Banking secrecy undead

Article as analysis
Automatic financial account information exchange is reserved for a club of rich countries. Tax evaders from poor countries will still be able to conceal their money in Swiss accounts in the future.

Salami tactics are not for the hungry. Since 2009, Switzerland has been trying to salvage what it can of banking secrecy. It serves up just a sliver of secrecy at a time for consumption. Still another slice of banking secrecy went in December last year, when the National Council and then the Council of States approved the Multilateral Competent Autority Agreement (MCAA). There are currently 82 States signatory to this "Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information" of the Organization for Economic Cooperation and Development (OECD). The Upper House also passed the relevant law on the Automatic Exchange of Information (AEOI) in December. This means that in future the Federal Tax Administration could automatically exchange account information regarding foreign bank clients with the tax authorities of 82 countries – information which local banks will be routinely required to submit to it as of 2017.

Since that decision by the Council of States, the consensus in the country has been that business with untaxed funds from abroad has died off. Yet a look at the world map shows that, on the contrary, banking secrecy is undead. For if the AEOI is really to be implemented between two countries, MCAA members must also activate it bilaterally. So far Switzerland has done so only with the 28 EU countries plus Australia, Canada, Iceland, Japan, Norway and South Korea. Under the FATCA Agreement (Foreign Account Tax Compliance Act), Switzerland has already been unilaterally supplying the USA with data since 2015. For the time being, however, Switzerland is willing to extend the OECD's AEOI standard only to countries with which it maintains close political and economic ties. In practice, this means only countries which, from a Swiss standpoint, offer their tax refugees meaningful possibilities for regularizing their untaxed funds.

A two-tiered global information society

For now, automatic information exchange with Switzerland therefore remains beyond the reach of most non-EU and non-OECD countries. Accordingly, official Swiss policy in the fight against tax evasion has long been tending towards a "zebra" strategy on the part of the financial centre: clean money from the rich countries of the North, dirty money from the poor countries of the South. A kind of transparency club is being created among OECD countries for international data exchange between tax authorities, but from which most poor countries remain excluded for the time being. When it comes to tax transparency, the new OECD rules effectively divide the world into two classes: on one side those in the know, on the other, those who are not.

Swiss asset managers have already taken this on board. For years now they have been trying to drum up wealthy new clients, especially in Asia and Africa. In April 2015, French citizen and former UBS employee and whistle blower Stephanie Gibaud told the Argentine newspaper the Buenos Aires Herald in an interview: "When the UBS was found out in the USA in 2009, Switzerland expected European and US regulators to move against Swiss banks. Consequently, as of 2009/2010, UBS began focusing its business on emerging countries in an endeavour to penetrate networks of potential clients in emerging markets, […] other banks were no doubt doing likewise."

Yet it is precisely the poor countries in Asia or Africa whose tax authorities must grapple with more-than-average tax evasion. For in poor countries, individual fortunes make up a much larger share of the tax take than in rich countries. By that token, the greater is the damage that a single tax evader can do. With a USD 15.4 billion fortune, Nigeria's Aliko Dangote is the wealthiest African, and this contrasts starkly with an annual per capita income of USD 1,692 in Nigeria. By way of comparison, the wealthiest family in Switzerland, that of Ikea founder Ingwar Kamprad, has a fortune of USD 44.5 billion. This is two and a half times that of Dangote. Meanwhile, Switzerland's per capita income is USD 81,324, or 48 times that of Nigeria.

Administrative assistance in tax matters still theoretical for the poor

The name of businessman Aliko Dangote also figures prominently in the Swiss Leaks and Panama Papers datasets. In last year's Swiss Leaks, he was named along with over 5,000 other African customers of the Swiss branch of the British bank HSBC. These are individuals as well as companies from over 50 African countries that use the Geneva-based HSBC subsidiary to move untaxed capital around. The home countries of these tax evaders stand no chance of benefitting from automatic information exchange with the Swiss tax authorities in the foreseeable future. But if, like Nigeria or Switzerland, they are parties to the Convention on Mutual Administrative Assistance in Tax Matters developed by the OECD and Council of Europe, they may submit a request for international administrative assistance in tax matters to the Swiss tax authority and in this way gain access to untaxed funds being held by their citizens.

But here too there are considerable hurdles, as the example of India shows. Since the Swiss Leaks, the tax administration in Berne has received hundreds of requests from that country for tax-related administrative assistance in connection with HSBC customer data on Indian citizens. To date the authority has not been able to reply to them, however, as the Federal Council has been postponing to submit to Parliament the draft for a corresponding legislative amendment extending tax-related administrative assistance to include "stolen data" until the beginning of June this year. Only such an extension of the scope of the law would make this form of administrative assistance an effective tool for countries that do not belong to the illustrious AEOI club. Extending administrative assistance to cover stolen data is also a mandatory component of the new OECD standard for international administrative assistance in tax matters. Those that do not abide by this criterion risk failing phase two of the peer review of the OECD Global Forum for Transparency and Information Exchange for Tax Purposes, which assesses the performance of individual participating countries in applying the new standard. The Forum is currently preparing its report on Switzerland. As members of the Forum, India and Nigeria could, for example, prevent Switzerland from progressing to phase three of the review. Switzerland could find itself back on the blacklist of OECD countries. The outcome of the review is therefore eagerly awaited.