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The blemishes of the clean money strategy

Published: 16. 04. 2012

Switzerland’s Finance Department must work out detailed provisions for a «clean money strategy» by June. The benchmarks presented by the Government are hardly suitable. Effective measures in favour of poor countries are still lacking.

Since March 2009, Switzerland has signed new double taxation agreements with over 30 countries, providing for the exchange of information in clear cases of tax evasion. Five of them are with emerging or advanced developing countries, and the others with rich industrial countries. Tax dodgers from poorer developing countries can continue to bring their undeclared fortunes to Switzerland undisturbed.

Even otherwise, Switzerland’s progress so far in matters of fiscal transparency has been unsatisfactory. On the one hand the agreements concern only cases of tax evasion that occur after conclusion of the contract. The problem of undeclared assets from the past remains unresolved. On the other hand, it is questionable whether the new rules will really deter future tax evaders. Switzerland will have to supply information only when the deceived state is able to substantiate the suspicion of tax evasion in detail. But this is very difficult, in particular for poor countries with weak administrations.

Federal Council's proposals insufficient

In an attempt to tidy up the image of the financial centre, the Federal Council presented a discussion paper for a comprehensive «clean money policy» at the end of February. Finance Minister Eveline Widmer-Schlumpf must now draw up a detailed strategy report by June. The strategy should ensure that no new illegal funds actually make their way into Switzerland. At the same time it should get to grips with the question of old undeclared assets. To achieve this, however, the Government's proposals would have to be properly reworked and supplemented.

Let us take due diligence, for instance. As a new central element, the Federal Council is proposing greater due diligence on the part of banks. But the stolen assets regulations in the Money Laundering Act demonstrate that such due diligence serves little purpose. In case of suspicion of stolen assets, the banks must already have completed detailed investigations. Should a suspicion be substantiated, the funds must be rejected or blocked. The Financial Market Supervisory Authority (Finma) maintains that most banks are complying with the requirement. Yet in recent months, stolen assets from North Africa in three-digit millions have been discovered in Swiss bank accounts.

Anonymity at any price

What is new in the Federal Council's proposal is the introduction of a self-declaration requirement. Foreign bank customers would be required to declare their tax compliance by signature. Such a signature is not worth much, however. There is nothing to prevent the customer from deceiving the bank. A duty of declaration would only be effective if the bank customers were required to present certification from their tax authorities. That would be an important first step towards removing their anonymity.

Yet the Federal Council still wants to continue to guarantee tax evaders their anonymity. That is why the final withholding tax (also known as “Rubik tax”) forms the third pillar of its proposal. It is to be offered to as many countries as possible. The only thing is that the Federal Council «forgets» that Germany could soon bury the first such agreement signed by Switzerland. That would put paid to the final withholding tax internationally.

Ill-suited double taxation agreements

Still unanswered is the question of what the Government intends to do about tax flight capital from poorer developing countries. For these countries, double taxation agreements are not really a meaningful option even when they provide for administrative assistance against tax evaders. The main purpose of such agreements is to keep withholding taxes on Swiss foreign investors as low as possible in the partner countries. But the developing countries are neither able nor willing to stand the resulting tax revenue losses.

It would make much more sense for Switzerland to offer these countries straightforward Tax Information Exchange Agreements (TIEA). But these are not envisaged in the Federal Council's discussion paper. The simplest and best solution for a clean money strategy would of course be automatic information exchange – for rich and poor countries alike. But the Federal Council and a majority in the parliament are seemingly not yet mature enough for this.

Mark Herkenrath
, Alliance Sud

Article published in: Alliance Sud News No. 71, Spring 2012

Classification: Finances , Switzerland
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