Guest blog: Swiss ditches and defence lines

On February 9 the French newspaper La Tribune published an interview with former Geneva prosecutor Bernard Bertossa, in an article entitled Le secret bancaire suisse va rapidement disparaître (Swiss bank secrecy will disappear rapidly - rough English translation here.) Now Andreas Missbach of the Berne Declaration provides some fascinating details about why Switzerland's positions on bank secrecy, tax fraud and tax evasion may be starting to look shaky.

In June 2008 the former UBS private banker Bradley Birkenfeld pleaded guilty in a Florida court to helping a client, property tycoon Igor Olenicoff, to evade taxes. Olenicoff had concealed about 200 million dollars in offshore accounts undeclared to the Internal Revenue Service (IRS).

One month later the UBS manager Mark Branson apologised, and admitted wrong-doing in a senate hearing. On that occasion UBS announced that the bank would terminate offshore private banking for its US clients and transfer all their accounts to their onshore branches in the US. But that was not really news: the bank simply reused a decision they had taken and communicated already in January, but which had gone largely unnoticed. Still, the apology was a sign that UBS was willing to cooperate.

Then, early in July, the Swiss finance minister took a hard line approach. The Federal Council (the Swiss government) was working to bring both sides – US and UBS – back “on the path of law” he said. But he warned UBS not to hand out client data as this would be a breach of banking secrecy, which is an offence, and must automatically be prosecuted.

Tax fraud, tax evasion

On July 17th the Swiss federal tax administration received a request for administrative assistance from the IRS in the UBS case. In the following weeks and months the Swiss government and especially finance minister Merz made a u-turn, now claiming that some UBS bankers committed tax fraud. This distinction is decisive in Switzerland only tax fraud (where documents are falsified as part of the evasion) is a criminal offence but tax evasion is not. Therefore administrative or legal assistance is only given in cases of tax fraud.

This is a crucial distinction that Switzerland has sought to use as a defence against attacks against its system from outside and inside the country. It makes Switzerland's position look nuanced, and confuses people. As Berne Declaration has remarked on the fraud/evasion distinction:

"This legal division has consequences. It also applies to legal and regulatory cooperation – that means that Switzerland only assists other countries to investigate when an act is considered a crime in Switzerland. In Swiss law on international legal assistance tax evasion is explicitly excluded. Without legal and regulatory assistance thanks to the separation of tax evasion and tax fraud, foreign tax evaders are safe here."

So the finance minister's u-turn and claim that some UBS bankers committed tax fraud appears to have been a way for Switzerland to find a way to co-operate with the US, without falling foul of its own laws.

That this new line was orchestrated with UBS became clear at the extraordinary annual meeting of UBS end of November. In the written English translation of Chairman Peter Kurer's speech that was handed out to journalists was the following passage:

“I do not believe that the purpose of client confidentiality is to protect such cases (tax fraud). In these situations, we must find a rapid, efficient and possibly unconventional solution.”

The last sentence was not in Kurer's speech in German, however, and while he spoke, UBS staff was trying to collect again the English translations, in exchange for a version without that sentence.

Cooperate on tax fraud to prevent information exchange on tax evasion

The Swiss strategy has one little problem. What the UBS-bankers apparently did – setting up shell companies to disguise the ownership of their clients holdings of US-securities to the IRS – is clearly not tax fraud according to Swiss law.

The Swiss double taxation treaty with the US allows cooperation on “tax fraud and the like” and a 11-page memorandum of understanding is clarifying what “and the like” means. Obviously -- and the federal council admitted this in reponse to a request from a parliamentarian -- some of the cases listed in that document don’t qualify for tax fraud according to Swiss law, but vis à vis the US they are treated as if it was tax fraud. Having the ability to expand tax fraud beyond what is written in Swiss tax laws one of the ways in which the Swiss government has sought to blunt pressure to cooperate in tax matters.

The Swiss Federal Tax administration has been gathering client data to cooperate with the US request for administrative assistance. In December they informed UBS clients that their data would be transferred to the US authorities within 30 days. But the clients have the possibility to appeal to the Federal Administrative Court (Bundesverwaltungsgericht). An appeal would take three to six months, and the U.S. is not amused with such a delay -- and that's even without considering the possibility that the clients will win their appeals.

At the end of January 2009 Swiss media speculated about a possible alternative strategy available to finance minister Merz. The federal council could use his power to decree, “if the national interest of the country” is at stake (article 184 of the Swiss constitution). The data of around 300 clients of paramount interest to the US would then be handed over. This could be followed by an out of court settlement with UBS, which media outlets speculate could cost the bank one to two billion Swiss francs.

The next days and weeks will show whether or not the federal council is willing to not only to stretch Swiss laws, but also the constitution (obviously UBS' tax difficulties are not a matter of national interest of Switzerland) in an attempt to appease the US and cooperate in a limited number of cases.

Will Switzerland get tough with its strategy to expand the interpretation of tax fraud, in order not to cooperate in the much bigger area of tax evasion? Much will depend on further pressure from the US, Germany and the European Union. Watch this space.

Andreas Missbach, Berne Declaration