The Swiss government agreed on Wednesday to institute a legal basis that would allow national banks to settle directly with American regulatory authorities in tax-evasion cases. The lawsuits in question argue that billions of dollars from wealthy Americans are being hidden from the federal government for tax reasons.
While the Swiss government insists that no changes to the rules will be made that affect protections to clients’ identity, special permission will be granted to allow banks to disclose information about the behavior of their staff and clients, including transaction histories.
“The bank will have to negotiate a DPA [deferred prosecution agreement] separately with the American authorities, which will also contain a fine,” Urs Ackerman, a spokesman for Zurich-based ZKB, said in an emailed response to questions from Bloomberg. ZKB faces a potential fine of $744 million for its role in the effort to defraud the Internal Revenue Service.
In recent months, the culture of bank secrecy in Europe has began to implode, in part due to increased pressure from American regulators. Luxembourg — whose national motto, “Mir wëlle bleiwe wat mir sinn” (“We want to remain what we are”), has spoken of the people’s resistance to change for centuries — was the first of the European tax havens to consent to share information with foreign tax authorities about deposits in Luxembourg banks. Recent revelations that mega-corporations — such as Apple — have been using offshore taxing arrangements to avoid corporate tax at home highlight a growing international trend to seek out tax evasions in the light of dwindling national coffers.
The European Commission has engaged in talks with Switzerland, Liechtenstein, San Marino, Andorra and Monaco in an effort to break down their banks’ secrecy that bring them in line with the banking standards in more open European Union nations. Austria, the EU’s lone objector to banking secrecy reform, has indicated it will not attempt to block talks regarding bank information sharing.
The power of fear
“The decision by Luxembourg and Austria is probably the death knell for Swiss banking secrecy, because it really leaves Switzerland without any key ally in the European Union,” said Urs Ziswiler, a former ambassador from Switzerland in Washington. “The EU might soon be in a position to demand as much as the U.S. got from Switzerland.”
The Swiss government is fast-tracking legislation that will put the issue of bank secrecy for American customers to bed. The “Federal Act on Measures to Facilitate the Resolution of the Tax Dispute between Swiss Banks and the United States” would allow the Swiss government to provide the U.S. with more evidence of tax dodging by American citizens. The bill will allow the government to provide the U.S. with client names and account details if the federal prosecutors specifically request them, as well as allowing the passing of information about bank employees that were involved in America-originating transactions.
The legislation is expected to clear the Swiss Parliament by mid-summer.
In the U.S., the Foreign Account Tax Compliance Act will force banks to name their U.S. citizen clients or to apply a 30 percent withholding tax on unnamed American accounts. Financial firms would be obliged to inform American regulators if they have non-compliant accounts or funds.
The Swiss’ willingness to comply with the U.S. government’s request is a reaction to fear. UBS — the largest bank in Switzerland — paid $780 million in fines to the United States under a deferred prosecution agreement in 2009 for allegations it helped defraud the IRS.
Wegelin, Switzerland’s oldest private bank — and the 13th oldest in the world — pleaded guilty in January 2013 in New York Criminal Court for allowing more than 100 American citizens to hide more than $1.2 billion from the IRS for over a decade. The bank paid $57.8 million in fines to the federal government and voluntarily closed. Earlier this week, it was revealed that American banking authorities have targeted Julius Baer, Credit Suisse, and nearly a dozen other Swiss banks for investigation of possible assistance in tax evasion.
In a statement from the Swiss government, the severity of the situation was drawn out in clear terms.
“If banks were not authorised to cooperate with the U.S. authorities, the initiation of further criminal investigations or charges concerning banking institutions could not be ruled out,” the statement read. “The uncertainty for the financial centre would continue to exist.”
A culture of secrecy
While Switzerland’s banking secrecy laws were codified in 1934 in response to fear that Nazi Germany was targeting the bank accounts of affluent Jews, secrecy in banking dates back more than 250 years.
“Originally all the banking houses across Europe were trading companies,” said Youssef Cassis, professor of economic history at the European University Institute in Tuscany. “They started to specialise in trade finance and then split off as banking became a separate profession.”
As such, the banks inherited the merchants’ need to not disclose their clients. This “secrecy at all cost” gave Central European banks a reputation as tax havens. Switzerland stands as the world’s largest offshore banking hub, with more than $2 trillion in assets.
However, with the recent indictment of Costa Rica’s Liberty Reserve — which the U.S. has accused of laundering as much as $6 billion in illicit funds for more than a million users, including at least 200,000 Americans — the announcement last month that the Justice Department has won federal court approval to subpoena the correspondence accounts of FirstCaribbean International Bank, and the announcement in March of the arrest of an 83-year-old Massachusetts man who hid $5.7 million in a Swiss account for five years, it has become clear that the U.S. has taken a no-tolerance stance on unreported offshore banking.
“Our work here shows our resolve to pursue these cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil,” said acting IRS Commissioner Steven Miller.
“Nothing is as it was before,” Luxembourg Prime Minister Jean-Claude Juncker told the Luxembourg Parliament last month, explaining why Luxembourg had decided to start sharing information with foreign tax authorities about the money stashed in its banks. “Not everything has changed, but lots of things have changed. Other changes are necessary, or everything will change.”