Swiss Banking Secrecy

1. Swiss Banking Secrecy Katie Frawley Gillian Gonzalez Cristine Gollayan

2. Outline • Overview • Trade Issue • Legislation • Major Problems • One Issue • Proposal • Conclusion

3. What is it? Swiss Bank Secrecy: Legal principle under which Swiss Banks are allowed to protect personal information about their customers

4. What is at Issue? At Issue: • Deters Accountability • Instrument for Tax Evasion • Aids in Underground Economy • Facilitates Money Laundering, Organized Crime • In light of Financial Crisis, governments necessitate transparency and accountability

5. Definition • Swiss Bank Secrecy prohibits Swiss banks from revealing the existence of one’s account or disclosing information about it without one’s consent • Covers all business relations with the bank • Not limited in time • Concerns all the people who work for the bank

6. Limitations • In terms of divorce or inheritance, plaintiff faces long, difficult, and costly procedure. • No undertaking has been successful • Bankruptcy falls under Federal law • Exceptions • Regulated by Law • Criminal Matters • Drug Trafficking • Gun Smuggling • Private Matters • Inheritance • Divorce • Bankruptcy • Rare

7. History • Over 300 years • First known dates back to 1713 • Until 1934, civil and labor code • 1934, criminal domain • Why? • Nazi Spies • Pressure from French • 1984, Swiss elected by overwhelming majority in favor of maintaining bank secrecy

8. Legislation • Banking Act of 1934 • Codified 8 November 1934 • Privacy is statutorily enforced • Swiss law strictly limiting any information shared with third parties, including tax authorities, foreign governments or even Swiss authorities, except when requested by a Swiss judge’s subpeona

9. Key Provisions • Regulated by both civil law and criminal law • 2 Articles of the Swiss criminal code regulate Swiss bank secrecy: • Article 162 takes punitive action against the disclosure of trade secrets or confidential business information. • Article 320 deals with occupational confidentiality. • Article 98 al. 2 of the Swiss Labor Code • Anyone who contravenes an obligation to abstain from action owes damages by the very fact of contravention

10. Key Provisions • Article 47 of the Swiss Federal Banking Act of 8 November 1934 • Reveal = Imprisonment of 6 months or 50,000 francs • Negligence = 30,000 francs • Termination = Still Punishable • Provisions of federal and cantonal legislation to be obligated to inform authorities and testify in court

11. Major Problems • The Swiss do not feel it is their position to be the global babysitter • Swiss banks are not just institutions in which money is stored. The banking industry accounts for 10% of Switzerland’s GDP, so they are heavily invested in maintaining their clients satisfaction

12. Swiss Banking Association • 360 Members: USB, Credit Suisse, and 358 other banks of various sizes • 16,340 individual members

13. Tax Evasion • Failure to declare earnings of non-Swiss citizens (tax evasion) is not a crime in Switzerland, and therefore Swiss banks see no reason to offer information • Sharing client information with other parties, where no crime is suspected, is an offence under Switzerland's banking laws

14. United Bank of Switzerland • UBS -- the world's biggest banker to the rich -- had to write down $49 billion when it was hit by subprime woes as part of a disastrous expansion into investment banking • Other problems for UBS include giving names to the US Dept. of Justice and now it may face charges in Switzerland for violating Swiss secrecy laws

15. Wegelin and Co. • Wegelin and Co. announced it would stop doing business in the United States and with Americans • The bank has over $17.9 billion in client assets under its management but claims they have been put in an 'untenable situation' by the requirements of the IRS

16. Other Issues • There are many major issues for the US and the Swiss banking institutions. As the US makes it harder for the Swiss to do business with Americans they are faced with a choice of perhaps not doing business at all

17. Criminal Elements • Money laundering and links to terrorist funds • The Swiss do not want to tarnish their reputation

18. One Issue • Due to banking secrecy and lack of information exchange, Swiss banks have acted as tax havens and allowed for US firms and individuals to commit tax evasion http://www.koreatimes.co.kr/upload/news/090824_p09_cartoon.jpg

