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Swiss Banking Secrecy

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									  Swiss Banking Secrecy

Katie Frawley
Gillian Gonzalez
Cristine Gollayan

•   Overview
•   Trade Issue
•   Legislation
•   Major Problems
•   One Issue
•   Proposal
•   Conclusion

What is it?

Swiss Bank Secrecy:
  Legal principle under which Swiss Banks
   are allowed to protect personal
   information about their customers

What is at Issue?

At Issue:
   – Deters Accountability
   – Instrument for Tax Evasion
   – Aids in Underground Economy
   – Facilitates Money Laundering, Organized

• In light of Financial Crisis, governments
  necessitate transparency and accountability

• 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

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


• 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

• 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

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
  – 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
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

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

Swiss Banking Association

• 360 Members: USB, Credit Suisse, and 358
  other banks of various sizes
• 16,340 individual members

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

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

Wegelin and Co.

• Wegelin and Co. announced it would stop
  doing business in the United States and with
• 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

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

Criminal Elements

• Money laundering and links to terrorist funds
• The Swiss do not want to tarnish their

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


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
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


    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-

Unilateral Approach
Domestic 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

Bilateral Approach
U.S. – Swiss Tax Treaty
•   New treaty agreed upon in June 2009 and formally signed in September
    “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                   23
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 Contracti ng
       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.
Multi-Lateral Approach
   • 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

US - Pro                                  US – Con
• “Crack down on illegal overseas tax     • “There has been a steady erosion of
  evasion” (Obama)                           the Fourth Amendment” – US
• Reduce “the amount of taxes lost to        shouldn’t be able to police activities of
  tax havens” (Obama)                        its citizens outside borders (Cato
• Sets a precedent for pursuing similar      Institute)
  treaty revisions and agreements with
  other tax haven nations

Swiss – Con                               Swiss – Pro
• 11.5 percent of GDP from financial      •  Staying away from the black list of
   sector                                    un-cooperative nations
• Fear of losing business – hurting
   industry and overall economy

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
   France and Germany

 Countries agreeing to follow the OECD Model
 Tax Convention – now they must actually make
 the agreements
   Liechtenstein, Andorra, Monaco
Progress Made as of
13 July 2009

 • Jurisdictions that have substantially implemented the
 internationally agreed tax standard

 • 12+ Agreements Signed
  Argentina          France                      Korea                Seychelles

  Australia          Germany                     Luxembourg           Slovak Republic

  Bahrain            Greece                      Malta                South Africa

  Barbados           Guernsey                    Mauritius            Spain

  Bermuda            Hungary                     Mexico               Sweden

  Canada             Iceland                     Netherlands          Turkey

  China              Ireland                     New Zealand          United Arab Emirates

  Cyprus             Isle of Man                 Norway               United Kingdom

  Czech Republic     Italy                       Poland               United States

  Denmark            Japan                       Portugal             US Virgin Islands

  Finland            Jersey                      Russian Federation

                   CRS Report: The OECD Initiative on Tax Havens
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                      29
   Guatemala                              2009                 0

• US and International Effort
• New agreements = progress
• Still more work to be done…


•   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
•   Switzerland Eases Banking Secrecy (2009, March). Retrieved November 2009 from http://news.bbc.co.uk/go/pr/fr/-
•   Article 26 of the OECD Model Tax Convention on Income and Capital. Retrieved December 2009 from
•   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
•   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
•   US, Swiss Complete Tax Treaty (2009, June). Retrieved November 2009 from
•   Swiss Banking Wins Libertarian Friends in US (2009, June). Retrieved November 2009 from
•   Banking Secrecy Faces an Uncertain Future (2009, Feb). Retrieved November 2009 from
•   Jucca, L. (2009, Feb). UBS Tax Deal Is Swiss Bank Secrecy’s Waterloo. Retrieved November 2009 from
•   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

•   Bowning, Linnley. “U.S. Reports Agreement With UBS in Tax Case.” New York Times, 12 Aug. 2009. Retrieved Dec 2009 from
•   “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

•   Foulkes, Imogen. “Clock ticking for Swiss bank secrecy.” Retrieved November 2009 from

•   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


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