassociated themselves.
The report contained no prescriptive measures; it was more in the nature of a statement of intent by the member countries. Mr Makhlouf was also at pains to emphasize that the report did not call for any general opening-up of banking affairs: banking secrecy was respected as a necessary and even beneficial part of the financial system. The report was directed towards allowing national tax authorities to obtain information about specific individuals or companies whom they have reason to suppose are engaged in tax evasion or criminal activity.
The publication of the OECD and FATF blacklists in mid-2000 posed no problems for Switzerland, which did not figure on either list, although it was placed in the Financial Stability Forum's list of jurisdictions which might pose a threat to international stability, albeit in the first group of jurisdictions which 'have legal infrastructures and supervisory practices of the best quality.'
The Swiss Federal Banking Commission and the National Bank wrote to the members of the Financial Stability Forum to complain:
'Switzerland is an international financial centre with a significant amount of business with non-residents. The same applies to other countries like the USA and the UK. However, it is incorrect to intermingle the typical features of international financial centres, such as the importance of financial business with non-residents, with the characteristics of "Offshore Financial Centres" as established by the OFC working group of the FSF itself. In fact, none of these characteristics apply to Switzerland. In our country:
- Business and investment income is taxed at rates close to the average of OECD countries. The overall tax burden of 33.8% in Switzerland (total tax revenue as % of GDP) is above the OECD average and higher than in the United States (29.7%), Japan (28.8%) or Australia (29.8%);
- A withholding tax of 35% applies to all interest and dividend payments of Swiss issuers or debtors, irrespective of the domicile of the recipient. The incorporation regime follows international standards. In particular, there is no regulatory or supervisory distinction between onshore/offshore or resident/non-resident activities. In Switzerland, there are neither offshore-licences nor is there preferential treatment for offshore activities. No shell-branches or brass-plate banks are admitted.
- The supervisory regime for financial services is in line with international standards and G10 standards in particular.
- Regulation does not offer the possibility to create trusts.
- Financial institutions without physical presence in Switzerland can not be licensed by the Swiss Federal Banking Commission (SFBC) and, therefore, can not lawfully operate as such from Switzerland.
- Swiss supervisors have full access to all files and privacy protection for bank customer information is no obstacle to international mutual assistance in criminal matters such as money laundering, corruption, insider trading or tax fraud.
- The volume of non-resident business does not "substantially exceed" the volume of domestic business despite the fact that, in general, the share of international transactions tends to be higher in smaller countries than in larger economies. In terms of funds under management, the share of domestic and foreign securities holders is about equal.
- The financial sector accounts for 11% of GDP.'
Rather than the OECD or the FATF, the main threat to Switzerland's traditional banking secrecy after 2000 was in fact been the EU's ultimately successful attempt to install an EU-wide regime for information-sharing under the Savings Tax Directive.
During early 2000, the action focused on continued attempts to apply a compulsory tax to interest payments on savings deposits in all Member states, which would have been fine for Switzerland, but during the spring, it started to become clear that a number of states, including initially the UK and Luxembourg, were rootedly opposed to a tax, so that attention gradually swung over to an information-sharing regime - not nearly so interesting for Switzerland.
Meeting in Brussels in May of that year, the ECOFIN working group of senior officials from finance ministries failed in their task of trying to assemble a consensus on the savings tax directive. Luxembourg continued to ask for a 'coexistence' model in which it could apply a withholding tax to interest payments made to citizens of EU member states until such time as it chose to switch to exchange of information (possibly never, given its atachment to the principle of banking secrecy).
Austria (also with strict banking secrecy laws), Belgium (with its dentists) and Greece (why?) supported Luxembourg in wanting to be able to choose between applying the tax and giving out information on depositors and savers from other member states.
At the other extreme, the UK continued to demand a compulsory switch from an initial, optional situation to a uniform regime for exchange of information within a predetermined period of, say, ten years. Most other countries took up positions in between the two extremes, although agreeing that exchange of information was a better model than actual collection of the tax.
The UK was at that stage also nearly alone in its continued insistence that other countries such as Switzerland and the US should conform to the 'exchange of information' model on the same time-scale as the EU.
The dossier then passed to the ECOFIN ministers' council in June at Santa Maria da Feira in Portugal, which inched towards agreement, with only Austria still holding out against the plan for compulsory information sharing, but only for short term political reasons.
Austrian finance minister Karl-Heinz Grasser enunciated what became a foundation principle of the proposed information-sharing regime, saying that the proposed system was dependent on financial centres from Switzerland to the Caribbean accepting similar measures, which was highly questionable. "We are still convinced that the withholding tax as we have it in Austria, at 25 per cent, could be a model for the rest," said Mr Grasser.
Responding to the EU's information-sharing proposal in late June of that year, the Swiss government said it was willing to co-operate with the European Union on tax policy but ruled out any change in its banking secrecy laws.
After its regular weekly cabinet meeting, the Swiss government said that 'a system of information on an automatic basis isn't a feasible solution for Switzerland'.
The government statement said the cabinet would consider ways of making Switzerland 'as unattractive as possible' for people trying to escape legitimate EU taxation, and revealed that it was examining the feasibility of a tax on non-resident savings, although its existing system seemed preferable .
The Government also said that it would only join an information-sharing scheme if other big financial centers outside the EU were prepared to do so.
An Ecofin meeting in Luxembourg in October was inconclusive as regarded the EU's information-sharing regime. No decisions were actually taken at the Luxembourg meeting, and afterwards the Swiss Economy Minister Pascal Couchepin said that Switzerland was waiting for the European Union to agree the details of the draft savings tax before it would decide whether to apply equivalent measures to EU citizen's bank accounts in Switzerland.
Mr Couchepin reiterated that Switzerland could consider imposing a withholding tax on non-resident savings but ruled out once again exchanging information with EU tax authorities, stating that: 'We are ready to discuss with the European Union when it itself has decided a certain number of issues, for example, defining the capital which is to be taxed and how to apply (the measure) in EU territories. We could consider a form of advance tax payments - a withholding tax. Exchange of information does not appear to us to be the most appropriate instrument.'
The EU of course disagreed with Couchepin, since it had been unable to agree on a withholding tax during the Portuguese presidency and was discussing phasing in exchange of information as a way of combatting tax evasion.
One principle expected to be agreed at a later meeting was that any revenues collected from non-residents' bank accounts in one country be redistributed to their home country tax authorities. Couchepin declined to say whether Switzerland would be open to applying a similar system of revenue sharing but said 'you never close the door before a negotiation.'
The 'whiter-than-white' attitude of the Swiss authorities towards the EU's simplistic demands was to some extent disingenuous, since the reality is that there have traditionally been several Swiss corporate forms or structures, some involving Luxembourg, that permit very low-tax treatment of investment income. Some forms of income are not taxed at all in the hands of non-residents, such as interest on loans and royalties. And there is the 'fiscal deal' which allows rich people to live part-time in Switzerland on a very low-tax basis. It's true that your average Joe Punter is not going to be able to use Switzerland as a tax haven, but anyone with reasonably resourceful advisers will be able to work out a combination of structure and instrument to bypass the withholding tax quite handily.
This mattered to the EU because its cobbled-together deal at the Feira summit in June relied totally upon a common agreement to move to information exchange as a way of dealing with national peculiarities on withholding tax, and the EU was never likely to be able to believe that secret bank accounts don't conceal tax evasion, no matter how hard the Swiss protested.
The Swiss though presumably saw clearly that nothing much had been agreed at Feira. As so often happens with the EU, a messy 'agreement to agree' had been dressed up as a bold announcement. The 'Report' (which is all it was) said:
'The Presidency and the Commission shall enter into discussions . . . with the US and key third countries (Switzerland, Liechtenstein, Monaco, Andorra, San Marino) to promote the adoption of (information sharing)' and the UK is to do the same for the Channel Islands, the Isle of Man and the Caribbean dependent territories. Once all these countries have given reassurances that they will adopt information sharing: 'The Council will decide on the adoption and implementation of the Directive (the whole tax Directive) no later than 31 December 2002, and do so by unanimity'.
Among the fifteen (at the time) members of the EU, Denmark, France, Finland, Germany, Ireland, Italy, the Netherlands, Spain, Sweden and the UK had given it as 'their view' that exchange of information should be introduced within 5 years after the adoption of the Directive (ie by 2007), while Austria, Luxembourg, Belgium, Greece and Portugal were committed only to 'seeking agreement' to the Directive.
This 'agreement' was as full of holes as a Swiss cheese. The EU had squared circles before against all the odds, but this one was as round as they come. Attempts by the Democrat administration of the time to increase the authorities' ability to penetrate US banking secrecy had been defeated in the then Republican-controlled Congress amid a frenzy of public libertarian outrage.
At the beginning of 2001, Sweden took over chairmanship of the European Union's council of finance ministers (Ecofin), and Finance Minister, Bosse Ringholm, said that the Nordic nation planned to use its time at the helm of Ecofin to initiate talks with countries outside the 15-strong EU bloc over proposals aimed at closing savings tax loopholes. According to Mr Ringholm, he had already held talks with with his British and Dutch counterparts on how to approach countries in their former territories.
The Swedish Finance Minister said: 'I hope we can start discussions with Switzerland. The timetable is 24 months and... there will be a (progress) report from the Swedish presidency in June'. Mr Ringholm was well aware that it would be difficult to convince the Swiss of the merits of information-sharing, and did not expect an immediate agreement.
In January 2001, at a meeting of the Ecofin Council, Ringholm said that the EU had written to Switzerland asking for a start to be made on negotiations to develop the information-sharing regime.
The EU's move had caused major discontent amongst members of the Swiss Private Bankers Association, who had warned that a hasty relaxation of the country's renowned banking confidentiality laws could spell disaster for the banking system. Jacques Rossier, an associate with Darier Hentsch & Cie, told the Swiss media: 'It would be totally unreasonable for Switzerland to drop its bank secrecy as a goodwill gesture in the forthcoming negotiations with the EU, whilst other financial centers, especially the United States and Britain, continue their own self-serving tax policies.'
Two Own Goals By The EU
A point not perhaps considered very thoroughly by the Swedish or by other EU countries was however that there was due to be a Swiss referendum on EU membership in February 2001, as previously mentioned.
Just days before the referendum vote, the French Parliament's taskforce on European money-laundering issued a downright rude report on Swiss banking practices called: "Switzerland's Fight Against Money Laundering is a Facade."
The report called Switzerland a 'predator of world finance' and says the number of reported cases of suspected money-laundering was 'derisory'. At a press conference in Paris, co-author Vincent Peillon suggested that: "If Switzerland is so financially powerful, it is because this is a choice. It has made this choice and has systematically organized this choice."
The report said that Switzerland's 372 banks made only 303 reports of suspected money-laundering in the year 1999-2000, which authors Arnaud Montebourg and Vincent Peillon said appeared low, given Switzerland's importance as a financial center.
Although the report did not represent the view of the French government, Switzerland reacted badly. The Finance Ministry said that 198 (65%) of the 303 reported cases were sent to prosecutors, whereas in France only 129 (7%) of 1,655 cases were sent onwards, fewer than in Switzerland.