19. Issues Involved • Tax Evasion • A person who owes taxes forgets to pay or conceals tax-relevant information • Different from tax fraud • Not a criminal offense in Switzerland • Tax Haven • No taxes or nominal taxes within the jurisdiction • Lack of transparency • Laws or practices prevent information exchange • Black list – “Uncooperative tax havens” • Information Sharing

20. Why is this a problem? • Government revenues – loss of $100 billion/year • Economic crisis • Switzerland is a major player • $2 trillion of global wealth held abroad

21. Proposal Three prong approach to promote greater information sharing • Unilateral • Domestic Legislation • Bi-lateral Approach • US – Swiss Tax Treaty • Multi-lateral Approach • G-20 • OECD http://www.onepennysheet.com/wp-content/uploads/2009/08/SwissBanks__1250868437_4071.jpg

22. Unilateral ApproachDomestic Legislation • Stop Tax Haven Abuse Act (HR 1265 and S 506) Limit use of offshore tax havens to “inappropriately avoid federal taxation” • Impose restrictions on foreign jurisdictions, financial institutions, or international transactions that interfere with US tax enforcement • Greater period for IRS review of tax returns involving offshore secrecy areas • Require financial institutions to report certain information about owners of accounts in offshore secrecy areas

23. Bilateral ApproachU.S. – Swiss Tax Treaty • New treaty agreed upon in June 2009 and formally signed in September 2009 “This treaty will increase our ability to enforce our tax law and will help bring an end to an era of offshore accounts and investments being used for tax evasion.” – Timothy Geithner • Revised existing treaty based on the rules set out by the OECD Model Tax Convention – Article 26 • Allows for greater information exchange • Still room for more improvements – automatic information exchange • When making a request under new treaty, requesting state must still provide “information sufficient to identify the person under examination or investigation” • Name, address, account number • “a request for information basically must include the name, rank, and serial number of suspected tax evaders, when in fact the end-game of many tax investigations is to discover the identity of tax evaders” – Raymond Baker, Global Financial Integrity director

24. Article 26 of Model Tax Evasion 1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2. 2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. 3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation: a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (order public).  4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.  5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.

25. Multi-Lateral Approach • OECD • Model Tax Convention • Global Forum on Taxation • Model Agreement on Exchange of Information on Tax Matters • Tax Information Exchange Agreements • G-20 • “…stand ready to take agreed action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over.” • London Summit • Monitoring proposals

26. Implications US - Pro • “Crack down on illegal overseas tax evasion” (Obama) • Reduce “the amount of taxes lost to tax havens” (Obama) • Sets a precedent for pursuing similar treaty revisions and agreements with other tax haven nations Swiss – Con • 11.5 percent of GDP from financial sector • Fear of losing business – hurting industry and overall economy US – Con • “There has been a steady erosion of the Fourth Amendment” – US shouldn’t be able to police activities of its citizens outside borders (Cato Institute) • Swiss – Pro • Staying away from the black list of • un-cooperative nations

27. Implications – Rest of the World • “Any success by the US tax authority could encourage tax authorities in other jurisdictions to pursue a similar strategy” – Merrill Lynch analysts • France and Germany • Countries agreeing to follow the OECD Model Tax Convention – now they must actually make the agreements • Liechtenstein, Andorra, Monaco

28. Progress Made as of13 July 2009 • Jurisdictions that have substantially implemented the internationally agreed tax standard • 12+ Agreements Signed CRS Report: The OECD Initiative on Tax Havens

29. Jurisdictions - Agreements CRS Report: The OECD Initiative on Tax Havens Jurisdiction Year of Commitment Number of Agreements Andorra 2009 0 Monaco 2009 1 Antigua and Barbuda 2002 7 Montserrat 2002 0 Aruba 2002 4 Bahamas 2002 1 Neth. Antilles 2000 7 Belize 2002 0 British Virgin Islands 2002 11 Panama 2002 0 Cayman Islands 2000 11 St Kitts and Nevis 2002 0 St Lucia 2002 0 Dominica 2002 1 Samoa 2002 0 Grenada 2002 1 Liberia 2007 0 Turks and Caicos Islands 2002 0 Liechtenstein 2009 1 Austria 2009 2 Malaysia 2009 0 Belgium 2009 6 Philippines 2009 0 Brunei 2009 5 Singapore 2009 0 Chile 2009 0 Switzerland 2009 0 Costa Rica 2009 0 Uruguay 2009 0 Guatemala 2009 0

