The Jurisdictions: Switzerland

Good news trumps bad

on Swiss banking secrecy:
Update on Rubik and other defences of privacy
By Jacques Leuba,
Jirehouse Suisse,
Lausanne, Switzerland

ealth professionals and their

clients can be forgiven for
feeling confused about what
is happening to Swiss banking
secrecy, particularly now that the socalled Rubik solution adds further
complexity to the debate.
This should not distract us from the
fact that now is a very crucial time for
negotiations by the Swiss government and
some of its most senior diplomats, on a
number of fronts.
The debate rages across a multitude of
fora and institutions. The list is quite long:
G20, OECD - and its recent emanation, the
Global Forum on Transparency and
Exchange of Information for Tax Purposes
the EU and ECOFIN, Switzerlands large
neighbours, France, Germany and Italy, the
US Government and its Justice Department,
the FATF (not to mention the other
discussions going on in the international
banking arena, such as IMF, FSB, etc).
Each of these entities emits sporadic
announcements, generating a flood of
media traffic and press comment, but
journalists rarely seem to connect the dots,
preferring to focus on the usually alarmist
statements of one or other of the many
self-appointed demagogues who abound on
both sides of this battlefield.
For the readers of this journal, whom I
assume to be defenders of legitimate,
virtuous financial privacy (let us abandon
the controversial and emotive term
banking secrecy), the news has not been
good, and prima facie, has been getting
worse, since Black Friday, 13 March 2009.
This was the fateful date on which, under
intense pressure from G20, the US Justice
Department and the OECD, the Swiss
government finally withdrew its
reservations to Article 26 of the OECD
Model Tax Convention and agreed to
comply with OECD standards of tax
information on request with existing and
new treaty partners.
OI 218 July/August 2011

Bad news in terms of erosion of

privacy - continued to flow, all through
2009 and 2010. Some of the main
developments, discussed below, unfolded
roughly in parallel.

Switzerland and the OECD

Switzerland has demonstrated
impressive zeal in rapidly concluding tax
information agreements (TIEAs) to include
the Article 26 standard. The Federal
Department of Finance (FDF) website, as
of its last update on 2 March 2011 (see
chart below) lists 32 countries with which
double tax agreements (DTAs), including
clauses for extended administrative
assistance, have been signed. Ten of these
are already in force, and more are in the
pipeline.
The deadline for a referendum which
might have slowed this process passed in
October 2010.
A new ordinance concerning administrative
assistance in respect of double tax conventions
(in French, referred to as OACDI) entered
into force on 1 October 2010. It sets out

the new regime for accessing information,

in line with the OECD procedures for
administrative assistance on request.
Recent further concessions were
agreed, in February of this year, in
response to G20 insistence on relaxing
some of the pre-requisites for standards
of identification demanded of requesting
states. These were agreed by Switzerland,
to align itself with the generally favourable
tone of findings of the Global Forum Phase
1 Peer Review (see below); predictably this
unleashed more diatribes from prophets of
doom.

Situation with the US

Following the UBS debacle, the
government was forced to agree with the
US Justice Department to hand over 4,450
UBS client files; while there was huge
resentment and opposition in Parliament,
and in Federal Court, the agreement was
finally implemented, and UBS paid penalties
of USD780 million after which the case1
against UBS was dropped, but prosecutions
of the clients, of course, continue apace

DTAs with an administrative assistance clause in accordance with the

OECD standard
DTAs in force
Austria*
Norway*

Denmark*1
Qatar

Finland*
Spain*2

France*
Luxembourg*
United Kingdom*

Mexico*

India*
United States*

Japan*
Uruguay

Kazakhstan*

Singapore

Slovakia*

DTAs approved by parliament

Canada*
Netherlands*

Germany*
Poland*

Greece*
Turkey

Malta

Rep. of Korea* Romania*

Signed DTAs
Hong Kong
Sweden*

Initialled DTAs
Ireland*

Oman

Russia*

UAE

NOTES:
* Revision or replacement of existing DTAs
1 Including extension to the Faroe Islands.
2 Most favoured nation clause: the extended administrative assistance entered into effect with the first
agreement with an EU member state, and consequently at the same time as the agreement with France.

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Switzerland

(not all successfully, see below).