James Nason, a spokesman for the Swiss Bankers' Association, responded that the report's "sweeping allegations reflect considerable ignorance of Swiss banking. The fact is that Switzerland is a pioneer in the fight against money laundering. We cannot repeat often enough that Swiss bank customer confidentiality offers no protection whatsoever to criminals."
"Mr Montebourg and his team" said Mr Nason, "came to Switzerland with their eyes shut, with the sole purpose of confirming their own prejudices."
Then with just a week to go before the Swiss vote, the EU Commission in Brussels joined the French Parliament in its efforts to annoy the Swiss into voting No!
Chris Patten, then European Commissioner for External Affairs, wrote a strongly-worded letter urging the Swiss Government not to delay negotiations on customs fraud and the savings tax.
"Any subsequent delay would risk having serious negative effects on the prospects for the development of our relations on this question and in other areas," the letter said, perhaps referring to a package of seven bilateral agreements reached 18 months previously between Switzerland and the EU (see below).
Moritz Leuenberger, Switzerland's president at the time, deplored Patten's letter and warned against attempts to link the bilateral agreements to negotiations on customs fraud or withholding tax: "We are ready to negotiate tax fraud but to make a connection with bilateral agreements is inappropriate, especially when Switzerland wants to join the EU. It gives the wrong message to the Swiss people that this is the way Brussels works and that is not good."
It certainly seemed strange timing that the EU should upset the Swiss twice so pointedly just before a referendum; but the two events were not connected. The French parliamentarians concerned are well known loose cannons, and Patten's letter was probably put in front of him to sign by bureaucrats working along according to some inscrutable internal timetable regardless of the real world outside.
In an interview with German newspaper Frankfurter Allgemeine Zeitung, the Swiss President said: 'If the EU Commission attempts to offer Switzerland a deal, this would contradict all prospective gains from bilateral negotiations and the assertions of EU member states. The most dangerous aspect of such a suggestion would be less the lingering approval for the bilateral treaties than the damage to the EU's image as a reliable negotiating partner in our country. I understand that the Commission is employing all means available. In the end, the Commission must be cautious not to scar our intention of joining the EU.'
When asked how he would explain the almost constant criticism of Switzerland as a haven for tax evaders and fraudsters (which the government categorically denies, of course), Mr Leuenberger stated: 'Switzerland is neither a member of the EU nor the UN, but we are striving for membership in both organizations. The world and the EU watch us with eagle eyes. Many criticize - openly or subtly - that Switzerland plays a parasitic role. We do not want to play this role. Precisely in regard to fighting bribery - we do not want to be the nexus for international smuggling and its money and have signaled to the EU that we are ready to go just as far as the EU in creating rules to fight bribery.'
Moritz Leuenberger said that he was keen to find a solution that would keep the EU happy and at the same time allow Switzerland to shake off any association with tax evasion. He said that the government was not in the habit of pointing the finger at other jurisdictions to take the focus off itself, but simply wanted to find a solution that fitted in with the EU's ideal of an exchange of information on non-resident savings income so it can be taxed in the person's country of origin.
The damage had been done, however, and in March 76.7% of voters rejected the idea of beginning negotiations to join the EU.
Christoph Blocher, Switzerland's most powerful politician, said the outcome of the vote showed that "we do not want to join the EU in its current form" and called the EU an "intellectually misguided construction" which would have a "desolate end".
After September 11th The EU Gets Serious . . .
In the last part of 2001 Switzerland might have been forgiven for thinking to itself about the EU and the US that, with friends like these, who needs enemies?
In October, during his first public appearance since his appointment, the new US ambassador to Switzerland, Mercer Reynolds, turned the spotlight on the financial aspects of international terrorism, and expressed his desire to pursue the question of where the funds came from, and how they were hidden.
Speaking to the Swiss-American Chamber of Commerce, the new envoy, who officially took office just hours before the attacks on the World Trade Center and the Pentagon, praised the level of economic cooperation between Switzerland and America, but stressed the need for stronger political relations and cooperation.
Meanwhile, EU Finance Ministers reached agreement on a mandate to authorise the opening of a formal phase of savings taxation negotiations with six key non-EU countries on ways to tackle tax evasion.
The aim of the talks was to persuade America, Switzerland, Liechtenstein, San Marino, Monaco and Andorra to agree to adopt anti-tax evasion measures set out by the EU which had already been agreed to by member states whereby an information exchange system would be implemented regarding interest payments on non-residents' savings. This, they fondly believed, would allow for effective taxation of savings income.
The Feira European Council had set a deadline of the end of 2002 for agreement to be reached with key non-EU countries to adopt the information-sharing system, and if that was achieved then the system would go fully into effect by 2009.
Under the EU proposals, member states and the six non-EU countries would be expected to share information on interest they pay to individual savers resident in the other relevant countries. For a transitional period of seven years, Belgium, Luxembourg and Austria would be allowed to apply a withholding tax instead of providing information, at a rate of 15 per cent for the first three years and 20 per cent for the remainder of the period.
However, there was good news too, when in November former US Deputy Treasury Secretary at the time, Stuart Eizenstat, said that in terms of anti-money laundering initiatives and the rooting out of terrorist and criminal finance, Switzerland 'can almost point the finger at us [the United States]'.
The politician leapt to the offshore financial centre's defense when a Democrat senator questioned Switzerland's sincerity in the international fight against money laundering. The newly appointed head of the Swiss Money Laundering Control Authority, Dina Balleyguier, pointed out: 'Everyone remembers cases like Abacha, and it will be hard to convince the international community that our banks and financial intermediaries are really vigilant now.'
But it is worthy of note that of all the countries implicated in the Abacha scandal, only Switzerland 'named and shamed' 19 banks.
. . . Followed By Switzerland Itself
In November 2001, in a first-ever show of strength, the Swiss Federal Banking Commission ordered the removal of the manager of the Swiss subsidiary of Israeli Bank Leumi for dealings with the former Peruvian intelligence chief, Vladimiro Montesinos. The bank had been accused of failing to exercise due diligence when approached by Montesinos to open accounts. The Commission said the dismissal was ordered on August 28, but was not at first made public to allow the bank time to appeal.
In 2000, Switzerland had frozen $114 million in accounts linked to Montesinos, who had been arrested in June in Venezuela. He had been a key figure in propping up Alberto Fujimori’s 10-year regime, and was implicated on video for corruption and bribery of top officials.
The head of the Commission, Daniel Zuberbühler, said that the general manager was responsible for “severe deficiencies in the internal organisation of the bank… and himself approved the relationship [with Montesinos]”.
“He did not recognise Montesinos as a politically exposed person,” Zuberbühler added. “He merely relied on information that was given to him by another customer of the parent bank in Israel without checking any of the information."
The Commission said information about the criminality of Montesinos was in the public domain and could have been accessed by the Bank Leumi le-Israel manager with “reasonable efforts”.
Four other banks involved in the frozen $114m were investigated by the Commission, but were cleared of wrongdoing. They are Fibi Bank Switzerland, Banque CAI (Suisse), UBS and Bank Leu.
As well as being one of the few countries publicly to reprimand banks that break its rules, Switzerland also took the lead in discussing how banks should deal with the illicit assets of politically exposed persons. The Swiss foreign ministry hosted a two-day seminar in Lausanne in November to discuss ways in which frozen criminal funds could be repatriated. And a year before, the FBC had publicly reprimanded Credit Suisse, the country's second biggest bank, and more than a dozen others for handling $600m of funds from the former Nigerian dictator Sani Abacha.
The head of the Swiss Bankers Association (SBA), Urs Roth, said that the naming and shaming of banks that have been found to contravene money laundering rules was a very useful tool for all banking regulators.
Particularly where Switzerland is concerned, Roth argued that this could transform the country's reputation as a jurisdiction with bank secrecy laws that allow such finanical crimes to take place. 'It's quite an important deterrent for regulators, not only in Switzerland but worldwide, to name and shame banks which break the rules against corruption and other financial crimes, in order to make the banks aware that their reputation is at stake,' he said.
Roth urged the government to reveal more details of the procedures carried out in connection with the freezing of bank accounts suspected of being related to terrorism. He said that members of the media had complained over the limited amount of information provided by the authorities when they announced that they had frozen 24 accounts containing $12 million (SFr19.56 million).
He announced: 'I believe it would be useful for the government to disclose information more openly with regard to the procedures that they have set up in order to fight financial crime and to cooperate with the international community. On the other hand, I understand that the authorities cannot at this point disclose names and accounts because there's a danger that if this information is disclosed, it would jeopardise the investigation.'
Switzerland's money laundering control authority then announced that the country had signed an agreement with Monaco to promote the exchange of information in international cases of money laundering; similar agreements had already been signed with Belgium and Finland.
The Swiss government had recently reorganised the money laundering control authority, after a report from the House of Representatives had criticised the implementation of parts of the federal money-laundering act, in particular the authority’s organization. The authority's chief executive, Niklaus Huber, had resigned, alleging that he had not received either the political or financial support necessary to do his job.
All that had changed after September 11th, and new head Dina Balleyguier had seen the number of her staff increase three-fold to 21, with another four positions to be filled by summer, 2002. 'I asked specifically for extra staff and I got them,' she explained. 'And I have been promised the support I need, right up the the Finance Minister himself, if necessary.'
By February 2002, Dina Balleyguier was able to claim that new controls and safeguards to halt money laundering and terrorist financing in Switzerland were more effective than those in place in other countries, most notably the United Kingdom.
She told journalists that the Authority, of which she took control in October 2001, had increased the number and pace of mandatory checks on financial intermediaries such as accountants, financial advisers, and lawyers.
Ms Balleyguier admitted that the Anti-Money Laundering Control had tended in the past to focus solely on banks, but argued that in other countries, regulatory focus is still centred on the banking sector, rather than on all financial service providers.
'As proof, let me point out that several intermediaries - bankers as well as asset managers - tell me that with all the duties that Switzerland imposes on them, all the questions that they are obliged to ask their clients, many customers have decided to go elsewhere - London, not to mention the name.'
When pressed, the anti-money laundering chief said that London was 'often cited' as an alternative destination, but admitted that she had no concrete figures to substantiate the claim.
She also revealed that the Authority's power to conduct spot checks on the accounts of financial intermediaries and to withdraw their operating licences if they are found to be in breach of reporting requirements had meant that far fewer finance professionals were turning a blind eye to suspicious transactions.
'A SFr 200,000 (135,900 euros) fine has never hurt a financial intermediary who earns good money,' she observed, 'but a withdrawal of his operating licence, which stops him earning a living, does encourage him to check on his customers and their money.'
The MLCA gradually made progress: the number of financial institutions investigated by the MLCA in 2002 totalled 160, and in 2003 the number increased to 245. In June, 2004, Dina Balleyguier defended the body's record, arguing that it has succeeded in "weeding out the lawbreakers" very effectively over the past few years.
Disputing the suggestion that the banning of seven financial intermediaries in 2003 represented a low number, Ms Balleyguier explained that: "If you consider that we conduct hundreds of investigations to find out if an individual or a company has broken the law, I would say the fact that we have to sanction so few of them means we have already weeded out the lawbreakers. I don’t think you should use the number of official sanctions as an indicator of how much money laundering is going on Switzerland. When we ban an intermediary, in many cases it is because they are operating without the right authorisation. This doesn’t mean somebody is indulging in money laundering."
