Swiss Bank Secrecy under Attack - Case Study Example

Swiss Bank Secrecy Under Attack Raffaela Wais of Swiss economy has been always considered one of the most advanced in the world despite its dearth of natural resources. One of the sources of Switzerland’s economic success may have been its banking system, one of the most developed and secured banking system in the world. However, recent agreements made between American and Swiss governments regarding partial disclosure of bank accounts changed drastically the definitions of “private” and “secure” as they relate to traditional Swiss banking industry. This paper aims to discuss and analyze Swiss banking legislation and how it impacts the aspects of bank secrecy and security of clients’ accounts. The paper also provides a perspective analysis on Swiss private banking development in the context of recent changes in security and secrecy policies. Swiss Bank Secrecy Under Attack Swiss bank secrecy: tradition and present Switzerland is a country famous for political neutrality and financial stability. Swiss banks have long been the ultimate symbols of banking privacy, which was the biggest attraction to foreign clients (Starchild, 1996). Private banking still remains the backbone of the Swiss economy. However, the centuries-old traditions are bound to cease, as a sea change is sweeping Switzerlands core industry. In the times of the financial crisis and shortage of cash, governments of developed countries realized that billions of dollars are missing from their budgets because of tax evasion and offshore accounts. Therefore, they turned their attention to tax havens and, first of all, to Swiss private banks. Switzerland holds about $2 trillion in offshore accounts, which equals, as Barber (2008) suggests, to 40% of the world’s offshore capital. In February 2009, for the first time in the history of Swiss banks, UBS, the worlds biggest private bank and one of the two Switzerlands largest banks agreed to disclose 4,450 personal accounts of American citizens to the U.S. tax authority. This will definitely transform the perception of what private banking means and the future of bank secrecy too. In this paper I will argue that wealthy clients around the globe will be facing more and more difficulties trying to find a perfect tax haven, bank privacy laws of Switzerland may be changed in the foreseeable future, and Swiss banks may slowly but gradually lose their reputation as “bankers to the world”. According to Browning (2009a), UBS gave in to the pressure from the IRS, and announced in July 2009 that it will shut 19,000 accounts that belonged to alleged American tax evaders. The total balance of these accounts was estimated to be $18 billion, which U.S. federal prosecutors claim resulted in unpaid taxes of $300 million each year. The history-breaking deal between the U.S. I.R.S. and Swiss government made a significant impact: banks in Switzerland and across Europe began closing the accounts of U.S. citizens, citing policy decisions. The domino effect seems to be part of the IRSs greater plan. The U.S.A. is leading the developed countries in their hunt for wealthy peoples cash stashed offshore. The repercussions of the IRSs success in attacking Americans private accounts in Europe are felt as far as Singapore and Hong Kong, with reports of banks closing offshore accounts belonging to Australian citizens, as the Australian government, emboldened by the success of the IRSs PR campaign, is following suit in the global onslaught on hidden offshore assets. It is safe to expect that clients fleeing UBS will transfer their money to the other Swiss private banking giant and the second largest bank in Switzerland, Credit Suisse. However, Credit Suisse could be the next target of the attack from the I.R.S. Financial advisors are suggesting alternatives for UBS and Credit Suisse, pointing to smaller Swiss banks that are confident they can continue to provide elaborate schemes to protect their clients privacy. Another alternative is locations like the Caribbean, Panama, Singapore and Guernsey in the English Channel. Apart from Switzerland, there are three other countries in Europe that still have bank secrecy laws: Liechtenstein, Luxembourg, and Austria. They are already thinking of ways how to respond to the attacks from other EU countries, notably France, Italy and Germany, that are lobbying to penetrate the bank secrecy barriers to obtain information on suspected tax dodgers. Swiss banking system and its privacy laws Today, Swiss bank accounts are available to almost any person who can deposit at least $100,000. If a rich person is looking for a way to protect his money from unwanted attention, a Swiss account can be the ideal place. 