Asher Rubinstein’s article, “After UBS Deal, Does Offshore Banking Have a Future?” was published on Forbes.com. Please click here to view the article on Forbes.com.
After UBS Deal, Does Offshore Banking Have A Future?
Swiss-account holders will still get stability, privacy and protection from private parties—but not from the IRS.
Asher Rubinstein 06.17.10, 4:45 PM ET
In Zurich this week, the talk of the town is the Swiss Parliament’s vote to approve the settlement by which UBS banking files will be handed over to the IRS. People are questioning whether the erosion of Swiss banking secrecy will lead to a decline in the prestige of Swiss banking overall.
Now that the UBS matter appears to be heading toward resolution, another question is whether charges will be filed against other banks, in Switzerland or elsewhere, for facilitating tax fraud by hiding income in accounts once thought to be impervious to tax authorities, but now shown to be vulnerable.
The Swiss Parliament’s vote to approve the UBS settlement was expected. Most Swiss bankers and lawyers understood that UBS files would be surrendered to the IRS, because the results of refusing to disclose the bank data would likely have been the Department of Justice re-instituting further civil and criminal actions against UBS in federal court in Miami.
The Department of Justice, which prosecuted on behalf of the IRS, would likely have argued that UBS was in contempt of court and violated the settlement agreement. The penalties might have included revocation of UBS’ lucrative banking license in the U.S., and seizure of UBS’ billions of dollars of assets in the U.S. The consequences would have been devastating to UBS, its account holders and the broader financial markets.
But still, the world–and especially some Americans with Swiss accounts they thought were “secret”–waited for Parliament to act. Delays in Parliament were caused by political maneuvering and the tacking on of special interest provisions to this must-pass legislation (just as happens in the U.S. Congress), but everyone expected the UBS settlement to be approved eventually because of the potential downside if it were rejected.
Now that it has passed, one question is whether Parliament’s approval is good for Switzerland. Many Swiss people do not think so. For one thing, the Swiss are historically and proudly independent, and many were not pleased at having to back down to the U.S. Many Swiss people were prepared to sacrifice UBS for its misdeeds, in return for Swiss sovereignty standing firm and Swiss banking secrecy laws left intact.
Had Parliament not voted in the affirmative, the debates may have extended to a referendum among the Swiss population. The Swiss populace may well have rejected the settlement, standing up against the U.S. and in favor of longstanding Swiss banking secrecy which has, until recently, served Switzerland so well.
Switzerland has for decades benefited from being the premier banking nation in the world, the country where everyone from other countries–business oligarchs, shady dictators and retirees alike–put their money. Switzerland has much of the world’s wealth in its vaults, under its management and earning huge fees for its banks. Switzerland, and the Swiss, have grown rich as the bankers of the world.
Will this notion of elite Swiss banking change because of Parliament’s vote and the defeat of Swiss banking secrecy? Probably not. What has changed is the reason for banking in Switzerland. Tax evasion by hiding income in Swiss accounts is no longer a viable reason. Yet the political, social and economic stability of Switzerland are all still intact. And notwithstanding Parliament’s vote, Swiss banking confidentiality is also still intact, so long as the account is tax-compliant. Confidentiality from one’s private creditors and other financial challengers remains. Switzerland will continue to be a strong banking and financial services center, even a confidential one, albeit a tax-compliant one.
While the IRS offensive against UBS may have been the first significant dent to Swiss banking secrecy, other recent events have demonstrated that banking secrecy vis-a-vis governmental tax authorities is no more, whether in Switzerland or elsewhere. For instance, all the “tax haven” countries, including Liechtenstein and Monaco, along with Switzerland, have signed Tax Information Exchange Agreements with the U.S. and other countries. The tax havens have also agreed to abide by banking transparency standards and bank information sharing standards set forth by the OECD, the Organisation for Economic Co-operation and Development, a transnational quasi-governmental organization supported by the European economic powers and the U.S.
Moreover, information sharing and cooperation among governments is now routine, as seen by Germany paying millions of Euros for stolen bank data, using that data to prosecute German tax evaders, and then sharing that data with multiple other foreign governments.
The HIRE Act, recently passed by the U.S. Congress, sets very rigid rules requiring Americans to disclose offshore accounts and foreign entities, and punishes noncompliance with very severe penalties.
It is not illegal to have a foreign bank account, and there are many good reasons for having one: asset protection, access to foreign investment products, international diversification, doing business globally, owning real estate in a foreign country. But the disclosure and tax reporting obligations are now stringent. While banking privacy and asset protection from private civil creditors may be ongoing, there can be no expectation of banking secrecy in the context of tax reporting and disclosure.
As UBS surrenders its client data to the IRS, we can expect the IRS to set its sights against other banks. The 15,000 U.S. taxpayers who have already made voluntary disclosure to the IRS about their foreign accounts, and the U.S. taxpayers who were indicted for tax fraud and have been cooperating, have provided the IRS with a wealth of information about other banks, in Switzerland and other countries, that have aided and facilitated tax noncompliance. It is unlikely that the IRS will stop with UBS, but will use this public relations victory as leverage to pursue other banks in Switzerland and elsewhere.
The bottom line for foreign accounts once thought to be secret: they’re not. Account holders must bring their accounts, wherever located, into compliance. Switzerland and other foreign banking centers offer safety and stability, but they no longer offer tax secrecy.
Asher Rubinstein is a partner in the law firm of Rubinstein & Rubinstein, LLP, in New York. His practice is devoted to domestic and offshore asset protection, wealth preservation and tax planning. He may be reached via www.assetlawyer.com