"We have discovered few cases of money laundering, and I am convinced this is because due diligence rules are being applied. Financial intermediaries are doing their homework and not accepting business from money launderers."
In December, 2002, the Swiss Bankers Association issued new guidelines designed to separate research and banking activities in the country's financial institutions. The SBA said:
'The Board of Directors of the Swiss Bankers Association (SBA) has passed binding guidelines concerning the independence of financial analysis with a view to further strengthening the good reputation of Switzerland as a banking and financial centre. In particular, the SBA wants to ensure that financial analysis in Switzerland continues to remain independent and credible.'
The new rules proposed by the Swiss Bankers Association stipulated the establishment of so-called 'Chinese Walls' between a financial institute's research department and its other business areas, prohibit analysts from investing in firms or financial instruments which they assess or play a part in assessing, and ensure that analysts are not recompensed according to the success of specific transactions, making the possibility of biased analysis less likely.
New anti-money laundering regulations spelling the end of the legendary numbered account in its traditional format came into force in Switzerland in June, 2004. Although the ordinance requiring, among other things, the ending of entirely anonymous money transfers abroad, was introduced in 2003, a one year transition period ended on June 30.
Somewhat paradoxically, German Finance Minister at the time, Hans Eichel chose the run-up to the full introduction of the tighter regulations to announce in an interview that: "I am very concerned that money transfers from Swiss banks to German financial institutions are being made without including the name of the sender."
However, the Swiss Bankers Association (SBA) hit back, asserting that: "It is internationally recognised that Switzerland has the toughest rules in the world to fight money laundering."
Switzerland Praised By The US . . .
In March, 2002, US Assistant Secretary of State for European Affairs, Elizabeth Jones, met with the Swiss State Secretary for Foreign Affairs, and subsequently praised Switzerland's financial intelligence system, naming it as one of the best in the world.
Ms Jones met with Urs von Daeniken in order to discuss the Swiss role in the war against terrorist funding and money laundering, and the country's decision to join the United Nations after 50 years as an observer.
Although the US envoy stressed that there are still many organisations throughout the world that the US and European Governments 'do not know enough about', she said that Switzerland's banking system had been highly effective in targeting the financial assets of terrorists, and praised the 'know your customer' and disclosure provisions in place in the alpine jurisdiction.
'We think it's quite a model for how other countries might conduct their banking procedures,' she said.
Ms Jones also announced that of the terrorist linked accounts frozen throughout the world, a quarter had been shut down in Switzerland, observing that: 'It is no accident that Switzerland has shut down as many accounts as it has. It is able to do so through the laws it has, and through the information it has demanded of its clients.'
. . . But Remains A Problem For The OECD
The OECD's second list of countries with 'harmful tax regimes' had just seven names on it, and the organisation was by then brandishing twenty eight commitment letters from jurisdictions it had originally targeted. The problem was that more than twenty of these letters contained the 'Isle of Man' clause, making action on information-sharing by the jurisdictions dependent on similar action by the OECD's members.
The Bahamas, for instance, one of the later jurisdictions to sign up, was quite explicit on the subject. The Bahamas Financial Services Board issued a statement reiterating that the jurisdiction would not be bound by terms more onerous than those imposed on other, rival jurisdictions, and would not act on tax practices and information exchange until all OECD members had been brought into line.
Illustrating this point, the BFSB pointed to the fact that: 'Four OECD members, including Switzerland and Luxembourg, abstained from the OECD's 2001 Progress Report on Harmful Tax Practices,' warning that: 'the OECD will need to ensure that its own membership backs its proposals before pressing others to adopt onerous obligations.'
Early in April, 2002, Swiss Economy Minister at the time, Pascal Couchepin reiterated his support for banking secrecy, saying that Switzerland's financial centre was feeling "the wind of competition", but that it would not lift the privacy laws which have helped it to become the home of a third of the world's offshore wealth.
"We feel that competitors would like to reduce the importance and the advantages of the Swiss financial centre which are based on the quality of the services on offer," Mr Couchepin said.
"Switzerland is not an offshore centre or a tax haven," he said, in response to worries that the Organisation for Economic Co-operation and Development would target Switzerland in its battle against tax evasion. "Switzerland is not a fiscal paradise. The overall tax burden is in effect higher in Switzerland than in the United States, and Switzerland also co-operates very efficiently in the fight against crime and tax fraud."
Mr Couchepin's Italian counterpart Giulio Tremonti said that Swiss banking secrecy would disappear by the end of 2002 (the deadline for non-EU countries to come into line with the EU's information exchange proposals), but Mr Couchepin demurred: "History will say who was right. I forecast that bank secrecy will not disappear." History was on his side.
Italy Didn't Wait For The Savings Tax Directive
Switzerland was historically popular as a savings destination with citizens of the high-tax countries which physically surround it, for obvious reasons, and Italy was one of seven EU countries which offered amnesties to undeclared currency holdings in the run-up to the launch of the euro.
Extending the deadline for its amnesty until June, 2001, the Central Bank's head of fiscal services, Carla Panzeri, said that large sums had been repatriated, including one individual payment of 50 million euros, although he added: "The fiscal shield is not an amnesty. It does not mean that we are ending any legal action currently underway." But returning money was charged a tax of just 2.5%.
The Bank thought that up to 500 billion euros was illegitimately sitting abroad in tax havens, much of it no doubt in Switzerland, and hoped that 10% of it might flow back under the scheme.
For its part, Switzerland stepped up its efforts to co-operate with the EU countries that surround it. Swiss Justice Minister Ruth Metzler, and the French Interior Minister Daniel Vaillant met in Geneva to sign a protocol for establishing a Centre for Police and Customs Cooperation (CPCC), which opened in the summer of 2002.
The Centre aimed to provide a rapid exchange of information between the customs and police forces of the two countries. Ms Metzler revealed that there was 'already good cooperation' between the two countries in this area. However, she added that: 'This centre will faciliate cooperation, because there are currently certain judicial and administrative obstacles.' The CCPD is staffed 24 hours a day, and has a staff of 20-40 from each country.
The End Of The Abacha Affair?
The aforementioned long-running affair of the funds looted from Nigeria by ex-dictator Sani Abacha took a step towards resolution in November, 2003, when Nigerian finance minister, Ngozi Okonjo Iweala, held talks in Bern with the Swiss justice minister Ruth Metzler, in the hope of speeding up the release of the money.
Following his death in 1998, the Swiss government had frozen more than SFr800 million ($615 million) of illicit funds at the request of the Nigerian authorities. Nigeria believed that Abacha probably siphoned off almost SFr4 billion altogether, which he invested in Britain, Luxembourg, Jersey and Liechtenstein, as well as Switzerland.
But Ruth Metzler had to explain that most of the SFr800 million was at the time the subject of a money laundering case in the canton of Geneva, and could not be released until the case was resolved. The Swiss justice ministry clearly hoped Geneva will act quickly, but Heinrich Koller, director of the justice ministry said no timetable could be put on the process.
“It’s really difficult to say [when the funds will become free],” said Koller. “All we can do is beg the Geneva authorities to bring the case to a final [and decisive conclusion].” But Koller denied that the Nigerian delegation was disappointed at leaving Bern empty handed. “No, I wouldn’t say that,” he said. “They said the discussions were fruitful.
"But we realize there was an expectation gap,” Koller continued. “The finance minister of Nigeria maybe came here hoping for a political solution to this case, and we had to explain that this was not possible because we have to follow our legal framework. But I think we were able to explain ourselves quite well, and there was a lot of understanding for what we are doing and how we are doing it.”
Nigeria was said to have agreed to a Swiss request that, once the money is returned, it will be invested in rebuilding infrastructure and social services.
Finally, in December of that year, the Geneva case was resolved when 78-year old British businessman Uri David was fined SF400,000 ($318,000) in a Geneva cantonal court for playing a part in the laundering of SFr800m by Nigerian president Sani Abacha. Israeli-born David also lost nearly $1 million in profits he made from playing a middle-man role in the laundering scheme. However, Mr. David escaped a jail sentence because he co-operated fully with the investigation and was judged to have shown "sincere contrition".
Mr. David was found guilty of aggravated professional money laundering, forgery and support of a criminal organisation. The bribes in which David was involved were paid by several international companies, including Ferrostaal of Germany and India's Tata, according to the Swiss sentencing order, and were eventually deposited in a UBS account.
In August, 2004, Switzerland agreed to hand back to the Nigerian government almost US$500 million of the Abacha money. The Federal Office of Justice (FOJ) said in a statement that the $493 million of frozen funds was "clearly of criminal origin" and should not be given to Abacha's family and associates.
A further $7 million deposited in Swiss accounts by Abacha during the 1990s was of "probable" criminal origin and would be placed in an escrow account for the time being, it added.
"President Olusegun Obasanjo and Finance Minister Ngozi Okonjo-Iweala assured the Swiss authorities last May, that once transferred to Nigeria, the Abacha funds are to be used for development projects in the healthcare and education sectors, as well as for infrastructure projects," the FOJ said. "The Swiss mission in Abuja will monitor the use of the Abacha funds in accordance with this assurance," it added.
The FOJ said the funds would be transferred to Nigeria after 30 days, unless Abacha's surviving relatives appealed against the ruling. Switzerland's Supreme Court would then make the final decision over who got the money. A lawyer acting for Abacha's family said they almost certainly would make a last ditch attempt to get their hands on the cash.
Switzerland's Federal Tribunal in February, 2005, ruled that some EUR352 million ($458 million) that had been frozen in 1999 should be returned to the Nigerian government.
The EU Would Not Be Denied
As abortive negotiations continued during 2002 with the EU over the savings tax issue, Swiss Economy Minister, Pascal Couchepin said that the European Union should welcome his country's offer to impose a withholding tax on the interest of non-resident savings accounts, despite the fact that the EU would prefer Switzerland to agree to information exchange proposals.
'For the first time in the history of civilisation, a country which is not under colonial rule of another country is offering to raise taxation freely for other countries,' he observed. Mr Couchepin argued that as the stated aim of the information sharing initiative is to reclaim unpaid tax, rather than to fish for financial information, a withholding tax should suffice. 'If we find a way of giving the EU countries the tax on these investments we will satisfy the legitimate interests of the EU,' he claimed.
In April 2002, with just eight months to go before the EU's self-imposed deadline for agreement on the terms of an information-sharing regime for the taxation of savings interest, politicians and the OECD started to crank up the pressure on the jurisdictions like Switzerland which were standing in the way.
The EU's Directive, laboriously agreed after years of wrangling, was made dependent on the adherence of non-members such as Switzerland and the US, and also assumed that member states' dependent territories such as Gibraltar and Jersey, in the UK's case, would apply the same rules.
While the British government started to berate Jersey publicly, in nearby Brussels, president of the European Commission at the time, Romano Prodi said outright that Switzerland should give up its banking secrecy to prevent money laundering, saying that current banking secrecy laws were "outdated" and protected "money stemming from unknown sources, which could include dirty funds".