300 years ago, when the history of Swiss bank accounts began, they were also used to give secrecy to very rich people. It all began with the kings of France who wanted strict secrecy. They borrowed money from Swiss bankers. The needed big loans, and always paid them back. Swiss bankers wrote a code of secrecy regarding banking and account holders. First Swiss laws on banking secrecy date back to that time In 1713, the Great Council of Geneva passed a law under which bankers were obliged to keep registers of their clients. But the bankers were banned to share the information with anyone except the client. Thats how Switzerland gained its reputation of a safe haven. Bank secrecy was regulated only by civil law. However, if a banker divulged information, he would not go to jail, as it was not a criminal offense. The modern history of Swiss bank secrecy began in 1934, when Hitler came to power in Germany, as described in Barber (2008). At that time, many Germans were worried about their wealth, so they were sending money abroad, mainly to Switzerland. The Swiss decided to protect their financial system against possible attacks from Nazis, so thats why Switzerland passed the Bank Secrecy Act of 1934. This law is still in effect today. Article 47 of the Swiss Federal Banking Law provides that bank employees shall be subject to criminal prosecution if they divulge confidential information about their customers. Bank employees are forbidden to disclose any information on the accounts or account holders without their consent. They cannot respond to an inquiry, even from the government, without a court order. Those who violate the professional secrecy can be sent to prison for a maximum of six months or can be fined for 50,000 Swiss francs. This law applies to retired bankers too. While this absolute secrecy is part of the Swiss banks culture, the branch offices outside of Switzerland must operate according to the laws of the foreign countries, which creates controversy, as these branches are not so well protected. Global war on bank secrecy Although Switzerland has a reputation of a developed civilized country, it has received a lot of criticism regarding its banks secrecy over the years. Switzerland was blamed for accepting money from drug traffickers in the 1960s, from dictators in the 1980s, and from tax cheats in the 1990s. In 2001, the United States learned that the Swiss had protected the bank that handled finances for Osama bin Laden. Its a well-known fact that bank secrecy helped Enron and Arthur Andersen, the two major corporations with high-profile scandals of 2001 and 2002, hide their offshore accounts, which led to corporate fraud, manipulation of accounting books, and evasion of U.S. taxes. All this is the reason why in recent years there has been a growing sentiment in the world against bank secrecy. Governments in many countries are putting pressure on Switzerland and calling on it to relax its bank secrecy rules. The U.S. attempts to break the secrecy at Swiss banks suddenly brought results in late 2007, when a former UBS midlevel private banker agreed to cooperate with U.S. tax authorities (Browning, 2010). Bradley Birkenfeld, an American citizen, worked at a UBS office in Geneva, Switzerland, in 2001-2005. He handled American private banking clients. In 2007, Birkenfeld voluntarily contacted US authorities and informed them that UBS was helping thousands of Americans hide money in secret Swiss accounts. He said 90% of his own clients evaded taxes (Browning, 2010). Some people believe that Birkenfelds motives were mostly altruistic. He even offered to wear a hidden microphone to expose high-level UBS managers on condition that he will not go to jail, but the negotiations with the U.S. Justice Department were not successful. Based on information provided by Birkenfeld, the American Justice Department and the Internal Revenue Service initially demanded a list of 52,000 American account holders suspected of tax fraud, and then got a court order demanding that UBS provide records on the 19,000 Americans that were believed to hide money in secret Swiss accounts. The U.S. threatened that UBS can be criminally charged and its license to do business in the U.S. can be taken away, if UBS didnt not cooperate UBS turned for help to the Swiss government. Finally, a settlement was negotiated. UBS agreed to pay a $780 million fine to the U.S. government and promised to stop providing private accounts to U.S. clients. Also, for the first time in history, UBS gave the U.S. Justice Department the names of 4,450 U.S. citizens suspected of tax fraud. Despite Birkenfeld helped the U.S. government, he was sentenced to 40 months in jail. Meanwhile, thousands of other Americans with offshore accounts were given a tax amnesty: they were allowed to file reports on their offshore money for the previous years and pay light penalties. Switzerland decided not to risk being added to a global blacklist of uncooperative tax havens, so it signed an agreement with the Organisation for Economic Co-operation and Development (OECD). OECD sets rules on bank data sharing, and works to exterminate offshore tax evasion. Meanwhile, the Swiss government hopes the concessions on privacy will be limited. It said that it would still protect banking customers from "unjustified watching from abroad", and would respond only to "concrete and justified" requests and provide banking information on a "case by case" basis. Foreign states would have to provide clients’ names and some evidence of breaking the law before asking Switzerland to give information on them. No Swiss laws on bank secrecy have been changed so far, and the country has not declared its intention to do so. Impact on clients Although it was believed that the 4,450 accounts disclosed by UBS to the IRS belonged to very rich Americans and contain hundreds of millions of dollars, the IRS now requires U.S. citizens and residents who have on their offshore accounts $10,000 or more, to disclose those accounts. Americans who have less that $10,000 dont have to worry. Also, if