Switzerland and FATCA: Broader Effects

Switzerland’s banks are known for service, prudence, discretion and privacy. Of course, recent headlines have brought the Swiss reputation for privacy to the fore as the country’s banks battled the U.S. over possible disclosure of the names and financial data of U.S. clients suspected of using offshore accounts to evade taxes.

UBS AG, Switzerland’s largest bank, settled criminal charges with the U.S. in 2009 for $780 million, and then handed over a portion of its 52,000 U.S. client names. Then the U.S. turned its attention to Swiss private bank Wegelin, which wooed U.S. clients left out in the cold by UBS’s deal with the U.S. In February of 2012, Wegelin was itself indicted, and this February it closed its doors for good after selling off its non-U.S. business in January. The U.S. is also pursuing investigations of a number of other Swiss banks, including such names as Credit Suisse, Zuercher Kantonalbank, Julius Baer and Pictet & Cie.

Also this February, Switzerland became the eighth country to sign an agreement with the U.S. on the Foreign Account Tax Compliance Act (FATCA), getting out ahead of most of the pack of 50 countries that will have to decide whether to add their signatures. The Swiss government has not only agreed to provide information on its U.S. depositors with funds in excess of $50,000, as required by FATCA, but it is also negotiating with the U.S. on behalf of its banks, hoping to bring about a global settlement and an end to the investigations and possible additional legal and criminal action.

This would be the best option for Switzerland, according to a recent report from Fitch Ratings. “While potentially costly in our view it would remove the risk of potential indictments and other legal action, including ultimately the exclusion from U.S. dollar clearing. This would allow the banks to refocus management attention on their core (non-U.S.) private banking operations,” the report states. Investigations and indictments, it adds, would not only be “significant,” but would not be quickly resolved and could “ultimately damage the banks’ business models. This is despite U.S. offshore clients typically accounting for a small proportion of the banks’ earnings and assets under management,” according to the report.

That said, Switzerland looks to gain an advantage by its cooperation, not just with the U.S., but by trying to broker deals with other countries which are also pursuing, or contemplating pursuing, tax evaders with Swiss bank accounts. While Switzerland failed to come to an agreement with Germany on a flat tax arrangement, other countries are interested, according to Patrick Odier, chairman of the Swiss Bankers Association (SBA).

Odier said in a Bloomberg Television interview that the agreement Switzerland had proposed to Germany allowed “a flat tax payment for the past” that would take the issue of legacy monies off the table; the agreement would also allow the famous Swiss privacy to be protected for clients with deposits in the country, while providing “that this privacy does not hide tax evasion.” While Germany could not come to agreement with Switzerland on the model, It was due to “internal policy issues” rather than a rejection of the arrangement’s provisions. The same model was also proposed to England and Austria, according to Odier.

Also, while it would change Swiss business practices a little, the country’s acceptance of international standards would be to its advantage, since in two years all banks would have to adopt some form of change to accommodate taxes, according to Odier. The move would, in fact, “push most players in [Switzerland] to do better.”