Prodi added that Switzerland should abstain from joining the European Union (EU) if it considered banking secrecy as essential. "If Switzerland does not want to join the EU because of the importance it attributes to banking secrecy, then I think that country should not join the union," Prodi said.
"I consider banking secrecy as an instrument, and not a fundamental value such as Switzerland's neutrality," Prodi added. "While values cannot be changed, it is possible to get rid of an ill-fitting instrument."
Within days, negotiations between Switzerland and the EU in Brussels over banking secrecy and the second set of 'bilateral' agreements ground to a halt, as Swiss negotiators referred back to their government after failing to dent the EU's demands.
Rudolf Dietrich, the head of the Swiss delegation negotiating a second series of bilateral agreements with the European Union, said he was disappointed that Brussels appeared to want Switzerland simply to conform to all EU financial legislation. "They want us to adopt their standards just as if we were an EU member state," he said. "In my opinion, Switzerland should be treated like a partner, and as long as we are not a member state, we should be able to have our own special rules."
After six rounds of negotiations, the two sides had failed to agree on legislation governing tax evasion and money laundering. Apart from the savings taxation issue, the EU wanted Switzerland to close loopholes that allow Switzerland to be used as a destination for the proceeds from cigarette smuggling and other customs frauds. Under Swiss law, cigarette smuggling has traditionally been treated as a customs violation rather than a crime, which means that the Swiss authorities do not normally comply with requests for judicial assistance from other countries.
Dietrich, who as it happens is director general of the Swiss Federal Customs Office, said the main stumbling blocks to an agreement were over fiscal crime. "Switzerland did make concessions," he explained. "We offered to cooperate fully with fiscal crimes which merit a prison sentence, but the EU wants us to cooperate with offences which only merit a fine as well. And now there is a new EU decision on tax evasion, which they want to be treated in a similar manner to money laundering."
The issue of banking secrecy underlay all the difficulties. "Banking secrecy has a long tradition in Switzerland," Dietrich explained, "and it is based on democratic decisions made in our country."
"I think people should look at what Switzerland has done rather than what it hasn't done," says Dietrich, "We act to solve real problems," he continued. "But the EU is acting in a more theoretical way: that in theory we should be treated as an EU member state, and adopt all EU laws."
In Brussels a senior EU negotiator was uncompromising: "The EU is not prepared to give Switzerland any special treatment, and Switzerland knew this right from the beginning," he said. "The EU wants an agreement which complies with European standards."
Cracks then started to appear in the wall of Swiss opposition, with a report that a majority of the Swiss cabinet was in favour of making some concession to the European Union over banking secrecy, in order to restart the stalled negotiations.
Then Finance Minister Kaspar Villiger admitted that there had been some differences of opinion between himself and his cabinet colleagues on the issue. 'This is the kind of standstill where both sides have to consider how to proceed. This is not a catastrophe, but it is not exactly satisfactory,' he acknowledged.
The EU's position wasn't strengthened however when both the Austrian Finance Minister and Luxembourg's Economy Minister were adamant that they would not budge on the issue of banking secrecy unless non-EU countries such as Switzerland also made a commitment to exchange information on interest payments to the bank accounts of non-residents.
'We can only accept what will be done in Switzerland,' the Luxembourg Economy Minister, Henri Grethen insisted. 'Europe would not have made progress if there is capital flight to Switzerland.' However, his Austrian counterpart, Karl-Heinz Grasser sounded a more optimistic note, although he stressed that Austria was not going to back down on the issue, and reiterated that the European Union would have to address the concerns of the rogue member states: 'As all the member states want to have taxation of savings income I think a compromise should be possible,' he said.
In January, 2003, it seemed that Switzerland had finally negotiated an acceptable withholding tax regime with the EU, allowing Finance Ministers to reach a heavily-fudged compromise Savings Tax Directive package. After last-minute haggling by Italy and Belgium, it seemed by mid-2003 that the Directive would enter into force in 2005.
In September, the Swiss Bankers Association urged the government of Switzerland not to hurry through the banking reforms laid down in the European Savings Directive whilst the EU and member states continued to drag their feet on the issue. "It is quite out of the question that Switzerland should carry out the expensive groundwork and be ready by the allotted date, while nothing or very little has so far been done in other countries," Urs Roth, the SBA's chief executive told the association's annual general meeting. "We therefore extend our appeal to the official Swiss bodies, and implore them not to make Switzerland the model pupil, thereby placing it at a competitive disadvantage vis-a-vis other countries," he added.
Mr Roth noted that the specific agreement between Switzerland and the EU regarding the directive and the implementation of a witholding tax by 2005 had not yet been published or officially signed. "It would appear that the Eurocrats in Brussels considered the matter closed and packed their suitcases for the long summer break," said Roth. "As a result, the [government] cannot present the proposed agreement to the Swiss parliament."
Bilaterals II And The Savings Tax Directive
Although the EU had declared the Savings Tax Directive a done deal earlier in 2003, the reality at the end of the year regarding negotiations between Brussels and Switzerland was that while the EU was trying to make passage of 'Bilaterals II' dependent on a dilution of Swiss banking secrecy, the Swiss were refusing even to begin the process of legislating for the Savings Tax Directive while 'Bilaterals II' remained unsigned.
The ever-helpful eurosceptic Swiss People's Party (SVP) put forward a proposal in December to incorporate the concept of banking secrecy into the country's constitution, which was approved by majority in the Swiss House of Representatives. Similar proposals put forward by four Swiss cantons were accepted by the Senate. Separate parliamentary commissions would next examine the different proposals, but any final decision on whether to enshrine banking secrecy in the constitution would require a national referendum.
The SVP, which became the largest party in the House after winning 27% of the votes in recent elections, had timed its move so as to cause the greatest possible embarrassment to the government as it attempted 'Bilaterals II' with the EU.
Experts in Switzerland said that the votes didn't have much practical significance, although they could annoy Brussels and slow down the bilaterals process. The Swiss Bankers Association welcomed the move.
By February, 2004, the EU was ratcheting up the pressure, with public statements by EU ministers urging Switzerland to change its position. But Swiss Finance Minister, Hans-Rudolf Merz was sticking to his guns on the issue of separate negotiations regarding security cooperation and tax fraud (part of 'Bilaterals II'). Switzerland had insisted from an early stage that they want an opt out in the area of judicial cooperation, and was continuing to hold its ground on the issue of the Savings Tax Directive, insisting that compromise was reached on the judicial issue before it signs up to the measure.
“For the moment, it would be absolutely wrong to sign the agreement on savings tax,” stated Merz. However, EU ministers appeared equally adamant that they would not accept the linking together of the two issues as a condition of Swiss participation. “It’s a clear, common position,” remarked Germany's finance minister, Hans Eichel. “We won’t accept linkage between questions that aren’t related.”
In March of that year, the Swiss government was able to take heart from the Swiss Bankers Association Survey 2004, which showed that an overwhelming majority of the population remained in favour of retaining banking confidentiality. 88% of respondents believed that protecting the confidentiality of financial data vis-a-vis third parties was correct. Specifically asked about bank client confidentiality, 76% said they were in favour of maintaining it. In addition, 68% (2003: 59%) believed it probable that bank client confidentiality would still exist in its present form in five years’ time, leading the survey to conclude that bank client confidentiality enjoyed strong support amongst the Swiss.
Furthermore, 80% agreed that the Swiss financial centre enjoyed a good professional reputation abroad (up 3% from 2003), and 80% – the same figure as in the previous year – considered the banks to be important employers in Switzerland. Meanwhile, 75% agreed that banks made an important contribution to Switzerland’s tax revenues.
Although April, 2004, saw a move to resolve a separate dispute between the EU and Switzerland over the taxation of re-exports - in Switzerland's favour - hostilities over the Savings Tax continued, with then Finance Minister Hans-Rudolf Merz announcing: "Surrendering banking customers' secrecy is out of the question to us," following a meeting with his German counterpart, Hans Eichel. Merz added that the Swiss banking system already contained measures which help to prevent fraud.
Finally in May a compromise was reached over the 'Bilaterals II' requirement for information exchange and judicial cooperation over crime, with Switzerland agreeing to provide legal assistance under the terms of the Schengen agreement in cases relating to indirect taxes such as customs, VAT, and alcohol and tobacco levies, but - crucially - being exempted from providing such assistance in cases of direct taxation.
This was enough for the Swiss to be able to accept the Savings Tax Directive, but Brussels had to put off the implementation date of the Directive until July, 2005, to allow time for the Swiss parliamentary process to grind out the necessary legislation. Switzerland's chief international tax negotiator, Robert Waldburger had warned that: "From the Swiss point of view, it's impossible that the January 1 2005 date will work. If everything goes really well, parliamentary approval in Switzerland will take 12 to 14 months."
The government began its legislative process in the autumn, but the ever-conservative Swiss Banker's Association announced in September that it would push for new domestic legislation to back up the Savings Tax Directive agreement. The SBA said that the new legislation would act as “additional insurance” against any unforeseen circumstances arising as a result of the agreement with the EU.
"Our aim is merely to formulate in more precise terms those provisions of Swiss law that will help exclude the ambiguities of the future EU law," Urs Roth, chief executive of the SBA explained. The Association is also urging the Swiss government to keep tabs on how negotiations between the EU and other financial centres are proceeding, if at all, regarding the implementation of similar agreements. According to Roth, the agreement with the EU will cost the Swiss banking sector a "high three-digit million" figure.
At the end of October, 2004, The European Commission announced that Switzerland had signed nine bilateral agreements with the EU at a ceremony in Luxembourg attended by Swiss President Joseph Deiss and Foreign Minister Micheline Calmy-Rey. Banking secrecy remained, but Switzerland would give more thorough international administrative co-operation in future in cases of tax fraud.
The agreements concerned: the taxation of savings; co-operation in the fight against fraud; the association of Switzerland to the Schengen acquis; participation of Switzerland in the “Dublin” and “Eurodac” regulations; trade in processed agricultural products; Swiss participation in the European Environment Agency and European Environment Information & Observation Network (EIONET); statistical co-operation; Swiss participation in the Media plus and Media training programs; and the avoidance of double taxation for pensioners of the Community institutions.
In November, 2004, the Swiss government indicated that a referendum on the Savings Tax Agreement was unlikely, and that the legislative process needed to approve the adoption of the Directive and the Bilaterals II agreements was proceeding smoothly.
In comments made after a regular meeting of finance ministers from countries in the European Free Trade Area, Dutch Finance Minister Gerrit Zalm revealed: “The Swiss minister made us happy by informing us that everything was well underway with the savings (tax) agreement.”
The possibility that the Swiss government might have been obliged to put the treaties to a referendum had cast doubt over the implementation of the directive. However, Swiss Finance Minister Hans-Rudolf Merz, who was also present at the EFTA meeting, assured ministers that this would not be the case. “He did not expect a referendum in Switzerland on this issue, so that was a very comfortable communication from his part," Zalm revealed.
In December, 2004, the Swiss parliament approved a plan to distribute some of the proceeds from the EU Savings Tax to the cantons, in a move intended to clear the path towards a final ratification of the Swiss-EU agreement on the sharing of the tax on bank interest between national tax authorities. The vote in the Swiss lower house reversed an initial proposal to direct all the proceeds from the withholding tax on bank interest to the federal government, and backed a measure supported by the upper house.
