What’s Next for Swiss Banking Secrecy?

What’s Next for Swiss Banking Secrecy?

The following is a question-and-answer exchange between Asher Rubinstein and a journalist from Switzerland, regarding recent developments effecting Swiss banking, exchange of confidential bank account data, the US Government litigation against UBS, and the German Government’s purchase of confidential bank account data.  The journalist’s questions appear first, followed by Asher Rubinstein’s comments.

The question I will be attempting to answer is: “Can Switzerland hold out in their efforts to protect banking secrecy – and the connected legal distinction between tax evasion and fraud?”

I believe that the events of 2009 (IRS v. UBS litigation, anti-tax haven offensive by the Organization for Economic Cooperation and Development (OECD), multiple Tax Information Exchange (TIE) Agreements with “tax haven” nations, etc.) have demonstrated that banking secrecy vis-a-vis governmental tax authorities is no more. While banking privacy and  asset protection vis-a-vis private civil creditors may be ongoing, there can be no expectation of banking secrecy in the context of tax reporting and disclosure.

With respect to the Swiss distinction between tax evasion and tax fraud, I likewise think that the distinction has limited ongoing viability. Under the new Swiss-U.S. TIE  signed in 2009, Switzerland would be obligated to disclose information to US authorities in connection with a US audit or investigation, whether civil or criminal. The tax fraud / tax evasion distinction under Swiss law would not be relevant to Switzerland’s obligation under the TIE to provide information to US authorities.

How will the US respond if the UBS deal falls flat on a Swiss legal technicality?

If UBS takes the position that Swiss law (i.e., the recent court ruling) prevents disclosure of the account information, the US would argue that UBS is in violation of the settlement agreement. The US might also argue that UBS is in contempt of court, and the US would move to re-open the civil litigation against UBS in US Federal Court in Miami. UBS’ defense to the contempt of court charge would be impossibility of performance, i.e., that it is impossible for UBS to comply and hand over account information, because the Swiss court ruling prevents UBS from complying.

I am not certain that impossibility of performance would be a persuasive argument to the US Federal Judge. Inability to hand over confidential banking data, because of Swiss law, has been UBS’ position all along, even before the settlement. Thus, the argument that UBS’ hands are tied is not new. We have had a hint as to the Judge’s possible response when, prior to the settlement, he asked attorneys for the US government whether they would be prepared to enforce a ruling by seizing UBS assets within the US.

UBS’ presence in the US gives rise to another vulnerability, independently of the legal proceeding. The US government could revoke UBS’ banking license, which would have far-reaching effects for UBS, its customers, and the international banking system.

Could we expect demands for data from other Swiss banks in the future?

Absolutely. We believe that the UBS is the “tip of the iceberg”. The 15,000 US taxpayers who have already made voluntary disclosure to the IRS about their foreign accounts, and the US taxpayers who have been indicted for tax fraud and have been cooperating, have provided the IRS with much information about other banks, in Switzerland and other countries, which have aided and facilitated tax non-compliance by US taxpayers. The IRS will not stop with UBS, but will use its public relations victory against UBS as leverage to pursue other banks. We know that other banks, including HSBC and Julius Baer, are already the subjects of investigation.

How does the issue of  Germany buying bank data change the international tax evasion landscape?

There is no absolute banking secrecy. Theft of banking data by a bank employee is one threat, and it’s not a new threat. Multiple threats to banking secrecy exist, on many levels.

The first level is institutional; for example, a bank like UBS disclosing account information to a tax authority like the IRS. The second level is governmental: the relaxation of banking secrecy laws, TIEs and increased transparency of former tax havens like Switzerland, Liechtenstein, etc.

A third level is the individual level: renegade bank employees looking to sell confidential bank data for a price. But this is nothing new. In 1999, the head of Guardian Bank in Cayman provided banking data to the US government in return for leniency in his criminal prosecution. In 2008, an employee of LGT bank in Liechtenstein sold banking information to Germany. In 2009, an HSBC employee provided banking data to France.

Thus, a foreign government purchasing once-confidential banking data is not a new development. Rather, it highlights yet another threat to banking secrecy.

