Daily Archives: June 9, 2013

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I have vivid memories of watching western movies with my father. For a boy, seeing John Wayne get his way brought certainty: it was clear that, with enough firepower, might would prevail. Switzerland and its banks were slow to recognise this simple truth. The price to pay is now uncomfortably high.

In recent years, US authorities have taken an aggressive stand against Swiss bank secrecy on the grounds that US clients are using it to evade tax. Several years of convoluted negotiations between the two nations were characterised by Bern clinging desperately to the belief that the anonymity of alleged tax refugees could be preserved.

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These negotiations have now come to an abrupt end. In effect, the US has issued an ultimatum, giving Swiss banks 120 days to hand over the identities of presumed US tax evaders. In addition, banks will have to negotiate fines to compensate for past misdemeanours.

Those that do not take this option will potentially face severe challenges. In the best case, affected Swiss banks and bankers will no longer be able to operate in, interact with or travel to the US. At worst, bank collapses in the wake of any indictments would be a possibility.

There is a further challenge: under Swiss law, banks are forbidden to release information to foreign governments. So the government finds itself having to submit to parliament an unpopular and hastily written bill that would legally empower the banks to opt for transparency. This has enraged a proud, fiercely democratic assembly, which threatens to sink the bill.

How did Switzerland get itself into this mess and how can it get out of it? The root of the problem is twofold. First, there is the refusal by some in the country to recognise that cross-border tax evasion is no longer tolerated by the international community. Second is the adoption of an incoherent strategy of pursuing distinct and incompatible solutions with the US and Europe.

With the settlement between US authorities and UBS in 2009, the basic paradigm of how to progress emerged: a fine of $780m was paid; a deferred prosecution agreement was entered; and transparency was ensured by handing over identities of US citizens suspected of using UBS to evade US taxes. Bern enabled that settlement by resorting to emergency law to empower UBS to co-operate with US authorities.

Meanwhile, Bern embarked on a different strategy with its European neighbours, in particular Germany. The aim was to avoid the sharing of client identities entirely and instead settle on an anonymous tax collected in Switzerland and transmitted to the countries of residence of European account holders.

While this made sense as a way to deal with historic private banking assets, it was bound to fail as a stable, forward-looking framework. After all, why should a European country settle for a mere financial solution when the US had secured the identities of alleged tax evaders?

Now Switzerland and its banks find themselves under severe pressure from the US and with no solution at hand with Germany, Switzerland’s largest European partner. From here, there is only one way forward, comprising four distinct steps.

First, Swiss banks must quickly settle with the US. Ideally, the government will find a way to avoid drawing in parliament again, after it refused last week to vote on the government’s bill; and the banks can proceed in line with the framework set by the UBS settlement. After all, equal treatment in equal circumstances is a fundamental Swiss constitutional principle.

Second, the government and the banks must quickly recognise that client anonymity for tax purposes is a thing of the past. The specific contours of how information will be exchanged across sovereign borders will have to be worked out. Ideally, this will occur under the auspices of the OECD, a Paris-based think-tank, where Switzerland should demand a robust voice at the table.

Third, and crucially, Bern must settle the problem of undeclared legacy assets, largely of European origin, residing in its private banks. A significant share was deposited a long time ago in a different era with different norms. A pragmatic and morally defensible solution is for clients to pay a one-off tax on them to their respective countries of residence. In return, they would be allowed to preserve their anonymity. The level of tax could be broadly linked to the relevant rates in the European countries in question.

Finally, Bern must be steadfast in demanding access to the EU market for its banking services, enabling it to refocus the sector on its excellence in cross-border wealth management. This is equally in the interest of the EU: any other outcome will drive significant assets out of Switzerland and probably out of Europe.

In his first major movie, Wayne said: “There are some things a man just can’t run away from.” It is time for Bern to resolve the legacy problems of its financial sector and create clarity for a tax-compliant future.

The writer is vice-chairman of BlackRock and former chairman of the governing board of the Swiss National Bank

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