Both chambers of parliament then approved the ‘Bilaterals II’ treaty, which encompassed nine separate agreements with the EU including the savings tax directive, the Schengen agreement on freedom of movement and cross border cooperation on crime, among other measures. The agreement meant that three quarters of the revenues raised as a result of the savings tax directive would flow back to EU countries, with the remaining quarter distributed to the Swiss state and Swiss cantons.
In March, 2005, SBA Chief Executive Urs Roth complained that the government had rushed into adopting new FATF money-laundering rules without adequate consideration. "Even a brief perusal shows that things have been rushing along very quickly and without adequately considering the economic impact," he said. In particular, Roth criticized the FATF's plan to define insider trading or price manipulation as 'predicate offenses' to money-laundering. 'In general', he said, 'we need to be careful that we don’t end up with a situation where every offence is classified as a predicate offence to money laundering just to satisfy the political agenda of certain states. Originally, the plan was to include only those offences that are attributable to organised crime. This rarely applies to stock market offences due to the transparent nature of stock market trading.'
Roth said that Switzerland was ready for the introduction of the EU's Savings Tax Directive on 1st July, although he said that many of the member states were not by any means equally prepared. Roth explained what had been involved on Switzerland's part: '(The Directive) applies, as we know, only to interest and not to other forms of capital income. Furthermore, it only affects private individuals, but not companies and legal entities. In addition, the savings tax applies only to those persons liable for tax in an EU country, and even then only if the interest income in question is paid or credited across borders.'
'The implementation costs for Swiss banks are estimated to be some CHF 300 million,' said Roth. He added that in terms of revenue to be generated by the tax, because of the directive's limited scope, low interest rates and the initial withholding tax rate of 15%, no "fiscal miracle" should be expected.
In 2006 it rapidly became clear that investors had easily outwitted European tax collectors by placing their assets out of reach of the EU Savings Tax Directive, and in July, Switzerland revealed withholding tax revenues that were far below expectations.
In the first six months of the operation of the legislation, which came into effect on July 1, 2005, Swiss institutions withheld and passed on to the tax authority about EUR100 million (US$128 million) from the savings of individuals resident in EU member states.
On the surface it seems implausible that Switzerland, the world's largest private banking centre with more than 500 major banking institutions and home to an estimated 35% of the world's private wealth, could collect such a relatively small amount; but given the relative ease with which the directive can be circumvented, the figures were not really surprising.
Other major banking centres also reported lowly withholding tax revenues in the months following the implementation of the Directive: Luxembourg EUR48 million, Jersey EUR13 million, Belgium EUR9.7 million, Guernsey EUR4.5 million and Liechtenstein EUR2.5 million.
In the case of Switzerland, the largest portion of the withholding tax revenues were remitted to the Italian and German tax authorities.
According to a Financial Times report published at the time, European Commissioner for Taxation, Laszlo Kovacs, ordered a review of the operation of the directive with a view to clearer definition of investment funds and clarifying the treatment of interest payments made to trusts.
“The Commission is aware of causes for concern relating to the interpretation of the directive," a spokeswoman for the Tax Commissioner was quoted as stating by the FT.
However, Dieter Leutwyler of Switzerland's federal finance ministry reportedly pointed out that consultations with the EU over "substantive changes" to the directive could only happen after July 2011 or when both sides agreed to such talks.
Other Developments In 2005
In June, 2005, after fierce resistance from the Swiss against the country's planned inclusion on the OECD's 'Harmful Tax' listing due out in July, the OECD backed off and Switzerland promised to improve its tax information-sharing rules.
International offshore financial centres which were included on the OECD's original list of countries with 'Harmful Tax Practices' frequently complained that the OECD was simply pursuing a campaign to defend the tax bases of its own members, and that many of those members had tax practices which were just as harmful as the offshore ones.
Indeed, the OECD threatened to blacklist Switzerland because of its benign holding company regime that has encouraged numbers of major international companies to base themselves in one of the cantons which operate the best regimes.
Finance Ministry spokesman Daniel Eckmann said that the forum was unfairly targeting Switzerland. “We have big difficulties understanding how after five years of discussions about what should be considered a harmful tax practice, the forum comes up with a report that considers Switzerland the only country in the whole OECD with harmful aspects in its tax legislation,” Eckmann said.
The Swiss government apparently promised to review the arrangements it had with other OECD countries to exchange information on the taxation of international companies.
Wilhelm Jaggi, Switzerland's ambassador to the OECD said: "We agreed to negotiate in the framework of our bilateral tax treaties [for new] provisions for an effective administrative exchange of information for holding companies." He added: "It's certainly a good result that we could get rid of this irritant between Switzerland and the majority of other OECD members."
OECD spokesman Nicholas Bray said: "This is not a victory for the Swiss. This is a work in progress. It is not Switzerland bashing the OECD, or the OECD bashing Switzerland."
In August, 2005, the Swiss Bankers Association said in a Position Paper that it rejected the Swiss Federal Banking Commission (SFBC)’s draft Circular on Internal Surveillance and Control. While the SBA stated that it supported in principle the goals of the SFBC, it nevertheless believed that no new state regulation is needed because many of the Circular’s planned provisions were already in force in many banks as a result of the SBA’s own 'Directives on Internal Control' issued in June 2002.
These self-regulatory directives were later accepted by the SFBC as part of the body of bank regulation that banks are legally obliged to conform with and they had proven their worth. The SBA suggested that any changes to banking regulation should be made by revising the SBA’s own self-regulatory directives, and that banks should be allowed to formulate bespoke internal regulation rather than adopting a new 'one size fits all' regulatory approach.
The SBA also rejected on principle the new "whistle blowing" clause proposed in the Banking Commission's Circular, arguing that adequate measures were already in place to manage risk. "In its proposed form the whistle blowing clause would radically change the internal culture of banks as well as the atmosphere in the workplace," stated the SBA.
"The SBA finds the SFBC’s argument that whistle blowing could be an 'early warning' system to be rather wobbly as there are today other and more effective methods with which to control and manage risk," it added.
Other points the SBA criticised were planned regulations regarding the composition and independence of boards of directors, which, according to the SBA, are already well covered by the Swiss Code of Obligations. The SBA also thought the Circular to be too narrow in its scope which would not survive a cost-benefit analysis if tested on individual cases.
Reports in October, 2005, suggested that the Swiss authorities may have agreed to help the Australian Taxation Office in obtaining client records of 500 Australian nationals who had done business with tax advisory firm Strachans, based in Geneva and Jersey.
"A priori it is not a simple case of tax evasion that would be rejected out of hand," said Rudolf Wyss, head of the international legal assistance division of the Swiss Justice Department. In Switzerland, as in some other countries, a court order is needed even after the Justice Department has agreed to give cooperation.
The Justice Department said that it had indeed seen credible evidence of tax fraud and had appointed investigating judge Daniel Dumartheray, who had a hawkish record on foreign assistance cases. Judge Dumartheray said the Australian case showed some evidence of serious fraud. "This exposes the limit between tax evasion and fraud," he said. "But we could co-operate (with the handing over of documents) if there are ingenious manoeuvres and fictitious structures and artificial operations."
The ATO's Carmody said in July 2005 that: "For some time we've been trying to crack open some of these offshore schemes and the information we obtained then, and I should say since, which is a lot that's come forward since, is giving me more and more confidence that we have made significant inroads there."
"A rough estimate at the moment of that territory, it needs to be refined down further, is probably around 500 people," he stated, adding that the total amount of money involved was somewhere in the region of A$300 million (US$230 million).
The problem is, of course, that for tax authorities and governments any attempt to minimize tax bills is morally reprehensible, whether it is actually criminal or not. Usually it isn't, and Strachans said at the time that it would vigorously fight the ATO's allegations. A director and partner of Strachans, Philip de Figueiredo, said that if the Geneva courts find against the firm and for Australia, the company planned to appeal in the Supreme Court in Lausanne.
Developments In 2006-07
In January, 2006, Switzerland's highest court rejected a request for judicial assistance from the Russian authorities, relating to the handover of documents in the ongoing investigation into the embattled oil company Yukos.
The Federal Tribunal partially upheld an appeal by several companies seeking to block the passing of documents to Russia detailing bank account information and financial dealings between Yukos and a number of Swiss firms. In doing so, the judges rejected the decision made by the Swiss federal attorney last July to hand over 80 files, out of the 1,300 it has in its possession, to the Russian authorities.
"Switzerland would not agree to collaborate with what looks more like a never-ending search for evidence," the court ruled as it temporarily blocked what is thought to be the twentieth request for information from Moscow.
The judges also noted the Council of Europe's reservations over the trials of former Yukos chief executive Mikhail Khodorkovsky and his associate, Planton Lebedev, which, it is widely believed, were politically motivated and carried out in an atmosphere of intimidation.
The fact that the two main protagonists in the Yukos affair have already been tried, convicted and imprisoned was also a factor in the judges' decision not to release the documents.
However, the court ordered the Swiss Federal Prosecutor's Office to seek further clarification from the Russian authorities relating to the case, and requested translated documents from the Russians so that it can continue to examine the Yukos affair.
In 2004, Switzerland froze almost US$5 billion in assets linked to Yukos at the request of Russia, as the company and Khodorkovsky fought multiple charges ranging from tax evasion to money laundering. Yukos was eventually made to pay back taxes totalling some US$28 billion, while Khodorkovsky was given an eight year prison sentence after a highly publicised trial last year.
Although a large chunk of the Swiss assets has been released, it is thought that about US$48 million remained frozen in Swiss accounts.
According to a comprehensive global money laundering report by the US State Department issued in March, 2006: 'Authorities suspect that Switzerland is vulnerable at the layering and integration stages of the money laundering process. Switzerland’s central geographic location, relative political, social, and monetary stability, wide range and sophistication of available financial services, and long tradition of bank secrecy are all factors that make Switzerland a major international financial center. These same factors also make Switzerland attractive to potential money launderers.
'While generally positive, Switzerland’s recent FATF mutual evaluation report nonetheless identified weaknesses in the Swiss anti-money laundering and counterterrorist financing regime, including problems with correspondent banking, identification of beneficial owners, and the cross-border transportation of currency. The Government of Switzerland should continue to improve on its regime while simultaneously working toward full implementation of existing laws and regulations. It should ratify the UN Convention against Transnational Organized Crime and the UN Convention against Corruption.'
In 2006, the Swiss parliament announced that it was considering plans to create a super-regulator, to be known as the Federal Financial Market Supervisory Authority (Finma), which would combine the existing Federal Banking Commission, the Federal Office of Private Insurance and the Money Laundering Control Authority.
Transparency International had said that there were shortcomings in the country's money laundering laws, pointing out that the number of money laundering cases reported to the Money Laundering Control Authority was low compared with other major financial centres.
Although the MLCA had carried out a number of investigations and has imposed fines in some cases, it had not at that time applied the ultimate sanction of removing a licence.