people keep not cash, but, for example, art in a Swiss bank, dont need to report it. For a country where a median home price is $500,000, having to report $10,000 in offshore accounts seems to be a very low threshold. In July 2009, UBS announced it would shut 19,000 accounts that were undeclared to the I.R.S. The assets held at these accounts will be most likely transferred to other banks, presumably first of all to Credit Suisse, or can be mailed in checks directly to the account holders. However, in this case US prosecutors will be able to trace the paper trail to clients, so many clients dont want the money to be sent to them. The clients now have a hard choice: 1) they can cash their checks, and thereby alert the authorities, or not cash them, effectively losing their money; or 2) they can transfer the money to new banks, a procedure which, in the case of foreign banks, requires depositors of more than $10,000 to report the new account to the Treasury Department. American clients of UBS also fear that they can be accused of money laundering, a more serious offense, because the transfer of cash to new accounts at United States banks can be viewed as criminal activity. “Any movement of money from UBS somewhere else can be a violation of U.S. money laundering laws,” said Bruce Zagaris, a tax lawyer who represents several UBS clients (Browning, 2009b). Also, as cited in Browning (2009b), one UBS client who preferred to stay anonymous said, “You can either take the check and throw it away, or take it to another bank and get caught. You cannot hide.” Some clients are afraid that they might go to jail if they dont come to the IRS before IRS finds them. According to Saunders (2010), said New York certified public accountant Stuart Kessler: "I just helped a 67-year-old man who cannot sleep, hes so nervous. Hes saying, What if they find me before I turn myself in?" Future of Swiss bank secrecy In January 2010, a Swiss court ruled that the Swiss financial regulator had broken bank secrecy law, when in 2009 it ordered UBS to hand over 300 client files to US authorities (Lambe, 2010). This cast doubts over Switzerlands ability to deliver the 4,450 names to the I.R.S. as agreed. So the situation around UBS is far from over. That means that the I.R.S. is yet to receive those names, and other Swiss banks can continue to operate without any changes. Progress of relaxing Swiss bank secrecy laws could be slow. The bankers will fight to the end to defend their tradition of bank secrecy. And even if Switzerland agrees, it would have to renegotiate more than 70 double-tax treaties. Michel Dérobert, secretary general of the Swiss Private Bankers Association, said "Switzerland would not cave in completely to outside demands on transparency" ("No Endgame Despite Concessions", 2009). In an article titled "Bourne to Survive" (2009, August 6) The Economist informed that UBS had been losing client money, with an outflow of $28 billion in the first six months of 2009; but Credit Suisse, the other giant Swiss private bank, received inflows of $30 billion. Thus, the magazine concludes that UBS clients fled the bank, not the country. They still keep their money in Switzerland because of its political stability and well-run banks. In February 2010, a trend of cash pouring back into Switzerland was reported. The problems in the EU countries force investors to turn again to Switzerland for banking stability, as Switzerland’s historic fame as a financial safe haven hasnt disappeared yet, despite the reputational issue around UBS. As Henning (2010) points out, its still an open question as to whether the wall around Swiss bank secrecy is about to fall. In past times of crisis, foreign cash entered Swiss banks. The same is happening now — confirming the belief that Switzerland is one of the best places in the world to safeguard cash and assets. However, globalization is spreading to all spheres of life, and bank standards sooner or later will be unified around the globe. Its only a matter of time before Switzerland will be forced to abolish its unique bank secrecy laws: it could take 3, 5, or 10 years, but it will surely happen someday. References Starchild, A. (1996). Swiss money secrets: How you can legally hide your money in Switzerland. Colorado: Paladin Press. 24. Barber, H. (2008). Secrets of Swiss banking: An owners manual to quietly building a fortune. New Jersey: Wiley. 35-36. Lambe, G. (2010). Rebuilding UBS: Can UBS revive its business and reputation? The Banker. Retrieved from http://www.thebanker.com No endgame despite concessions (2009, March). Private Banker International, 246, 1-6. Bourne to survive (2009, August 6). The Economist. Retrieved from http://www.economist.com Saunders, L. (2009, July 20). IRS Gets Tougher on Offshore Tax Evaders. The Wall Street Journal. Retrieved from http://online.wsj.com Browning, L. (2010, January 3). U.S. Is Said to Consider Easing Informant’s Term. The New York Times. Retrieved from http://www.nytimes.com Browning, L. (2009, January 8). Pressured by I.R.S., UBS Is Closing Secret Accounts. The New York Times. Retrieved from http://www.nytimes.com Browning, L. (2009, August 19). Names Deal Cracks Swiss Bank Secrecy. The New York Times. Retrieved from http://www.nytimes.com Henning, P.J. (2010, February 3). What’s Next for Swiss Bank Secrecy? The New York Times. Retrieved from http://dealbook.blogs.nytimes.com Read More