An economic war against offshore Switzerland. Who will win?

What things are associated with Switzerland? The majority of people will answer - chocolate, watches and confidential bank accounts. Banking secrecy is an integral part of the national Swiss character. It is one of the main reasons why Switzerland has become the biggest offshore banking-services center in the world. 

However, this year Switzerland’s bank secrecy laws have come under increasing scrutiny. The Swiss Bankers Association have accused the United States and Great Britain - backed by Germany, France and other countries from G-20 - of forcing their nation to weaken its bank secrecy laws and conform them with international transparency standards. Is it the beginning of an economic war against Switzerland?

The Swiss bankers believe that Organization for Economic Cooperation and Development (OECD) is engaged in disgraceful treatment of their nation. OECD is threatening to include Switzerland in a blacklist of uncooperative tax havens in order to make them release the names of tax evaders. 

It started when American government decided to take measures against tax havens all over the world. They estimated that they lose about $100 billion in tax revenue every year. So there is a lot of anger and vengeance against people who have not paid taxes in the U.S. and hid their income in foreign banks. 

Trying to repatriate hidden wealth and inject it into economies in time of financial crisis and recession, American government tries to use all possible means. You know from history that during financial crises many countries tend to devaluate or control their currency in order to prevent capital flight.

That’s why last week American government promised no criminal charges and lower penalties to people who contact IRS within the next six months. They think that tax amnesties are an effective way to make people declare hidden cash. Typically, the fines are equivalent to 50%-70% of the accounts' value for the whole period of time when taxes were not paid. 

Large penalties have prevented many wealthy people from declaring their offshore bank accounts which were sometimes inherited from relatives. American government hopes that tax amnesties will help such people solve all problems with IRS.

Another move is to include a crackdown on tax havens, where investors can hide their wealth. Since offshore money is typically protected by bank secrecy standards, there is no official data on the account holders or on the amounts of undeclared cash. American government can just estimate approximately how much money they have lost. 

According to the Boston Consulting Group, the amount of funds held abroad (not all of them are undeclared) is close to $7 trillion. About one third of this sum is held in Switzerland’s banks. That’s why American government is forcing Switzerland and other leading offshore centers to weaken their bank secrecy rules and help them chase tax evaders.

Swiss bankers consider unpleasant prospects of sanctions as a national "humiliation." They have all reasons to think so because banking confidentiality has long been the norm in Switzerland, the country with the most efficient and comprehensive banking model. 

The confidentiality of bank information made Switzerland a very popular destination for capital during the World War II. Since that time bank secrecy has been one of the main attractive features of their bank accounts. 

Nowadays, according to experts, Swiss banks manage about $2.42 trillion in offshore accounts. About 75% of them belong to foreign private investors.

There are over thousands of Americans who have accounts in Swiss banks. Although the banks know the identities of these customers, they do not indicate their names on statements or in computer records. This system has worked well until the recent events.

Why should Switzerland damage their successful offshore banking business and let the jealous competitors gain market share? Just to please the U.S. who wants to control currency flows? It is not the job of Swiss banks to enforce American tax laws.

American requirements do not only concern paying taxes. This country wants to restrict the ability to invest money freely and without fear of currency controls. When your bank accounts are regularly checked, you lose your liberty. Isn’t it the main value of American nation?

The economic war started from the recent prosecution of UBS, the Swiss largest private bank, by American government. UBS was accused of trying to help its U.S. investors evade taxes by placing their money in confidential bank accounts. 

In February, UBS agreed to pay $780 million to the U.S. Justice Department, and provide the names of nearly 300 account holders accused of evading taxes to the Internal Revenue Service. However, American government doesn’t think that it is enough. They demand to disclose the information on additional 50,000 accounts. 

Swiss bankers believe that the U.S. actions violate banking secrecy and the terms of a bilateral tax treaty. And they are absolutely right in this situation. Why can’t a neutral county control the laws inside its own borders? 

In addition, Swiss Bankers Association does not agree that Switzerland is a tax haven. According to their opinion, 99.9% of tax evaders do not have a bank account in Switzerland. That’s why it is not true that the Swiss banking business is based on tax evasion. 

If you look at some Anglo-Saxon countries, you can notice that countries like Jersey and Guernsey prefer to disclose all information about their clients. The difference is that they don’t know who their client is! In Switzerland, all information about their account holders is valid and useful, so such politics is very unfair.