In April, 2007, the Swiss Money Laundering Reporting Office Switzerland (MROS) reported that it had received fewer reports on suspicious transactions in 2006 than in the previous year, but that reports from the banking sector on suspicious financial transactions had reached an all-time high last year.
With 619 reports on suspicious financial transactions submitted to MROS in 2006, the number of reports received decreased 15.1%, from 729 in the previous year, according to the 9th MROS Annual Report 2006, published on Tuesday. As in the past few years, this decrease was due to a steady decline in the number of reports from the payment transaction services sector and in particular from the money transmitters, culminating in a substantial drop of 52.9% in 2006.
The payment transaction services sector still accounted for a remarkably high share of 26.5% of the total reports in 2006. However, the quality of reports improved, a fact that translated into a higher percentage of reports forwarded to the prosecuting authorities for further handling (2006: 57%; 2005: 45%). Another result of the better-quality reports is that in 2006 a mere 15% of the cases forwarded were dismissed, as opposed to 34% in the year before.
While the number of reports from the money transfer sector dropped in 2006, the number of reports from the banking sector rose by a significant 22.5% to 359. This represented an all-time high in the number of reports submitted by the banking sector since the duty to report suspicious financial transactions became effective in 1998. Accounting for 58% of the total of reports in 2006, this sector filed the bulk of reports again for the first time in five years. This increase is largely due to Article 305 of the Swiss Criminal Code, providing for the right to report suspicious financial transactions without violating the business-client privilege. The compliance services and their efficient monitoring system that take a risk-oriented approach also account for this increase.
The aggregate assets involved in suspicious-transaction reports rose 19.7% from about CHF681 million (US$562 million) in 2005 to some CHF815 million in 2006. This increase, too, correlates to the increase in reports from the banking sector.
About 2% of the aggregate assets or 1.3% of the sum total of reports MROS received in 2006 involved reports filed in relation to suspected terrorism financing. The number of such reports declined from 20 in 2005 to 9 in 2006. Most of the reports were triggered by lists made available publicly with the names of terrorist suspects.
On the whole, suspicious-transaction reports received in 2006 were of considerably good quality, which translated into respectable 82% of reports passed on to the prosecution authorities for further investigation.
In June, 2007, the Swiss parliament approved the aforementioned plans for a new 'super regulator' which will bring the activities of three current regulatory bodies under one roof.
Finma, it was confirmed, would incorporate the roles currently played by the the Federal Banking Commission, the Federal Office of Private Insurance and the Money Laundering Control Authority (MLCA) and is due to begin operating from 2009 - one year later than planned.
The Swiss government designed the new regulator in response to criticism from international bodies of the shortcomings in the country's money laundering laws, and particularly the low number of money laundering reports being received by the MLCA compared with other major financial centres.
In its most recent assessment of the Swiss economy, the International Monetary Fund (IMF) praised the Swiss government on its commitment to improving the supervision of the banking and financial sector, but raised concerns over the degree of autonomy that Finma will have from the government.
"The crucial importance of the Swiss financial sector to both the domestic economy and the global financial system — as well as its large size and increasing complexity — heighten the need for continued vigilance and for the highest standards of financial supervision," the report said. It went on to add that: "The Financial Market Supervisory Authority (FINMA), should be assured both financial and regulatory independence."
Speaking to Swissinfo, finance ministry spokesman Dieter Leutwyler rejected concerns over the independence of the new regulator.
"We do not share the concerns of the IMF in the field of independence, sanctions and costs of regulation," he said. "The independence of Finma is an important prerequisite for it to be able to fulfil its supervisory duties."
Swiss banking industry officials have expressed worries over the separation of powers within the new unitary authority, and have also questioned the overlap of powers and whether this will reduce the regulator's efficiency.
"There is a saying that if it ain't broke then don't fix it and I strongly believe in that. Regulation works very well in Switzerland so why change it?" Professor Hans Geiger of Zurich University's Swiss Banking Institute told swissinfo.
He added that the creation of Finma was, nevertheless, "absolutely necessary."
In June, 2007, a Geneva court blocked the release of some of CHF7.6 million ($6.2 million) held in a Swiss bank accounts by former Haitian dictator Jean-Claude "Baby Doc" Duvalier.
The order came just days before a previous freeze by the Swiss authorities was due to expire, and which would have allowed members of Duvalier's family to begin withdrawing funds from the accounts from June 3.
The request for the order was lodged on behalf of two Haitian individuals, a priest and a taxi driver, who were persecuted under the Duvalier regime. The plaintiffs were trying to have a 1988 US court ruling, which ordered the Duvaliers to pay them US$1.75 million in damages, recognised in Switzerland.
Duvalier and his followers have been accused by Haiti's new government of siphoning off state funds during their reign, but the money in question has been caught up in legal wrangling ever since the Duvalier regime was ousted in 1986.
Then in August, 2007, it emerged that Duvalier's assets held in Swiss bank accounts would remain frozen for an additional year.
In an announcement after a meeting of the seven-member Swiss cabinet in Bern, government spokesman Oswald Sigg confirmed that the federal government "has decided to extend the freeze by 12 months."
According to the Associated Press, Swiss Foreign Ministry spokesman Jean-Philippe Jeannerat said that the extension followed assurances by Haiti that proceedings against Duvalier would be launched "in the near future", which is a necessary step for Switzerland to confiscate the funds.
Marc Henzelin, lawyer for the plaintiffs, said that most of the money is held in one account with the Geneva branch of UBS, in the name of the "Brouilly Foundation" in Liechtenstein. The Brouilly Foundation is owned by a Panama-based company, which in turn is owned by members of the Duvalier family.
In January, 2007, it was announced that Switzerland was to become a member of the Financial Stability Forum (FSF), a body which brings together high-ranking representatives of national authorities and international financial institutions.
Membership of the FSF afforded Switzerland the opportunity to participate actively in the international dialogue on early identification of questions relevant to stability and financial market regulation and oversight. In particular, Switzerland will greatly benefit from taking part in the discussions held by the authorities of the major financial centres on relevant questions regarding international financial systems.
As a new member of the Financial Stability Forum (FSF), Switzerland was represented for the first time at the meeting of 29 March 2007. Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank, was the Swiss representative.
The FSF was established by the Ministers of Finance and central bank governors of the G7 countries in 1999, in the aftermath of the Asian crisis. It seeks to enhance cooperation and to promote coordination in overseeing the international financial system. Moreover, it serves to reduce systemic risk.
In addition to ministries of finance, central banks and regulatory bodies of the G7 countries, central bank governors of Australia, Hong Kong, the Netherlands, Singapore and now also Switzerland hold seats in the organisation. International financial institutions, international regulatory and supervisory authorities and the European Central Bank are also represented in the FSF.
In April 2007, the Swiss government's Federal Department of Finance released new figures showing the amount of tax withheld from the savings of individuals resident in EU member states under the much-maligned EU Savings Tax Directive regime.
The gross revenue generated from the imposition of Switzerland’s system of tax retention on interest payments in Switzerland, on earnings liable to tax in the EU for the 2006 tax year, amounted to CHF536.7 million (EUR327 million). For the second half of 2005 the amount collected was CHF159.4 million.
Overall in 2006, approximately 55,000 declarations were received (35,376 declarations were received for the second half of 2005).
On 31 March, the payment deadline expired for EU tax retained from individuals resident in EU member states on interest payments made by Swiss paying agents during the course of 2006.
The agreement on the taxation of savings income with the European Community in force since 1 July 2005 made provision for 75% of the proceeds to be passed on to the member states concerned. 25% goes to the Confederation, of which 10% is passed on to the cantons. This meant that CHF402.54 million was passed on to EU member states, while Switzerland's share amounted to CHF134.18 million.
The figures show that by far the largest sums were remitted to Germany (CHF103.4 million) and Italy (CHF103 million).
In May, 2007, the Dubai Financial Services Authority (DFSA) entered into Memoranda of Understanding with the national banking and securities regulators in Switzerland and Luxembourg.
The MoU signings coincided with a visit to Berne and Luxembourg by David Knott, Chief Executive of the DFSA. On April 30 in Berne, Knott met with Daniel Zuberbuhler, Director of the Swiss Federal Banking Commission (the SFBC). Knott then met with Jean-Nicolas Schaus, Directeur General of Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) on May 2.
Knott observed that: “Switzerland and Luxembourg have long been regarded as among Europe’s leading international financial centres and the SFBC and CSSF have played an important role as the regulators of these centres."
“As such, each of these memoranda of understanding is a most significant initiative, recognising the importance of these arrangements for cooperation and information sharing between the two regulators,” he added.
“This week’s bilateral agreements reflect each agency’s responsibilities, in the area of banking and securities,” Knott went on to state, concluding:
“There are already a number of significant Swiss financial institutions operating from the DIFC and there is a level of interest from financial entities in Luxembourg. In addition, there is a possibility of the development of additional business between traded markets in the DIFC and Luxembourg. These two bilateral relationships will assume increasing importance as each regulator relies on the quality of regulatory standards administered in the other’s jurisdiction.”
In June 2007, the Swiss Federal Council adopted a draft dispatch on the implementation of the revised FATF (Financial Action Task Force) Recommendations.
The draft, which extended the scope of application of the Anti-Money Laundering Act (MLA) to the fight against terrorist financing, contained several measures aiming to improve the effectiveness of the Swiss system to combating money laundering and terrorist financing, and in general terms to reinforce the protection of Switzerland's financial centre to prevent it from being misused.
According to the Swiss Department of Finance, consideration was given in the draft to ensuring that the administrative burden on financial intermediaries and authorities is kept to a reasonable level, and that the regulatory framework is not extended excessively.
"It should contribute to maintaining a healthy, competitive Swiss financial centre of integrity, which will be of benefit to the Swiss economy as a whole," the department stated, continuing: "Thanks to this draft, Switzerland will in addition contribute even more effectively to the general effort undertaken by the international community to combat money laundering and terrorist financing."
For the first time since its creation, the FATF in 2003 completely revised its Recommendations to adapt them to new forms of criminality in the areas of money laundering and terrorist financing. Switzerland approved these revised Recommendations at the FATF Plenary in June of the same year.
Swiss legislation already broadly conformed to the majority of the new FATF standards. In certain areas, however, Swiss legislation diverged from the revised Recommendations. In January 2005, the Federal Council therefore submitted a proposal on the revised FATF Recommendations for consultation, which was modified in view of the results of the consultation, and following Switzerland's assessment carried out by the FATF in autumn 2005.
In July 2007, a protocol to the double taxation convention between the United Kingdom and Switzerland was signed in London by the UK's then Paymaster General Dawn Primarolo (pictured) and Alexis P. Lautenberg, the Swiss Ambassador to the UK.
The protocol made some amendments to the existing double taxation convention, dated 8 December 1977. The main amendments were the elimination of taxation at source on dividends, where the beneficial owner of the dividends has a substantial participation in the payer or is a pension scheme.
The protocol also amended the exchange of information article. It provided that, in future, information will be exchanged in cases of tax fraud or the like, and in cases involving holding companies.
Measures were also contained in the new protocol relating to pensions, meaning that lump sum payments could be taxed only by the state in which they arise. Also, pension contributions paid to a scheme recognised for tax purposes in one country may, under certain conditions, be deductible in the other country.