New arrests of former UBS employees,
and a slew of announcements about new
rules for securities businesses, Foreign
Bank Account Reporting requirements
(FBAR) and FATCA the US attempt at a
unilateral, automatic information exchange,
globally have added further
complications.
All of this has discouraged Swiss
institutions from contact with any US
business because of legal risks. In the words
of Secretary of State Michael Ambhl, head
of the recently created State Secretariat for
International Financial Matters, it cannot
be that everyone doing business with the
US already has one foot in prison without
knowing it.

Situation with EU and Ecofin

Council:
In decisions during December 2010
and February 2011, Ecofin continues to
review and tighten directive 77/799/EEC,
reconfirming their intent:
a) to take steps to weaken the safeguards
available to non-member states under
OECD rules for administrative assistance
upon request: the information required by
the requesting state is now being whittled
down to the barest minimum of identity
and purpose, avoiding the need to name
any specific institution;
b) to proceed with the objective of gradual
introduction of automatic tax information
exchange between members of the EU
(starting with partial implementation in
2015), bullying Luxembourg and Austria
into gradual submission although, to date,
they continue to hold out, thanks to
Switzerlands outright refusal to
contemplate automatic exchange (and the
hopes raised by Rubik see below).
The long term aim of ECOFIN is to
ensure unconditional exchange of
information for eight categories of income
and capital. meanwhile, from 2015,
member states will communicate
automatically information for a maximum
of five categories
This is also bad news for the Swiss on
other fronts, in the context of important
Swiss-EU trade and economic agreements
(accords bilatraux), and the desire of
Swiss financial institutions (particularly big
banks, insurers and fund companies) to
extend their activities in the EU and
achieve Europe-wide distribution of their
products.

Use of information stolen from

banks
Germany, France and other EU
countries are making extensive use of data
stolen, chiefly from LGT and HSBC, for
threatening and prosecuting taxpayers.
Periodically, names of celebrities drop into
the news (most recently in Spain) as having
been cornered on tax offences revealed by

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the stolen data communicated across

borders by the French and Germans to
other countries.
On this matter the Swiss, however,
have been very firm and excluded
administrative assistance if it can be
traced to the use of data obtained by
illegal means. An instance of this is the
decision, by the Paris appeal court on 15
March 2011, to annul a search warrant in
the home of a taxpayer whose name
appeared as one of the 3000 listed in the
HSBC data.2

FATF
In November 2010, the FATF of
which Switzerland is a member decided,
against Swiss opposition, to adopt the all
crimes money laundering principle,
whereby any but the most trivial tax
offences are assimilated to moneylaundering and subjected to the same
draconian rules for reporting, tipping off
and waivers of privilege, etc., as are
already applied to serious and organised
crime (terrorism, drugs and arms
trafficking, prostitution etc).
Whereas this is now the norm in many
English speaking countries, Switzerland and
some others, including Luxembourg, believe
that strong anti-money laundering
provisions already exist and including tax
offences is not consistent with their
domestic law, which treats certain tax
offences, not involving manifest fraud, as
administrative and not criminal matters.
The longer term significance of FATFs
decision and how things develop from here
are probably bad news. This certainly adds
to the pressure on Switzerland and other
finance centres. However, fortunately, the
definition of what is criminal and what isnt
will remain, for the foreseeable future, a
matter for each jurisdiction to decide.
Now for some surprisingly good news
for the defenders of financial privacy in
three areas:
1. Rubik
2. Recognition of trusts
3. Global forum peer group review
1. Rubik: bilateral withholding tax
agreements on track for success with
Germany and UK, and others likely.
At this very moment, we hold our
breath in expectation of further news from
Bern, and the German Finance Ministry,
about the outcome of their bilateral
discussions which began in October 2010,
on the so-called Rubik proposal.
Rubik refers to the assessment,
collection and payment by Swiss banks, of a
final flat lump sum tax due to the home countries of their private clients, where
these are known to have evaded tax, and
who shall thereby achieve legal tax
compliance but remain wholly anonymous.
The French term describes it succinctly:
impt libratoire la source. A good

