Swiss Bank Secrecy: US based clients are in trouble.
- Switzerland
- 03/31/2009
In a previous article we have explained that foreign clients of Swiss Banks need to seek advice as to the best way to protect their interests in the future. This is important even if at the present time there is no risk of information being sent from Switzerland to their home tax administrations in case of tax avoidance. This is because Switzerland still makes the distinction between not declaring assets to the tax authorities, which is not a fraud under Swiss law, and tax fraud, which implies typically the use of false contracts or false balance sheets or similar documents. Even if this distinction will not be upheld in future treaties concluded by Switzerland to avoid double taxation, the distinction will remain so long as the existing treaties have not been renegotiated, and notwithstanding, it will cover only facts occurring after the revised treaty enters into force.
This, however, is not true for US-based clients because some 300 client names were forwarded to the US authorities on February 18, 2009, by order of the Swiss Banking Regulatory Authorities (FINMA), short-circuiting the pending judicial review of the administrative decision to forward the information to the USA 1. US-based clients of UBS Inc. are also in trouble because the Swiss courts have given a very broad interpretation to the “fraud and the like” concept, which is applicable only in the cases of information sought by US authorities.
Indeed, the Federal Administrative Court held in its decision of March 5, 2009 (A-7342/2008 and A-7426/2008) 2 that acquiring an offshore company to hold the assets under the name of said company for the sole purpose of escaping the US taxes was a fraudulent activity, if at the same time the US resident continued in fact to exert control over the assets transferred on an account in the name of the offshore company, and if the US person managed those assets by way of instructions given directly to the Swiss Bank, without going through the directors or officers of the offshore company. This very broad Swiss interpretation of fraud in the US context is due to the fact that under the Qualified Intermediaries agreements entered into by Swiss banks with the US Tax Administration in 2003, UBS Inc. specifically undertook towards the US Authorities to identify the US beneficiaries, thus creating indirectly a higher degree of diligence duty. Fortunately for the US clients of UBS, the USA Internal Revenue Service has withdrawn on March 16, 2009 all pending requests for additional assistance from the Swiss Authorities in their tax investigation launched in August 2008. Switzerland has therefore immediately discontinued all pending investigations regarding names which had not already been forwarded to the USA pursuant to the previous decision 3.
In all other cases (except the special situation described above), a request must be filed by the non-Swiss foreign authorities, stating what fraud is being investigated and what information is needed in connection with a specific person. Whenever judicial or administrative assistance is granted, the Swiss bank is then ordered to put at the disposal of the Swiss authorities copies of all banking documents, including the names of the beneficial owner, settlor, protector, and beneficiaries, if in the bank’s files.
This is followed by a review of what documents are relevant to meet the request for information presented by the foreign state. The Swiss authorities will not check if the request is legitimate, but only if the request meets the formal requirements for assistance and if the banking documents are potentially relevant in the context of the investigation described by the foreign state. The legal owner of the bank account may then object to the forwarding of the information, for instance if it discloses the names of third parties, who may have made payments on the account or who may have received funds from said account, but unrelated to the foreign investigation. Such objections will however only be successful if they are obviously outside the scope of the investigations described by the foreign authorities. An appeal for judicial review of the administrative decision is possible, but only very few appeals are upheld in practice.
The Swiss courts in the case of the US requests for information have also been extremely lax in their interpretation of what was not a fishing expedition. As indicated above, normally the name of the person investigated must be stated in the request and must correspond to a name found in the banking records as a beneficiary or otherwise in the investigated account. The Swiss government has insisted that this practice must be maintained in the future.
In the March 5, 2009 case, the Court held however that a precise description of the account, even without a specific name, could be sufficient to grant the requested assistance. This goes far beyond, for instance, what the Isle of Man agreed to provide to the German authorities under the new Anti-Tax Avoidance Treaty between those two assets. It is therefore likely that in implementing the new legal Swiss policy abolishing the distinction between tax abuse and tax fraud in cases of assistance sought under a tax treaty, the Swiss government will seek to enforce stricter requirements to limit the assistance to cases where the name of the taxpayer is identified by the requesting state. This is indicated in particular by the Federal Department of Finance communication of March 13, 2009 setting out the conditions for granting administrative assistance in fiscal matters 4.
While relinquishing the unique distinction between tax evasion (which did not lead to international assistance) and tax fraud (which led to assistance), the Swiss Federal government will certainly set tighter conditions on which prerequisites will have be to met to have the request accepted. The requirement to identify the name of the taxpayer will certainly be one of the key requirements to avoid fishing expeditions.
Swiss law is therefore moving more in line with international practice, but this does not mean that more requests for administrative assistance will necessarily be successful, provided the clients take appropriate steps to protect themselves.