The convention and the protocol were to enter into force once both countries had completed their legislative procedures. In the United Kingdom the provisions would take effect from 1 April (for corporation tax purposes), and from 6 April (for income tax and capital gains tax purposes) in the calendar year following the date of entry into force. In Switzerland, the provisions would take effect from 1 January in the calendar year following the date of entry into force.
Developments in 2008-09
In April 2008, the Swiss Money Laundering Reporting Office (MROS) announced that, after a three-year slump, the volume of suspicious activity reports (SARs) had regained momentum, with SARs from the banking sector having reached a record high in 2007.
In 2007, MROS received a total of 795 SARs (up from 619 in 2006), which amounted to a 28.4% increase over the 2006 figure. It was also the third highest reporting volume observed since 1998, the year when MROS began gathering statistics on incoming SARs.
The rise in reporting volume was mainly attributed to the increase in the number of SARs received from the banking sector (up 37%), particularly those relating to investment fraud.
According to MROS, with 2007 a good year for financial activities and the stock market, scam artists were given more opportunities to dupe trusting investors with unrealistic offers of quick and easy gains. These activities triggered SARs from banks, which suspected money laundering.
In 2007, the total asset value of incoming SARs also increased by nearly 13% to around CHF921mn (USD902mn) from around CHF816mn in 2006. This increase was again mainly due to the greater influx of SARs from the banking sector, made possible by the fact that the bank's professional money laundering specialists now have more efficient monitoring systems at their disposal.
There was also a surge in the number of voluntary SARs submitted, the level of which rose 110% in 2007, compared with 2006. This was put down to the fact that more voluntary SARs were being sent to MROS rather than to law enforcement agencies directly, which boosted the voluntary SAR figure in the MROS statistics.
Once again, the payment services sector was the second largest contributor of SARs (29% of all incoming SARs came from this category), which influenced the reporting volume in the MROS statistics.
As in the previous reporting year, most of the SARs from the payment services sector came from the so-called "money transmitters" (68% of all SARs received from the payment services sector).
As in the previous reporting year, MROS received fewer SARs relating to suspected terrorist financing. A total of six SARs were submitted, amounting to 0.03% (around CHF233,000) of the total asset value of all incoming SARs.
The quality of SARs submitted in 2007 was high, enabling MROS to forward a large proportion (around 79%) of incoming SARs to law enforcement agencies.
However, the quality varied greatly among the various financial intermediary categories: while nearly 91% of SARs from the banking sector could be forwarded, the same was true for only about 52% of SARs from the payment services sector.
The smaller percentage of forwarded SARs was mainly due to the large proportion of SARs from the so-called "money transmitters", a subgroup of the payment services sector that gathers very little information about its customers, and therefore tends to generate lower quality SARs.
Representatives from Switzerland and the European Commission met in Bern in April 2008 for a third round of dialogue on the EU's assessment of certain cantonal company taxation arrangements.
According to the Swiss Federal Department of Finance, this round of talks "further contributed to improving the mutual understanding of the respective positions" of both sides.
However, it was agreed that no date would be set for a further round of meetings, suggesting that the long-standing impasse between Bern and Brussels on the vexed question of taxation will never be solved to the EU's satisfaction.
The third round of discussions focused, much like the previous two rounds, on the question of whether the 1972 Free Trade Agreement between Switzerland and the European Community was applicable with regard to certain cantonal company taxation regulations.
The Swiss continued to argue that this "is by no means the case," and that the country has no obligation to adapt or even do away with these regulations. Following the discussion, the Finance Department confirmed, somewhat unsurprisingly, that: "Diverging positions remain in this regard."
The European Commission considers certain cantonal company taxation arrangements for mixed and holding companies to be forms of state aid which are not compatible with the 1972 Free Trade Agreement. In its decision of February 13th 2007, it requested a mandate from the Council to take up negotiations with Switzerland. The mandate was adopted by the Council on May 4th, 2007.
The Swiss Federal Council has consistently rejected the EU's interpretation, considering it to be unfounded, and has consequently refused to enter into negotiations.
"It was therefore agreed by both sides that no date would be set for a further meeting at the present time," the Swiss government stated.
While Switzerland has said it supports the separate issue of the European Union's efforts to ensure that investment income is properly taxed under the Savings Tax Directive, it was insistent in 2008 that it would not be persuaded by Brussels to adopt exchange of information with other member states for tax purposes.
This was the message relayed by Swiss Finance Minister Hans Rudolf Merz following discussions on the issue of tax and banking secrecy with Luxembourg Prime Minister Jean-Claude Juncker in May 2008, in which he stressed that a paying agent tax, as opposed to automatic exchange of information, was the only means to accomplish the EU's goal of taxing capital yields.
"Switzerland will not deviate from this stance," the Swiss Federal Department of Finance confirmed after Merz's meeting with Juncker in Luxembourg.
The European Union is reviewing the Savings Tax Directive with a view to improving the legislation's effectiveness at taxing the investments of EU residents held in other member states and certain third countries, such as Switzerland and UK offshore territories in the Channel Islands and Caribbean.
One proposal that is being considered is to force all countries that have signed up to the directive to adopt automatic exchange of information with national tax authorities on such investments. Presently, certain countries keen to uphold banking secrecy laws are able to apply a withholding tax on such income instead of exchanging information.
While Switzerland and Luxembourg acknowledge that any shortcomings must be resolved first by amending the directive, the Swiss have emphasised that they have no obligation to enter into talks with the EU on a revision of the agreement on the taxation of savings income before 2013.
Furthermore, the Swiss authorities are adamant that the subject of banking secrecy would not be open to negotiation, "even within the scope of such discussions".
"This stance is shared by Luxembourg," the Swiss statement went on to add.
After his meeting with Juncker, Merz also sought to counter criticism that Swiss secrecy laws hamper the fight against financial crime, insisting that Switzerland "does not provide protection for criminals and fraudsters".
Merz added that citizens have a right to privacy which must also be preserved.
Then, in July 2008, Swiss banks UBS announced during a congressional hearing that it would be shutting down all private banking accounts held by US residents.
The decision was made after it emerged via a recent report unveiled at the hearing that a considerable proportion of wealthy US citizens are avoiding taxes by 'concealing' their assets in offshore accounts in Switzerland.
UBS Global Wealth Management and Business Banking, Mark Branson stated:
“We have decided entirely to exit the business. UBS will no longer provide offshore banking or securities services to US residents through our bank branches."
“While we are winding down this business there will be no new accounts opened and Swiss-based client advisers will not be permitted to travel to the United States for the purpose of meeting with US clients."
UBS also assured that it would not be naming and shaming any of those US citizens who actively used the bank to avoid tax charges.
Mr Branson finished by explaining:
“We are working with the US Government to identify the names of US clients who may have engaged in tax fraud. Client identity is generally protected from disclosure under Swiss law. But such privacy protections do not apply when disclosure of client names is requested in connection with an investigation of tax fraud and where the requests are presented to the Swiss Government.”
In October 2008 the German government suggested that Switzerland should be included on any new 'blacklist' of uncooperative offshore jurisdictions in an attempt to reduce cross-border tax evasion by wealthy German citizens and raise the level of transparency in the global financial system.
A strident Peer Steinbrueck, Germany's Finance Minister, made his remarks following a conference of OECD leaders in Paris, where the main topic of discussion was the role of offshore financial centres in the international banking crisis.
According to Steinbrueck, Switzerland offers the conditions that invite Germans to evade domestic taxes and he accused them of being unwilling to cooperate with the German authorities when these cases are being followed up. "Therefore, in my view Switzerland belongs on such a list," he argued.
Switzerland was unable to respond directly to Steinbrueck's remarks because, like Austria, Luxembourg and the United States, it did not attend the meeting. However, the Swiss Finance Ministry responded in a statement that it complies with all rules laid down by the OECD regarding exchange of banking information, and that it has information exchange agreements regarding tax with several countries, including Germany.
Nevertheless, the OECD confirmed that it wasworking with more than 80 countries around the world in the area of cross-border finance, supposedly with a view to enabling countries to "fully and fairly enforce their tax laws."
The OECD announced that it was launching the new initiative after concluding in a recent report that "significant restrictions" on access to bank information for tax purposes remain in three OECD countries – Austria, Luxembourg and Switzerland – and in a number of offshore financial centres, including Liechtenstein, Panama and Singapore.
The 30-member multilateral body was also of the view that a number of offshore financial centres had"failed to follow through" in commitments to implement the standards on transparency and the effective exchange of information developed by the OECD’s Global Forum on Taxation.
The French government, which convened the conference, suggested that a new blacklist of uncooperative jurisdictions be drawn up and released by the middle of 2009. They got their wish sooner than that.
The election of Barack Obama in November 2008 represented the next threat to Swiss banking secrecy. Various representatives of the Swiss government and banking sector warned after the election that although the issue was unlikely to be Obama's first priority his administration is likely to step up the anti-offshore campaign sparked earlier this year by the news that Swiss bank, UBS, had helped wealthy US citizens duck their tax liabilities. UBS subsequently announced that it would no longer be offering private banking services to US residents.
Foreign Minister Micheline Calmy-Rey observed that an increase in pressure on the Swiss authorities with regard to the issue of banking secrecy was very much expected by the Swiss authorities
"It is clear that fiscal questions will come to the forefront and we have to face them, as much from the European Union and as from the United States. That is the logical consequence of the financial crisis," she said.
Whilst sitting in the Senate, Obama lent his support to a previous incarnation of Senator Carl Levin's 'Tax Haven Abuse' bill.
In March 2009, the Swiss Finance Ministry announced that it would hold a tripartite forum with Luxembourg and Austria to discuss the G20’s meetings on ‘tax havens’, and the implications of a new blacklist of unco-operative jurisdictions.
Swiss President Hans-Rudolf Merz held the meetings, in his capacity as Finance Minister, with his respective counterparts on March 8. The meeting in Luxembourg served primarily to coordinate points of common interest of the financial centres in the international environment. The talks covered a range of issues including the debate surrounding a possible blacklist of so-called 'tax havens'.
The Organisation of Economic Cooperation and Development duly published a list of jurisdictions it believes have not implemented internationally agreed standards of tax cooperation on April 2, 2009, following through on the G-20 nations' pledge to take action against 'non cooperative' territories in the interests of maintaining stability in the global financial system.
The list was published in tandem with the G20 communique which sets out the major economies' vision of the future global regulatory and economic landscape. "We stand ready to deploy sanctions to protect our public finances and financial systems," read the communique, presented by British Prime Minister Gordon Brown, which went on to declare that: "The era of banking secrecy is over."
The list is split into three parts: the first list contains jurisdictions which are deemed to have "substantially implemented" the agreed tax cooperation standard; the second contains the names of jurisdictions which have committed to, but have not yet implemented the standard; and the last list names those jurisdictions which have not committed to the standard and will presumably face sanctions of some sort unless they fall into line. Initially, only four jurisdictions fell into the latter category, namely Costa Rica, Labuan, the Philippines and Uruguay. However, they were soon removed after assuring the OECD that they were commited to implementing its tax standard.
Unsurprisingly, the largest economies of the G20 group, such as the US, the UK, Germany and France, appear on the OECD's 'white list.' But there are also a number of offshore and low-tax jurisdictions which appear in this list (including a number which have been demonized by politicians and the mainstream media), including Barbados, Cyprus, Guernsey, Ireland, Isle of Man, Jersey, Malta, Mauritius, Seychelles, the United Arab Emirates and the US Virgin Islands.
The majority of offshore and low-tax territories fell into the second tier of compliance. Notable inclusions in the second list were Austria, Belgium, Luxembourg and Switzerland, although, sub-categorized as 'other financial centres', they at least escaped the ignominy of being labeled as 'tax havens.'
Welcoming the outcome of the G20 meeting, OECD Secretary General Angel Gurria said: “Recent developments reinforce the status of the OECD standard as the international benchmark and represent significant steps towards a level playing field. We now have an ambitious agenda, that the OECD is well placed to deliver on. I am confident that we can turn these new commitments into concrete actions to strengthen the integrity and transparency of the financial system”.
However, others believe that if the playing field is indeed uneven, it is now tilted towards the large onshore countries, after many years of sustained pressure on offshore financial centres to improve their regulatory and enforcement systems.
Commenting on the outcome of the G20 meeting and the publication of the OECD blacklist, David Harvey, Chief Executive of the Society of Trust and Estate Practitioners said: "STEP has concerns that, historically, regulatory standards espoused by OECD member states as international standards have not been applied in those very same states. Where standards of regulation are applied selectively, or warnings of risk are ignored, the global regulatory system will be inadequate. Indeed the IMF has made it clear that large economies often lag behind well-regulated offshore centres."
He added: “STEP urges the G20 to ensure that if regulation is to be effective it must be extended to the G20’s own membership."
However, following the G20 London Summit, Switzerland indicated that it may exercise its veto on various key votes within the OECD together with applying other financial sanctions in protest at the way OECD Secretary General Angel Gurria is personally is applying pressure to relax bank secrecy laws and share information for tax purposes.
The Swiss have already blocked a budget payment of USD180,000 and are considering delaying their payment of a USD8.65m membership subscription. The USD180,000 was destined to promote the OECD's widening engagement with emerging economies, including China and India, which is regarded as one of Gurria's most important initiatives.
Further Swiss applications of its veto have been discussed in the Swiss Parliament with the aim of disrupting such initiatives, and the Swiss right of veto over Gurria's re-election in 2011 was a focus point in the debate.
Swiss president, Han-Rudolf Merz played down suggestions of disrupting OECD work with the Swiss veto, but at the same time he stated his wish to build a coalition of other countries also on the OECD 'grey list' (countries which have not yet implemented their commitment to the OECD tax standards) with the objective of stopping the OECD from acting 'behind their backs'.
This 'coalition' was seen in action when Belgium, Luxembourg and Austria joined Switzerland in the application of the budget payment veto.
The US Department of the Treasury announced in April that the United States and Switzerland would soon begin negotiation of a protocol to amend their bilateral income tax treaty, which entered into force in 1996.
Consistent with the announcement made by the Swiss Federal Council on March 13, 2009, the two countries intend to revise the tax treaty so the two countries can exchange information for tax purposes to the full extent permitted by Article 26 of the Organization for Economic Co-operation and Development (OECD) Model Income Tax Convention.
"As called for in the G-20 meeting in London, we believe that all countries must adhere to international standards for exchange of tax information. We welcome moves by Switzerland to implement international standards by agreeing to revise the US-Switzerland tax treaty for the exchange of information for tax purposes with the US," said US Treasury Secretary Tim Geithner.
"I look forward to swift conclusion of an agreement; this agreement has the potential to serve as an example for other leading financial centers around the world, and I will continue to demand transparency from countries on behalf of American taxpayers," he concluded.
Negotiations were expected to begin on April 28 in Berne, Switzerland.
Switzerland is hopeful that the signing of a new Double Taxation Agreement with the US will result in an end to legal proceedings currently involving the Swiss banking giant UBS.
During a sideline meeting conducted at the International Monetary Fund and World Bank gathering in Washington, Switzerland’s President and Finance Minister Hans-Rudolf Merz urged US Treasury Secretary Timothy Geithner to have complaints against UBS withdrawn, in order to secure approval for a new double tax treaty in the Swiss Parliament, and to guarantee a positive outcome in the event of a national referendum.
The US tax authorities are pursuing a civil lawsuit against UBS, and demanding access to information on a further 52,000 accounts held by Americans that it claims may have been used for possible tax evasion.
Indicating that the case has deeply affected both Switzerland and its Swiss bank UBS, Merz warned that if legal proceedings were to continue, that the prospect of reaching a double tax agreement would then very much be jeopardized.
Emphasising the mutual benefit of an agreement for both Switzerland and the US, and referring to the US as a “key partner”, Merz nevertheless remained confident that a new treaty would indeed be negotiated.
In a news conference on May 6, Swiss President Merz confirmed a Cabinet decision to satisfy OECD demands by signing at least 12 tax accords, in which they offer to exchange information in tax evasion matters, by the end of 2009. Merz indicated that agreements may be signed, but not fully ratified in this time scale due to legislation required with regard to bank secrecy and the nature of Swiss constitutional procedures, which can involve referenda.
According to Merz, 23 countries have notified Switzerland that they are interested in new accords on double taxation, out of more than 70 members of the OECD, the European Union, or countries that have a special economic importance for Switzerland. At the time of the announcement, negotiations had already started with the United States, Japan and Poland.
Switzerland will approach European Union states individually rather than risk delay that could arise from the European Commission obtaining an EU-wide mandate. Merz indicated as an example of EU delay that many of the 27 EU member countries had not yet implemented a bilateral accord concluded with Switzerland in 2004 to combat customs fraud.
In March, 2010, the Swiss Bankers Association has published a survey that showed resounding opposition to Switzerland’s move towards increased transparency and information exchange with regard to bank account deposits.
Survey respondents were strongly in favour of maintaining the protection of their privacy in financial matters (89%) and retaining bank-client confidentiality (73%). Moreover, a good 70% objected to the automatic exchange of information with foreign tax authorities.
For the first time in the history of these surveys, a narrow majority claimed to be unsatisfied with politicians' commitment to bank-client confidentiality. However, within Switzerland, clients are more satisfied with their banks than ever before, the survey found. Respondents were also optimistic about the general economic situation and the international competitiveness of the Swiss financial centre.
Since 1995, the Swiss Bankers Association has conducted an annual representative survey of the Swiss population, asking them about their attitudes towards the banking sector and about the general importance of banks for the Swiss economy. The consistency of methodology over the years enables long-term comparisons to be drawn with high reliability.
Respect for financial privacy among the Swiss population remained very strong, despite or perhaps because of the ongoing debate about bank-client confidentiality. 89% believed that bank clients' financial details must be protected from third parties. Bank-client confidentiality also continued to receive strong support: 73% (2009: 78%) thought that bank-client confidentiality should be maintained. 70% believed that Switzerland should not give in any further to European pressure on bank-client confidentiality and oppose an automatic exchange of information with foreign tax authorities. It should be noted that the government's efforts to defend bank-client confidentiality were rated significantly lower than a year ago (40% believed that the government does not make enough effort, while 11% thought that the government makes too much effort). As a result, there are serious doubts about whether bank-client confidentiality will still take the same form in five years' time.
Most Swiss people remain loyal to their main bank, even in times of turbulence. The cantonal banks are still in the lead, at 27%, followed by the Raiffeisen banks (21%). The respondents' view of their main personal banks improved once again: 87% had a positive or very positive opinion of their main bank (2009: 85%). This means that clients have never been more satisfied with their banks since this question was introduced in 2001. The proportion of clients of the major banks expressing a very positive opinion doubled from 11% to 22% over the last year. Respondents’ trust in their own bank has apparently recovered from the events of last year, with 73% believing they can trust their main bank. In contrast to this positive assessment of their own personal bank, perceptions of Swiss banks are a matter of public debate. Respondents said, however, that Swiss perceptions of banks are more critical than is deserved.
When asked how Switzerland’s banks and financial centre stand compared with competitors from the UK, Singapore, Luxembourg or the US, 56% saw Swiss providers as having an advantage (2009: 59%). Quality of service, education and training as well as both political and economic stability were still recognized as advantages for the Swiss financial centre.
In June, 2010, a line was finally drawn under the UBS affair, when after a tough political battle, fraught with tension and speculation, Switzerland’s National Council and Senate finally united in their decision not to subject the UBS agreement to a national referendum.
The landmark victory came as the National Council, the country’s lower house of parliament, yielded at the eleventh hour, and followed the advice of the conciliation group (comprising 13 members of each council) set up to resolve the highly critical issue. Marking a significant u-turn, the lower house voted by 81 votes to 63, with 47 abstentions, against a referendum.
An agreement was eventually reached thanks to the decision by the Swiss People’s Party (SVP) to reverse its previous stance and to approve the treaty in order to prevent its collapse. Failure by the National Council to comply with the conciliation group’s recommendations would have resulted in an end to the agreement.
Commenting on parliament’s decision, UBS stated that:
“UBS welcomes today’s Swiss Parliamentary approval of the US-Swiss Government Agreement. This vote is an important step to support the resolution at the governmental level.”
“UBS continues to focus on its comprehensive and timely compliance with all obligations under its separate settlement agreements with the US Department of Justice and the Securities and Exchange Commission (known as the Deferred Prosecution Agreement, or DPA, and Consent Order) and is confident that this will be achieved by the relevant deadlines in August 2010.”
As a result of parliament’s decision to give the green light to the agreement, the Swiss Federal Council will now be able to assist US authorities under the terms of the agreement by August 19.
Concluded in August last year, the agreement provides that UBS is to disclose to US authorities the names and bank details of 4,450 of its American clients, suspected of evading taxes over a number of years with the help of the Swiss banking giant. In return, civil charges against the bank will be dropped.
In July, 2010, the Swiss government initialed a revised agreement with Ireland for the avoidance of double taxation and fiscal evasion. Along with other issues, the revised agreement will incorporate provisions that provide for the exchange of tax information in line with the Organisation for Economic and Cooperation Development’s (OECD's) internationally-accepted standard.
Since the Federal Council decision of March 13, 2009, to adopt the OECD standard, extending administrative assistance in tax matters, Switzerland has concluded negotiations with over two dozen states for agreements that include tax information sharing provisions. In the process, the government said, Switzerland has also been able to negotiate various benefits for the economy, such as reductions in withholding tax on dividends, interest and royalty payments, as well as the introduction of an arbitration clause. This policy will be pursued and further negotiations are already envisaged with important countries, the government said.
Initially, the content of the revised agreement with Ireland will be confidential. The next step is for it to be disclosed, in the case of Switzerland, only to the cantons and business associations concerned in the form of a brief report so that they can submit their comments. The agreement will then be signed and subsequently presented to parliament for approval. Providing it receives approval it will then be ratified bringing the document into force.
A total of ten double tax agreements with the extended administrative assistance clause have been approved by the Swiss parliament. Further DTAs which have been signed in the meantime will be gradually submitted to parliament for approval, the Swiss government confirmed.