30. Conclusion • US and International Effort • New agreements = progress • Still more work to be done… http://www.koreatimes.co.kr/upload/news/090223_p9_cartoon.jpg

31. Sources • http://switzerlandisyours.com/e/banking/secrecy/index.html • Dixon, Kim. “U.S., Swiss formally sign new tax treaty.” Reuters. 23 September 2009. • Hilzenrath, David. “Treaty Conveys Little Power to Break Swiss Bank Secrecy.” Washington Post. 8 July 2009. • Jackson, J.K. (2009, July). Congressional Research Service: The OECD Initiative on Tax Havens. Retrieved November 2009 from opencrs.com/document/R40114/2009-07-24/download/1013/ • Switzerland Eases Banking Secrecy (2009, March). Retrieved November 2009 from http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7941717.stm • Article 26 of the OECD Model Tax Convention on Income and Capital. Retrieved December 2009 from http://www.oecd.org/document/53/0,2340,en_2649_33747_33614197_1_1_1_1,00.html • HR 1265 and S 506. Retrieved December 2009 from http://thomas.loc.gov/cgi-bin/thomas • Banking Secrecy and International Tax Issues: Switzerland’s Viewpoint (2009, June). Retrieved November 2009 from www.efd.admin.ch/themen/00796/01377/index.html?lang=en. • Danzinger, M.P. (2009, Sept). Information Exchange Shortcomings in US-Swiss Tax Agreement. Retrieved November 2009 from http://www.gpif.org/index.php?option=com_content&task= view&id=263&Itemid=70 • US, Swiss Formally Sign New Tax Treaty (2009, Sept). Retrieved November 2009 from http://www.reuters.com/articlePrint?articleId=USTRE58M55S20090923 • US, Swiss Complete Tax Treaty (2009, June). Retrieved November 2009 from http://www.cbsnews.com/stories/2009/06/19/business/main5097360.shtml • Swiss Banking Wins Libertarian Friends in US (2009, June). Retrieved November 2009 from http://www.swissinfo.ch/eng/swissinfo.html?siteSect=43&sid=10828236&ty=st • Banking Secrecy Faces an Uncertain Future (2009, Feb). Retrieved November 2009 from http://www.swissinfo.ch/eng/swissinfo.html?siteSect=43&sid=10383979&ty=st • Jucca, L. (2009, Feb). UBS Tax Deal Is Swiss Bank Secrecy’s Waterloo. Retrieved November 2009 from http://www.reuters.com/articlePrint?articleId=USTRE51I1ZP20090219 • Protocol Amending the Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income. Retrieved November 2009 from www.ustreas.gov/press/releases/docs/US-SwissProtocol.pdf

32. Sources • Bowning, Linnley. “U.S. Reports Agreement With UBS in Tax Case.” New York Times, 12 Aug. 2009. Retrieved Dec 2009 from http://www.nytimes.com/2009/08/13/business/global/13ubs.html • “Financial crisis: Why the Swiss economy is still as safe as – er – a Swiss bank.” Telegraph.co.uk. 20 Oct 2008. Retrieved November 2009 from http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3198667/Financial-crisis-Why-the-Swiss-economy-is-still-as-safe-as---er----a-Swiss-bank.html • Foulkes, Imogen. “Clock ticking for Swiss bank secrecy.” Retrieved November 2009 from http://news.bbc.co.uk/2/hi/business/7901832.stm • Swiss Bankers Association. Retrieved December 2009 from http://www.swissbanking.org/en/home/portrait.htm • “Switzerland’s Oldest Bank Rejects the US.” 26 Nov. 2009. Retrieved Dec. 2099 from http://www.getirshelp.com/irsblog/686/switzerlands-oldest-bank-rejects-the-us/