idea, adapted from previous amnesties, but

a challenge to implement, and a historic
milestone in support of legitimising privacy.
It emerged in early 2009, from the
Association of Foreign Banks in Switzerland,
and its vigorous Ticinese chairman, Alfredo
Gysi, head of BSI (part of Generali group)
and certainly an expert on the workings of
the Italian tax amnesty. After months of
acrimonious debate, he succeeded in
convincing the Swiss private banks and
their new progressive chairman Patrick
Odier and, ultimately, the rest of the banks
(against considerable opposition from
domestic banks and others with conflicting
agendas). On that basis, the bankers
associations were able to appeal to
government to propose Rubik as a brake
on tax information exchange in bilateral
negotiations, both with the EU and with
large neighbouring countries, in particular
Germany.
In October 2010, clever Swiss
diplomats, led by the brilliant Michael
Ambhl, emerged with the triumphant
news that, not only Germany but also
the UK had decided to negotiate with
Switzerland for a Rubik deal. The
announcement also carried the rider
that, in exchange, those countries would
consider improving access by Swiss
institutions to their home financial markets.
The FDF have recently confirmed that
discussions, details of which are kept tightly
under wraps, are on track with both
countries, and that announcements on the
outcomes will be due shortly (before the
summer vacation), with implementation
being scheduled for the year end.
Rumours have emerged in the SwissGerman press on the possibility that the
flat rate agreed for taxing existing capital
sums would be as low as 20%, and for
capital gains 26%.
The really good news is that this
proves there is good reason to fight the
principle of automatic exchange. Rubik flies
squarely in the face of the EU
Commissions dogmatic (indeed
fundamentalist) insistence on automatism
and will, we hope, facilitate discussions on
future EU agreements with their rich and
troublesome Helvetic neighbour.
There are ironies aplenty in this debate
on principles and practices - where
governments and politicians (not least
some demagogic Eurocrats and MPs) reveal
double standards. The German and UK
governments were among the zealots for
automatic exchange. But the lure of quick
and huge dollops of cash (estimated by
some to be worth between EUR20 and
EUR40 billion for Germany) tempers the
inquisitional verve. Somewhat surprisingly,
the two big Swiss banks, and some
domestic institutions were initially reluctant
to back Rubik, citing the high costs of
implementation and seeming keener to
achieve agreement on Europe-wide
offshoreinvestment.com

OI 218 July/August 2011

case, provides the legitimate client with the

arguments required to halt disclosure.
Diligent trustees and estate planners
always knew that they could insist on
obtaining a complicated Form T, from
their Swiss private bankers i.e. one which
accommodates full details of relationships
within a proper trust arrangement
instead of the simple Form A, which
merely names individuals as beneficial
owners. Now is the time for clients to
appreciate the benefit of engaging diligent
estate planners and trustees and for the
latter to reap the rewards of their hard
work, previously passed over by cheapminded clients in favour of less scrupulous
advisors and fiduciaries.
3. Switzerland passes Global Forum
Peer Review Report with flying
colours
In February 2010, the Federal Council
confirmed that policy for the financial
industry would henceforth be a white
money strategy, to be oriented toward
the handling of taxed assets.
To quote the eloquent Michael Ambhl,
in a recent speech to the American
Chamber of Commerce:
On the one hand, countries have a
legitimate interest in tax revenue, including
from the income of their citizens capital
deposited in Swiss bank accounts. On the
other hand, bank clients have an equal
legitimate interest in the protection of their
privacy. Additionally, banks have an interest
in being competitive. For a long time, the
management of untaxed assets was seen as
such a competitive advantage. This has now
changed. The understanding has won out
that untaxed assets are in the interest
neither of Switzerland, nor the banks, over
the longer term.

This is progress. Additionally, on 1 June

this year, the OECD Global Forum came
out with its Phase One Peer Review
Report on the legal and regulatory
framework in Switzerland4. The process is
being carried out with 30 countries, which
will facilitate the drawing of comparisons
and will surely nourish debate for years to
come.
It makes interesting detailed reading,
both for the background it gives on the
Swiss financial sector and as an example of
the intricacy and range of issues covered.
(Beware demagogues and automatic
exchange zealots, who dont usually
acknowledge the complexity of the
subject matter.)
The report has, overall, acknowledged
and endorsed the high level of sophistication
of Swiss law and institutions, and the fast
pace of Switzerlands progress towards tax
information exchange on request according
to the OECD standard.
There are predictable objections about
bearer shares, and some intriguing details
about the lack of transparency in the way
ownership can be organised for Swiss