Is it justified for country A to flagrantly break laws because country B is encouraging people to violate country A’s criminal code?

This question seems more a moral question than a legal question, but the law does shed some light. Under the law in the US, stealing from a thief is still theft. In other words, focusing on the second crime, i.e., the purchasing of stolen bank data, is merely a distraction from the first crime, i.e., facilitating the violation of tax law. The focus on country A’s actions do not undo the first issue, which is country B’s encouragement of tax violations.

Is there any chance that this issue will blow over if Switzerland sits tight?

I don’t think so. The IRS obtained tremendous public relations in bringing UBS to settlement, and scared thousands of Americans to come forward and voluntarily disclose their offshore accounts. The recent Swiss court decision has undercut that momentum, and I don’t see the IRS allowing that situation to continue. Rather than “blowing over”, I think there will be tremendous diplomatic activity between the US and Switzerland. I also think that it is likely that the IRS will re-commence the litigation against UBS in federal court in Miami, in order to try to get additional leverage. This will continue to be an ongoing diplomatic and judicial issue.

Renegade Bank Employees Further Erode Offshore Banking Secrecy

Renegade Bank Employees Further Erode Offshore Banking Secrecy
by Asher Rubinstein, Esq.

In an article from December 2009, titled “Get Ready for a One-Two Punch: More Taxes and More IRS Audits” , I wrote the following:

Taxpayers are not only at risk of discovery by the IRS; they face an increased danger of being turned in by private informants seeking recently enlarged rewards. . . . Foreign tax haven banks offer an opportunity for underpaid employees to get rich by becoming IRS informants. Additionally, taxpayers are at risk of being turned in by ex-partners, ex-spouses, ex-companions, ex-employees, litigation/arbitration adversaries, estranged children, or anyone else with a grudge who senses an opportunity to get even and get a reward.

Back in 1999, John Mathewson, the former owner of Guardian Bank and Trust, a defunct Cayman Island Bank, was charged with money laundering involving his Cayman bank. When Mr. Mathewson was arrested, he gave Federal investigators computer records which he had stolen from the bank and brought to the U.S. These computer records contained information regarding American depositors at the bank who evaded U.S. tax obligations. In that case, the motivation for sharing banking data was not money, but cooperation in criminal prosecution and leniency in sentencing.

In 2008, a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold the data to the German intelligence service in return for a few million Euros. With that data, the German government prosecuted Germans for tax fraud. The German government also shared the data with other governments around the world.

In 2009, an employee of HSBC shared bank account data with the French government.

In January 2010, it was reported that an employee of a Swiss bank offered confidential client banking data to the German government in exchange for a multi-million Euro payment. As of today, indications are that the German government will again purchase the banking data in order to investigate tax fraud by German citizens.

An article in Bloomberg, “Swiss Banks Achilles Heel Is Workers Selling Data” , echoes our warnings.

As the events of last year have shown, Swiss banking secrecy laws caved under pressure from the IRS, resulted in the disclosure of account information once thought to be sacrosanct, and led to prosecution of many US taxpayers for tax fraud.

In addition to weakening secrecy laws and greater information exchange among governments, we must add one more threat: the threat by bank employees looking to deliver confidential banking information in return for payment. Thus, last week’s Swiss court ruling that the UBS-IRS settlement violated Swiss law becomes only a secondary issue if the underlying foreign account data is sold by a renegade bank employee. Exchange of account information at the governmental level is sidelined when an inner employee of the bank poses a more immediate and direct threat to banking secrecy.

As we have long-counseled, any of these threats – – whether from weakening bank secrecy laws, exchange of information by governments, or from renegade bank employees – – is not material if the foreign account is tax-compliant. It is completely legal to have funds offshore, for many reasons, so long as the funds are disclosed and taxes are paid on the income. If the accounts are compliant, the threat of information sharing, from whatever source, is eliminated. The lesson: if you have assets in foreign banks, make sure they are tax compliant. As the window of banking secrecy closes further, taxpayers with tax-compliant accounts need not worry.



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