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.