companies with foreign shareholders. These

matters will have to be dealt with by
proposals to be submitted within six
months and will be a prelude for the Phase
2 Report, due to start at the end of 2012.
The issuing of the report also prompted a
compromise by the Swiss on the details
required to identify a client (already
mentioned above), which are now reduced
to a minimum, while nevertheless
maintaining strict safeguards against fishing
expeditions.
On balance, this report is good news
in parallel with the surprising success of
Rubik - because of the positive effect it is
having on the Swiss wealth industry and the
political parties, and the level of
sophistication of the debate.
The voice of reason and legitimacy
politique de largent propre has come.
Gone, finally, are the days when - until quite
recently - much of the industry, and its
clients, kept heads buried in the sand and
went on using cheap, unplanned, solutions,
which achieved nothing for the longer term
interests of client families.
The focus on clean money, which used
to be referred to as complex, in contrast
to simple money (code for black), must be
good for the defence of legitimate financial
privacy and for Swiss wealth managers as a
whole.
The playing field is levelling slowly.
Singapore and Hong Kong, inter alia will
no doubt be able to offer unrivalled
advantages for a while, but these are
disappearing, even in Panama. The new era
of clean money and legitimate clients will
be conducive to attracting and keeping
more institutional players and to bringing
in the best of foreign professionals who
may have had concerns previously about
reputational issues. There are huge
advantages for private client advisers in
taking advantage of Switzerlands specific
rules for independent managers under its
notably enlightened self-regulatory
regime. While getting stricter, this is still
one of the best adapted and least onerous
jurisdictions for independent asset
managers and wealth professionals, with
over 3,000 independents offering highly
individualised services, not easily accessible
in the larger institutions, to private clients
and entrepreneurs from all over the globe.
In particular, it is to be hoped, Rubik
and TIEAs will take the wind out of the sails
of the demagogues and automatic exchange
activists.
www.jirehouse.com

Switzerland

distribution for their products, rather than

to protect their clients privacy.
Rubik is thus a tender plant, at a
critical stage of development (now
sometimes referred to as Rubik II), with
both friends and enemies in high places.
Its name is well justified: reaching a
solution is certainly an arduous and
complex task, covering a range of
challenging technical issues, not least of
which will be formulating practical
definitions for the taxable persons, and
the structures and paying agents they
may be using, and how to assess and
compute the amounts due after years of
evasion.
So let us wish the negotiators in Bern,
Bonn and London well. It looks like the
Athenians will soon be joining them, and
we hope others.
2. An important legal decision: trust
beneficiaries in the light of TIEAs
On 23 March 2011, the Tribunal
Administratif Fdral made a historic
judgment in favour of trust beneficiaries.3
The case involved a request for
administrative assistance by the IRS about
US taxpayers who were alleged to be
clients of UBS, with signatory rights over or
ultimate beneficial ownership of accounts
at that bank.
Between 2009 and 2010 a number of
agreements and protocols were made
between the two countries which closely
defined criteria for admission of a request
for assistance and what constituted beneficial
interest. Look-through rules are in place to
pierce the veil of entities where there is a
lack of substance, but there is a clear
insistence in the agreements on the need
to consider all the specific facts and
circumstances of each case.
In this instance, the case involved an
irrevocable discretionary trust. The
highest Swiss court held that the trust
beneficiaries were not to be considered as
beneficial owners under the terms of the
TIEA. Hallelujah! The request was denied,
based on the careful analysis of a wellstructured estate plan, where the trustees
were validly empowered to act in a
discretionary manner and not on the
instructions of related parties. (One hopes
for the clients and trustees that they all
complied with their FBAR and other
reporting obligations, which are not the
subject of the TIEA).
Unfortunately for most of the UBS
clients whose files were handed over (and
for a majority of Swiss bank clients under
the pre-2009 regime), such fully-fledged,
well-structured (and probably rather
expensive) estate plans were the
exception, for larger, better advised clients,
rather than the rule for the hoi polloi. The
good news is these will now become the
rule. All TIEAs afford the alleged taxpayer
an ultimate right of appeal against
disclosure. Good structuring, as in this

END NOTES:
1. U.S. v. UBS AG, 09-cr-60033, U.S. District Court,
Southern District of Florida (Fort Lauderdale)
2. CA, ord. 8 fv 2011, no 10-14507.
3. A-6903/2010.
4. http://www.efd.admin.ch/aktuell/medieninformation
/00462/index.html?lang=en&msg-id=39453

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