x Abu Dhabi, UAESaturday 20 January 2018

Read between the lines: Swiss banks not changing ways

The credit crunch and global financial crisis have forced the Swiss to do what they have long been reluctant to do.

The credit crunch and global financial crisis have forced the Swiss to do what they have long been reluctant to do: share information about their banks' secret client accounts. But before we celebrate the advent of global transparency, the Swiss may have the last laugh. It is not only Switzerland that has come under pressure to open up, but also countries such as Liechtenstein, Andorra, Austria, Luxembourg, Costa Rica, Malaysia and the Philippines. All have been advised to co-operate and open up their books.

What scared some was the threat of a concerted international attack on tax havens from the rest of the world. Even the Group of 20 leading and emerging economies summit in London got into the act by promising invigorated action against tax evasion by their nationals. But it was Switzerland's decision to co-operate that has attracted the most attention among offshore tax havens. While international co-operation may have been good public relations for the Swiss authorities, it was the thought of being placed on the Organisation for Economic Co-operation Development (OECD) blacklist if they did not co-operate, as well as the US$780 million (Dh2.86 billion) fine imposed on one of its largest banks, UBS, by the US that seems to have focused minds.

UBS was fined after an American investigation into US nationals thought to be hiding money through the bank. The bank is also embroiled in a continuing row over 50,000 clients that the Americans would love to know more about, but UBS is so far refusing to give in to a US court's requests. It is anyone's guess how much foreign money is handled by Swiss banks, with figures of between $2 trillion and $3tn being bandied about.

Until now, Switzerland got away with refusing to share information about these accounts on the basis of a legal technicality, as well as hefty penalties for unauthorised client disclosures. This made Swiss banks the darlings of big and small financial players. Under Swiss law, the only circumstances under which banks can provide others with details of customers' accounts is if they receive a detailed claim about a specific individual with precise information about alleged crime. But tax evasion is not deemed an offence in Switzerland. This is what UBS has argued in the US.

It is this attitude that has upset other countries that feel they have to do something about their citizens hiding cash in Switzerland in order to pay less tax back home. Again, the amount in lost tax revenue is fuzzy but it makes for great political theatre, especially for those governments under pressure to punish corporate and banking fat cats at home, and bring in money to help pay for financial market support packages.

The US estimates it loses $100bn in tax revenues each year because of banking secrecy in Switzerland and other tax havens. And in fact Barack Obama, the US president, has just launched a series of measures aimed at making it difficult for US companies and individuals to use tax havens. That aside, let us look closer at what exactly it is the Swiss have promised, as far as co-operation goes. They have said they will share more information, but will decide on what they actually share on a case-by-case basis. Bear in mind that the essence of Swiss banking, client confidentiality, remains intact as no law relating to banking secrecy and banker-client confidentiality will be amended.

What the Swiss are doing is making a distinction between tax avoidance and tax fraud, and international co-operation will be granted only on the grounds of documented suspicions of fraud and presentations of names of persons suspected to be involved and their bank account details. This concession will be granted on an ad hoc basis and only after suspicions have been duly documented. Also, there must be a guarantee of the accused's procedural rights and right to appeal before competent legal authorities. The automatic exchange of information with other countries is expressly excluded.

So there you have it, a lawyer's paradise. And a nightmare for any government hoping to pry information out of the Swiss. Just to make sure, Switzerland says that every double-taxation treaty that is renegotiated will have to be reassessed by its parliament. And these may be subject to a referendum, for how can anyone disenfranchise Swiss citizens from expressing their views? For those still worried, the Swiss have said that any new measures regarding international co-operation in tax matters will not have retroactive effect. And deadlines for renegotiating any new double-taxation conventions are far into the future.

The crisis will pass, and most people will forget how and why it started. But one thing is certain: Swiss banking and its privileged banker-client relationship will continue to allow what Swiss bankers do best: preserve and ncrease their clients' funds. Dr Mohamed A Ramady is a former banker. He is currently a visiting associate professor at the finance and economics department of King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia