Tuesday, February 16, 2010

Offshore Tax Evasion: Swiss Court Upholds Swiss Bank Privacy Laws

Approximately, two years ago, the U.S. began investigating offshore tax evasion schemes focusing on certain operations involving Swiss bank UBS AG (UBS). I commented on the details of the U.S. Justice Department (U.S.), and Internal Revenue Service (IRS) investigation regarding UBS and Citigroup last fall. It is available here. The U.S. and IRS reached a settlement with UBS in which, UBS agreed to pay $780 million to the U.S. and IRS as part of a deal to avoid criminal prosecution for helping wealthy Americans evade taxes. A central part of the settlement was a special agreement between the U.S. and the Swiss Government to permit UBS to disclose the identities of approximately 4,450 of its American clients who are suspected of hiding assets in offshore Swiss bank accounts. This disclosure was a major shift in the historical policies and existing Swiss law regarding Swiss bank privacy laws.

The Swiss principle of bank secrecy is derived from statutorily enforced privacy laws. Swiss law strictly limits any information shared with third parties, including tax authorities, foreign governments or Swiss authorities, except when requested by a Swiss judge's subpoena. The law only permits a bank to share information with third parties in cases of severe criminal acts, such as identifying a terrorist's bank account or tax fraud, but not simply for non-reporting of taxable income, otherwise known as tax evasion. A bank employee who violates a banking client's privacy is subject to severe punishment under Swiss law. Recent bilateral treaties negotiated between Switzerland and a number of countries are designed to weaken Swiss law privacy protections related to tax evasion. The bilateral treaties are analogous to the disclosure provisions contained in the special agreement between the U.S. and Switzerland concerning the disclosure of American UBS clients.

However, last month a Swiss Court, the Federal Administrative Court in Switzerland, ruled that Swiss authorities may not disclose the bank account details of a wealthy American who used UBS’ private bank to evade American taxes. Some commentators believe that the Swiss Court’s ruling may nullify the special agreement between the U.S. and Switzerland regarding the disclosure of American UBS clients. In the ruling, the Swiss Court noted that Switzerland is an independent democratic country with a clear separation of powers, and it is the court’s responsibility to maintain said independence by adhering to Swiss national law, and not provide confirmation of external political pressures. As such, the Swiss Court issued a ruling forbidding UBS to disclose information to the U.S. or the IRS regarding approximately 4,500 American UBS clients. Furthermore, the Swiss Court ruled earlier last month that Switzerland's financial regulator violated Swiss law when it turned over data regarding 255 UBS American clients last year. The Swiss Court’s decision cannot be appealed. The ruling has placed the special arrangement between the U.S. and Switzerland regarding American UBS clients in jeopardy. It is unlikely that the Swiss Government wants a confrontation with the U.S. One possible remedy would be an emergency decree by the Swiss Government to enforce the original special agreement between the U.S. and UBS. The decree would arguably be beyond the scope of the Swiss Court’s jurisdiction. However, this all remains to be negotiated or it may all lead to an international legal battle.


  1. Doesn't the Swiss cour relaize that they are harboring criminals? What about the international concept of comity? Doesn't the court have an international obligation to confirm the special arrangement between Switzerland and the United States? Why is the court permitting tax criminal to get away with fraud?

  2. Funny, when speaking about U.S. involvement in other parts of the world the left generally and Barrack Obama specifically is quick to assert the the U.S. must not impose it's values. Leading up to his initial tour of the Middle East he told the BBC, "The danger, I think, is when the United States, or any country, thinks that we can simply impose these values on another country with a different history and a different culture." The Swiss court seems to agree.

    The Swiss are only asserting their sovereignty. They are as the court said, " ... an independent democratic country with a clear separation of powers ..." and it is the Swiss court's responsibility to, " ... maintain said independence by adhering to Swiss national law, and not provide confirmation of external political pressures."

    If the left wants to be consistent and maintain it's credibility it should but out. After all, there are many countries whose laws concerning extradition make it impossible for us to prosecute accused criminals and whose independence from U.S. influence is defended vigorously by leftists. What's the difference? Oh, yeah, you want the money.

  3. It interesting that the court doesn't feel any compulsion about maintining its privacy laws even when it is resulting in a harm in another country? Doesn't the contract between the countries prevail? If the Swiss Government said okay to give the information, I don't understand why the court is not accpeting the government's decision.

  4. Recently, 60 Minutes aired a story about Bradley Birkenfeld who was an American banker working for UBS and I believe living in Switzerland (http://www.cbsnews.com/stories/2009/12/30/60minutes/main6038169.shtml). In light of this recent ruling, its clear Switzerland is protecting its economy and in some assuring their current and future banking clients that their accounts and information will remain confidential. The 60 Minutes interview seemed to suggest that banking and the Swiss' lenient laws provide a big boost to Switzerland's economy. Anonymous is right, this is no different than the difficult extradition laws/regulations counties impose so criminals cannot be sent back to certain places to face prosecution. In fact, Birkenfeld who helped expose UBS' banking practices is now being prosecuted in the U.S., but I wonder how severe his punishment will be compared to what he could have faced in Switzerland for revealing the identifies of his clients and violating Swiss law and presumably his former company's practices.

  5. It seems that UBS had a duty to their clients not to reveal their identity even if there was illegal activity. While UBS certainly played a role in safeguarding these criminal tax evaders, I do not believe identities should have been revealed. I am of the opinion that since UBS harbored these illegal actions, they should not have been allowed to mitigate damages by revealing their clients identities.

  6. I do not believe that it is fair for the United States to meddle in the affairs of UBS or the tax laws of Switzerland. This whole charade began with the Birkenfeld indictment back in 2004. If the IRS and the United States government does want wealthy Americans to find loopholes in the system then maybe the system should be better designed. I believe that this is only the beginning of many criminal investigations in other tax havens such as the Cayman Islands, the Virgin Islands, and Bermuda. However the Swiss court has spoken and I believe that their laws should be respected.

  7. I believe that the US law enforcement community is overstepping its bounds by trying to influence hundreds of years of Swiss law. The Swiss have always maintained a culture of independence and neutrality in the face of every modern political and economic movement. It is one of the things that has led to them becomming a symbol of stability on the world stage. I hope that this special decree spoken about toward the end of the piece is abandoned and the Swiss court system is allowed to exert control over its country's own legal affairs.

  8. Late last summer, following the UBS tax fraud affair, the international media reported that the Americans had finally permeated the fabled Swiss storied secrecy.

    Swiss banks in general, as well as the country’s banking secrecy laws, have incurred the wrath of people and governments the world over for every evil from tax evasion to capital flight to money-laundering to conduits for terrorism financing.

    “Bank-client confidentiality” is not indigenous to Sweeden. It actually reflects the German word Bankkundengeheimnis more accurately — is the professional duty and legal obligation of a banker to treat his or her clients’ affairs in confidence. (see www.swissbanking.ch)

    Confidentiality in banking has long existed as a traditional unwritten professional code amongst bankers. However, in Switzerland, this tradition is actual law in 1934 when it was codified in Article 47 of the country’s first-ever federal banking act (see www.swissbanking.ch)

    Banking secrecy, therefore, is not some ploy the Swiss manipulate to attract foreign clients to their banks. It reflects the very high degree of trust that exists between the Swiss state and its citizens and it has strong democratic foundations.

    Further, there are limits on Swiss banks confidentiality (see www.swissbanking.ch)

    Limits of Swiss bank-client confidentiality
    A banker's obligation to respect his/her clients' privacy is not absolute, and no protection is afforded to criminals. In particular, there is a duty for banks to provide information under the following circumstances:
    civil proceedings (inheritance or divorce, for example);
    debt recovery and bankruptcy proceedings;
    criminal proceedings (money laundering, association with a criminal organisation, theft, tax fraud, blackmail, etc.). If circumstantial evidence gives rise to a suspicion that the financial assets are the proceeds of a crime, then financial institutions may inform the authorities without thereby breaching bank-client confidentiality; if the suspicion is well-founded, they must inform the Money Laundering Reporting Office;
    international administrative and judicial assistance proceedings

  9. When looking at the Swiss' perspective in this case, I'm not sure which position is better for them. Receiving international funds from the other nations as opposed to getting into a conflict with the United States over these tax evasion issues here are difficult options. Obviously, the Swiss federal court has obviously chosen to protect its national financial interests probably to the ire of the United States to had already arranged a settlement to uncover the Swiss bank accounts.

  10. Tax evasion is a crime under the US law, but not so under the Swiss law. Tax fraud as stated in Professor Pierre Louis article is regarded as a more serious offence under the Swiss law. However in this case, the norm of client confidentiality seems to have been misused to cover up the fraudulent acts of customers, in direct assistance with bank personnel. From my understanding the Swiss statutory law still considers tax evasion which it defines as the under-reporting of income or filing incorrect returns as a civil violation, different from tax fraud, which it views as a serious crime involving illegal income and the use of sham entities to hide assets. The UBS story has reportedly shaken the Swiss banking system. The tax scandal has posed substantial monetary losses for UBS and threatened Switzerland’s banking industry in general. They have also affected other governments because tax havens encourage business corporations and wealthy economic entities to avoid paying taxes, which leads to substantial revenue losses for governments. Governments of developing nations in particular, use tax revenues for funding various human developmental works; sufficient revenue generation from taxes frees developing nations from the strings tied with foreign aid. Does this mean that although we may not seem to have been directly affected by tax havens, our governments which use these tax revenues to fund social services may have been? I think there may be a correlation between the two and until there are universal laws that protect tax evasion someone or some agency will always be on the losing side.

  11. From this blogs we can awareness from Swiss bank secrecy and this help us know about that which are punishments during the breaks laws of Swiss banks rules. Each client can get information before go with Swiss bank.Thank you for sharing with us..............