The United States and other countries from Group of 20 powers consider Switzerland as an easy target to attack because there is no political risk involved. Switzerland doesn’t have a powerful lobby in the U.S. or in the European Union that it can take advantage of. 

OECD has made out the blacklist of suspect countries long time ago, but Switzerland has never been included in it. And suddenly, Germany and France started to insist on adding Switzerland, Austria, Lichtenstein and other tax havens to this blacklist without discussing it with the countries’ authorities or in the commission which treats the tax issues.  

The opportunity to be slapped with serious sanctions made Swiss bankers worry. Earlier this month the country decided to adopt international rules concerning banking secrecy. The country agreed to share banking records with other countries, something that the Swiss have refused to do for years. 

This decision should bring an end to threats to put Switzerland on a blacklist of countries that shield tax evaders. Swiss banks will work on the problems of tax cooperation and will no longer protect individuals who are suspected of tax evasion at their home countries. 

Foreign governments just want to put pressure on their citizens and frighten them not to put money in Switzerland or other tax havens. This move is intended to scare investors who may be able to withdraw some of the estimated $2 trillion deposited in Switzerland’s banks. But in turn, it will hurt Swiss banking system. 

Other tax havens (including Austria, Liechtenstein, Luxembourg and Singapore) recently agreed to adopt similar international transparency rules on tax evasion in order not to be included in the OECD’s blacklist. Germany, France and Great Britain have mooted economic sanctions for those countries that don’t want to weaken their banking secrecy laws. 

The Swiss Ministry of Finance stated that the country doesn’t plan to relinquish bank secrecy at all. According to a recent research, this policy is favored by over 75% of the Swiss. 

The research also showed that the Swiss feel deceived because they think that British and American offshore financial centers (Isle of Man, Bermuda, Channel Islands, Cayman Islands, Bahamas, etc.) are just trying to take their profitable business away. 

There could be more tax evaders in Florida and Delaware than in Switzerland. Why can’t American government start with putting its own house in order before turning their attention to small Switzerland? 

Vice chairman of the Convention of Independent Financial Advisors Jean-Pierre Diserens agrees with this point of view. Great Britain, the U.S. and Switzerland are the main offshore centers, so this politics is just a trick to disrepute Switzerland and gain market share. 

The reasons that caused the U.S. and Great Britain to put more pressure on Switzerland are obvious. But what about Germany and France, why did they take part in this game? 

Some experts believe that they are trying to divert attention from their own tax faults and complicated tax systems. The attempts to punish Switzerland for the refusal to cooperate in tax investigations are caused by their jealousy of the well-organized Swiss financial industry. 

It is necessary to keep in mind that Swiss authorities have always cooperated with foreign governments in cases of a criminal offense that involved lying to authorities, instead of just hiding income. They believe that tax evasion is not a criminal offense, so why they should open all information about each account holder?

In most countries investors face imprisonment if they are found guilty of tax evasion. On the contrary, Switzerland considers that when a taxpayer commits a not very serious fraud, he should pay a penalty, but not go to jail. 

The new rules state no difference between tax fraud and tax evasion. However, unless other countries first present proof of tax evasion by specific account holder, Switzerland will refuse to provide banking information. 

Ahead of G20 summit where tax havens issues will be discussed, Switzerland’s private banks have started to ban their top executives from leaving the country. It is done to prevent their detention and questioning concerning tax evasion. 

Banks feel that they have to take extra precautions to protect their employees. Nowadays, if you are a Swiss banker going to the U.S., you have to be afraid that you will be taken in for questioning. 

Some people in Swiss private banking industry also told that their executives aren’t even travelling to France and Germany. What is it if not an economic war?

The unfair attack on Switzerland’s banking business is not really about international transparency rules. It is intended to solve an internal problem by finding an enemy outside to bash. But do American authorities remember that several past tax amnesties, for example in Latin American countries, were not successful?

The U.S. move sets a bad example for other countries. For example, France is already under pressure for introducing tax reductions for rich citizens. Will this country be the next scapegoat? It can happen that some people can immigrate to France in order to take advantage of their taxation system. 

In the face of weakening bank secrecy laws, Swiss tax lawyers have started to advise foreign customers to disclose their secret bank accounts. They hope that American authorities will be lenient towards bank accounts holders. 

Prince Alois, the head of Liechtenstein, also said that foreign countries should implement a tax amnesty under which account holders could repatriate money to their home countries. Otherwise, the clients can simply open new accounts in other parts of the world. So it’s not guaranteed that all customers will come back into their tax system.