Switzerland’s continuing dominance in the offshore wealth management sector was confirmed by the funds brought to light by Italy’s fiscal amnesty, which ended on April 30th, 2010. There’s no room for doubt about Switzerland’s leading role in sheltering foreign funds. In February, The Bank of Italy estimated figures revealing that of the 85 billion Euros declared, at least 60 billion were deposited in Swiss banks. No other nation’s financial sector came anywhere near rivalling Switzerland. San Marino turned up 3.8 billion Euros in deposits and Monaco’s 4.1 billion Euros are now caught up in regularisation. These are substantial sums considering the small sizes of the states concerned. However, deposits in Austria amounted to only 1.2 billion and the United Kingdom sheltered just 900 million in funds - figures well below those estimated before tax evaders came forth during Italy’s fiscal amnesty.
The truth is that Switzerland is the leading player in this sector and should retain its position as such. Should Switzerland’s position be weakened by concessions made in the banking sector in any way, its relative appeal is unlikely to weaken as well, particularly in the context of the deterioration of the European Union’s economy in general – and the Euro zone in particular. In other words, Switzerland would have a hard time of it if surrounding nations should go back to the position of strength they enjoyed in 2007, when the Euro’s value climaxed. But that’s extremely unlikely given the fact that the financial crisis has now become a budgetary crisis. In spite of Switzerland’s weakened bank secrecy policy, the country should preserve its role as a safe haven.
Lately, a flood of declared deposits from certain EU countries has been streaming into Swiss banks; particularly from Spain and Germany. These foreign depositors are eager to benefit from the solid balances approximately 330 Swiss banks in the national marketplace provide. Furthermore, privacy protection is a more important aspect than bank secrecy in the strictest sense of the term to an increasing number of European clients – as well as those from further abroad. It’s not so much about evading income tax collectors as it is about guarding the funds from ill-intentioned parties.
LIVING WITH UNCERTAINTY Switzerland’s continued appeal for European depositors – and even greater appeal for non-European investors – has barely been touched by caution resulting from the latest bilateral treaties concerning how double taxation agreements (DTA) will be enforced in the future. As of March 2009, Switzerland actually agreed to conclude 12 DTAs, conforming to the OECD model which makes no distinction between tax fraud and tax evasion. This is a major reversal of Switzerland’s previous policy, as the Swiss have never granted administrative assistance in terms of DTA unless tax fraud was proven. The act of not declaring a foreign bank account in Switzerland was not considered sufficient grounds for disclosing data to any other nation.
As of now, the ratification process of these DTAs is still pending. The new model, which makes no distinction between tax fraud and tax evasion, was signed with 12 countries and was unofficially agreed to with another 12 countries; involving a total of 24 nations including France, Germany, Poland, Austria, Holland, the United Kingdom, Denmark and Greece. Only a few countries beyond European borders – Singapore, Mexico, Uruguay and, of course, the United States – have either concluded or are in the process of negotiating a new model DTA with Switzerland at this time. No DTA renegotiations are currently underway with Russia and the existing agreement is particularly restrictive as it is essentially limited to mutual judicial assistance.
Given these conditions, some fund management banks have shown a marked interest in Russian clientele, and the interest has proved to be mutual.
The burning question about the new DTAs for those foreign nationals concerned is how they will be applied. Numerous European clients fear that all any nation need do is submit a list of names to obtain the data they seek from Swiss banks. Naturally, legal experts disagree with these fears, and insist that “fishing expeditions” are not an issue. Contrary to popular belief, any and all requests for data will have to include the name of the bank as well as a solid reason for suspicion to allow disclosure. In other words, clients who keep a low profile should be able to avoid attracting unwanted attention. Given the aforementioned, the number of cases in which the new DTAs are applied will amount to dozens (rather than hundreds) of requests from any given nation.
GETTING RID OF AMERICAN UNCERTAINTY The new system developed to apply the recent DTAs hence seems viable for the Swiss financial market, as it doesn’t even affect the essential aspects of bank secrecy. However, these relaxed conditions are intrinsically tied to Switzerland’s persistent fiscal debate with the United States. In February 2009, FINMA (the Swiss authority in financial market surveillance) agreed to deliver the names of 250 UBS clients strongly suspected of tax evasion to the United States government. Rather than having the desired calming effect on the situation, it incited the United States to request information on all of UBS’ 52,000 American clients. In an August 19, 2009 accord signed with the Swiss authorities, the Americans finally decided to “limit” their demands to 4,450 names which began to be disclosed in August, 2010. This accord was the cause of widespread debate in Switzerland and once it was submitted to Parliament, the debates became extremely tense indeed. The accord’s defendants wanted it to be considered as an exception, justified in the specific context of UBS’ American activities.
In contrast, the accord’s opponents demonstrated concern about the issue that it doesn’t conform to the existing DTA when it happened. As it goes back to the 1996 agreement with the United States at the time in question, it could therefore represent a dangerous precedent in retroactive application of the law. The fact is that UBS clients affected by the accord are not guilty of tax fraud, but can only be accused of tax evasion for not declaring their accounts. Other observers take questioning the legal validity of the agreement with the United States a step further by underlining that the conditions of the agreement would not even conform to the basic conditions of the new DTA, in the sense that it falls into the category of a “fishing expedition”. The psychological implications of applying the agreement in this context could extend far beyond the individuals concerned, in that it may cast doubts upon Switzerland’s loyalty to its particular concept of legal security. The accord with the USA on UBS was finally ratified by Swiss parliament in June, 2010.
Even though the fundamental differences between the two are relatively small, it none the less represents a real division between two main parties on Switzerland’s financial marketplace. On the one hand, large banks and certain large private banks would like to turn the page, given their highly developed networks which already cover most of the globe’s fund management markets. On the other hand, traditional Swiss fund managers serving clients with relatively “modest” incomes – numbering in the hundreds of thousands rather than in the millions – have real concerns on the issue. This sector of the Swiss financial market doesn’t have access to so-called offshore alternatives, particularly in the area of establishing structures in tax havens. They will therefore be subjected to increasingly greater pressure on fiscal issues.
For these “small” clients and their fund managers, the situation could become even more complicated, as FINMA has clearly stated its intention to limit travel abroad for Swiss financial intermediaries. This could make keeping in touch more difficult, although the inconvenience could be balanced by the very principle of discretion in Swiss-style fund management. After all, Swiss fund management contracts are designed with that very discretion in mind as well...
