FATCA sounds death knell of banking secrecy

Keystone

Legislation allowing for the sharing of American citizens’ bank data will go before the Swiss parliament next month. It seemingly spells the end of prized Swiss banking secrecy, although lawmakers say it is far from a done deal.

Recent weeks have seen an unprecedented ramp-up of international efforts to put an end to banking secrecy.

The Group of 20 major economies wants automatic exchange of tax information at a world level, and it wants it soon. The Organisation for Economic Co-operation and Development (OECD) is setting out the relevant international standards in the coming months, and the European Union wants to open talks on imposing fiscal transparency on all its members – and Switzerland – by 2015.

The bastions of banking secrecy are caving in one after another – Luxembourg, Austria and even faraway Singapore. 2013 is likely to be the year in which Switzerland too hoists the white flag. The first major act of surrender could happen in mid-June, when a draft agreement between Bern and Washington on the United States Foreign Account Tax Compliance Act is debated by Swiss parliamentarians.

Having enacted this legislation, Washington wants the financial institutions of the world to hand over names and information on deposits and interest of “persons subject to unlimited tax liability in the US” from next year on. This obligation concerns not just American citizens resident in the US but also expatriates.

Full transparency

Under the terms of the agreement negotiated by the Swiss government with Washington, financial institutions will have to obtain the consent of account holders before turning over their data to the American Internal Revenue Service (IRS).

But clients who refuse to comply will be hit with a 30 per cent tax at source on payments coming from the US. And the IRS can still obtain data on these people by submitting a request for administrative assistance to Bern involving whole groups of bank customers.

As the Swiss government formulated it, the agreement provides for “semi-automatic exchange of information”. In reality, however, beginning January 1, 2014, banking secrecy will no longer exist in Swiss dealings with the US.

“This is indeed how it is, in spite of any euphemistic language being used,” says Beat Bernet, who teaches banking economics at the University of St Gallen. “Under FATCA, Switzerland is giving Washington almost total transparency about bank customers.”

“It should not be forgotten that we became a lot more transparent in the wake of September 11, 2001, when Washington demanded and got access to a lot of bank data to investigate networks financing terrorism. Since then the American administration can see data about international financial operations through the servers of SWIFT [Society for Worldwide Interbank Financial Telecommunication] and accounting centres for credit cards based in the US.”

Chasing down the fat cats

In 2010, the US Congress adopted a piece of legislation called the Foreign Account Tax Compliance Act (FATCA) to fight offshore tax evasion by its own citizens. The acronym seems a wry nod to President Barack Obama’s frequent denunciations of “fat cats” who salt their untaxed wealth away in offshore accounts.

Under this new legislation, Washington is demanding that all foreign financial institutions (banks, life insurance companies, investment funds, foundations), including even those not operating in the US, give up names and data of all their customers who are subject to American tax.

This means all American citizens or non-nationals resident in the US, American expatriates, and foreigners with significant holdings in the US.

All financial institutions abroad are required to register with the US Internal Revenue Service (IRS) and to enter into an agreement by which they undertake to identify customers subject to American tax and give their names and bank data to the IRS.

Nobody gets off

The FATCA legislation – which other European countries are also having to accept – allows very little margin for banking secrecy. By this September parliament has to ratify or reject the agreement concluded by the government with Washington, which at least provides some leeway for the financial institutions.

Whatever the outcome, Swiss banks will not be able to sidestep this legislation even if they do not have branches in the US.

Financial intermediaries who do not cooperate with the IRS will be hit with a 30 per cent tax at source on all payments originating from the US. They will thus have to stay away from the dollar and the American securities and capital markets.

“A refusal is theoretically but not practically possible. The institutions who do not cooperate will in fact be excluded from the international financial system,” notes Bernet.

This view is shared by Christoph Schaltegger, professor of economics at the University of Lucerne. “If Switzerland wants to have a financial market, it will not be able to dodge the international rules,” he says.

“All banks are closely connected through the international interbank payment system. If a bank is at risk of heavy sanctions in the US, it will be excluded from the interbank agreements. Thus it will lose the trust of its customers and their money too.”

The Bern-Washington accord

Several EU countries have already concluded a FATCA agreement with the US based on what is called ‘model 1’, which provides for automatic exchange of tax information between the two sides.

Under the agreement concluded by the Swiss government (‘model 2’) however, it will be up to the banks themselves to send names and data of their customers directly to Washington.

To do this, they must first obtain the customer’s consent. Banks are nonetheless required to notify the IRS of the number and total assets of accounts belonging to customers unwilling to cooperate.

The IRS can then ask for full details as part of a request for administrative assistance to the Swiss authorities.

Unlike other European countries, the Swiss government has not insisted that the American side reciprocate.

Imperialist attitude

Despite looking like a foregone conclusion, the Swiss FATCA agreement will meet stiff resistance in parliament. Only the centre parties intend to vote for it, albeit with major reservations.

The left will only give its agreement if the government officially undertakes to rapidly implement the automatic exchange of information. “FATCA reflects the imperialist attitude of the US. But it is a step in the right direction, if it leads to automatic exchange of information”, says Social Democratic parliamentarian Carlo Sommaruga.

For the political right, the agreement is unacceptable under any conditions. “As an independent country, we cannot let ourselves be dictated to by other states or organisations to change our laws unilaterally. All the more so since the FATCA agreement would oblige us to rubberstamp all future changes in the American legislation,” objects Peter Föhn.

According to the People’s Party senator, this is not the way to change the rules of the game. “Until now Swiss banks promised to protect their customers’ assets and respect their privacy. Now, in one fell swoop, all their data are being sent to the US. That way we do damage to the reputation of the whole financial industry.”

Wide breach

But that is not all. The breach in Swiss banking secrecy caused by the FATCA agreement will no doubt be forced wider by the EU as well. “It will be very hard for Bern to explain to Brussels that it is ready to give the US automatic exchange of information, but not Germany or France,” notes Schaltegger.

At this point, “Switzerland would do better to focus its energies on the strong points of its financial industry: a strong currency, a reliable legal framework, a stable political system and a high level of professionalism,” Bernet believes. “Even without banking secrecy, it can provide a lot of security to foreign individuals and companies.”

(Translated from Italian by Terence MacNamee)