Switzerland Ponders a Future of Clean Money

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Linette Paul
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1 Switzerland Ponders a Future of Clean Money 09/25/2012 Breaking the Banks By Mathieu von Rohr Part 3: Dismantling Banking Secrecy But banking secrecy has been in the process of being dismantled for years, and at a strikingly fast rate, at that. As recently as March 2008, then-swiss Finance Minister Hans- Rudolf Merz said: "You'll have a tough time with this." Only a year later, following scandals surrounding stolen customer data, threats by the OECD and the attacks by Steinbrück, Switzerland announced that it would assist foreign authorities in investigating suspected cases of tax evasion. Until then, it had only done so in cases involving such crimes as the falsification of documents. That spelled the end of the old banking secrecy practice, which protected tax evaders. As of this January, foreign tax authorities can even submit group requests, and they are not even required to provide the name of a suspected tax evader anymore: It's enough to describe a suspicious pattern of behavior. Last Friday, the Swiss government violated another taboo, announcing that it also intended to remove protections for tax evasion for its own citizens. A man who was long a strong advocate of banking secrecy has grown quiet these days. Konrad Hummler has likened it to the right to asylum, a form of self-defense against the state. For him, Switzerland was a monetary safe haven on a continent that, for historic reasons, suffers from what he calls a "fear of confiscation." Hummler, as a former partner in Wegelin & Co., a Swiss private bank, and chairman of the Neue Zürcher Zeitung daily newspaper, is perhaps the country's most intellectual banker. He wrote a regular column for investors, which often doubled as a commentary on the state of the nation. Now Hummler spends most of his time in a house near the Stiftskirche in St. Gallen, in eastern Switzerland. It's all he has left of his bank, after he was forced to sell the rest. The US government indicted Wegelin for conspiracy to commit tax fraud. This is the kiss of death for a bank, because it prevents it from conducting any transactions in US dollars. Now Hummler is considered a "fugitive," which means that if he leaves Switzerland, he runs the risk of being arrested and extradited. Part of Swiss Culture Page 1 of 5

2 The Hummler case came as a shock to the country, with one of Switzerland's most prominent bankers being hunted like a criminal. American authorities are also after employees of other banks for possible involvement in tax offenses. Other Swiss banks could also face charges soon. Hummler's case is unique because he was the one who devised the principle of the flat rate withholding tax, the core of the tax treaty with Germany. The private bankers hoped that if tax offenders could pay their taxes while remaining anonymous, they would retain those customers who chose to use this path to legalize their money. Under the agreement, they would pay between 21 and 41 percent in taxes on their previously untaxed assets, and would be spared criminal charges. Ruedi Noser, a member of the Swiss National Council for the liberal FDP, defends the idea. "The fewest tax fugitives have come here in the last 10 years," he says. Most of the assets, he explains, consist of old money and involve business relationships that have been handed down from grandfathers to fathers to sons. According to Noser, many of these people would like to come clean with their taxes. "It's part of Swiss culture that we provide customers with an honorable way to transition into a new legal system," he says. "The flat rate withholding tax requires a certain amount of forgiveness. Germany is having a hell of a time accepting this. But if German society is no longer capable of forgiveness, it won't have a future." But the German SPD doesn't want to agree to the treaty, which has already been ratified in Switzerland, primarily for one reason. Banking expert Strahm warned early on that customers who moved their assets abroad before Dec. 31, 2012 could remain undiscovered. This was long a subject of negotiation, with Switzerland prevailing in the end. Considerable Clout And now it will likely spell the demise of the treaty, something which many Swiss politicians and bankers already seem to have accepted as inevitable. Some even want it to fail, including Oswald Grübel, the former head of UBS and Credit Suisse. He meets us in his office on the third floor of an office building in the Zurich banking district. Grübel is from the former East Germany, but he has spent his entire career in Switzerland, where he was once one of the country's most powerful bankers, which still gives him considerable clout. Grübel says that he is disgusted by the way things are going in the world. "There is an ominous development underway today," says Grübel. "We're having trouble dealing with the transparency we create with the aid of technology." This, he says, could lead to a future in which everyone is monitoring everyone else, and the individual is controlled by others. Page 2 of 5

3 He laments the fact that "everything that existed in the past is being judged by today's ethical standards. What was once considered a good thing," namely that there was a safe haven for money, "has since been turned around by the media. They have made Switzerland feel guilty as a result." All of this means that banking secrecy only exists on paper nowadays, says Grübel, noting that the state has gradually softened the policy and no longer seems to support it. "But do secrets even exist anymore? With the technology we have developed, it's become almost impossible to keep secrets." A Good Place to Hide Assets Informants, enticed by the money being offered by governments, send secrets around the world in the form of data sets. Bradley Birkenfeld, a former UBS employee, just received a $104-million reward from the US tax authority, the Internal Revenue Service (IRS), for providing information on how he and his colleagues broke the law. Some might consider it ironic -- Grübel says he would recommend the United States to anyone looking to hide untaxed assets, saying that they would never be discovered there. Grübel says that there will soon be a recession, and the loss of banking secrecy will adversely affect the economy. "The financial sector has subsidized the economy to the tune of 30 to 40 billion francs a year. Because of the influx of foreign capital, banks were able to keep interest rates low," he says. But not all economists agree with his view, with some saying that there are various reasons for low Swiss interest rates, including the attractiveness of the Swiss franc and low inflation. In contrast to the smaller private banks, major Swiss banks lost their interest in illicit funds some time ago. Nevertheless, Grübel has a low opinion of the government's "clean money strategy," under which banks, in the future, would only be allowed to accept money that has been taxed. "How can this be verified? It would require bank employees to be familiar with tax laws from around the world. No other country has anything like this," says Grübel. Grübel is opposed to the tax treaty. He believes that the SPD will ultimately accept it. "Because it's a very good solution for Germany," he says. "And who has the luxury to turn down 10 billion these days?" But Grübel does not think it is good for Switzerland. He doesn't like the fact that banks would be required to withhold taxes for other countries. "In the end, will Switzerland be expected to withhold taxes for every country in the world?" Costly Step Grübel calls the treaty "nothing but a costly step on the way to the automatic exchange of Page 3 of 5

4 information," which is something the EU would like to introduce, and that would enable the German tax authorities to obtain customer data. The Swiss government's goal in the past has been to prevent the automatic exchange of information. But Grübel believes that Switzerland, together with Austria and Luxembourg, which have also resisted this exchange of information, should negotiate a treaty with the EU. It would be "better than this treaty, which is unsatisfactory for everyone, costs a lot and makes customers feel that they are being betrayed. But this would have been less advantageous for Germany." A few months ago, it would have been inconceivable to hear Grübel talking about the automatic exchange of information. But Pierin Vincenz, CEO of the Raiffeisen Group Switzerland, and former Swiss National Bank President Philipp Hildebrand, have also said similar things in recent weeks. Some private bankers are also slowly realizing that the current strategy has failed, and that the illicit money business is over. But almost everyone is undecided on what should come next. For a long time, a few banks made money this way without having to do very much in return. The customers couldn't leave and paid high fees. A finance professor puts it this way: "It was always the least intelligent students who went into private banking." Another professor says: "They used to say that you could turn any hairdresser into an investment adviser." But those days are gone. 'The Recklessness of Inherited Wealth' There are differing views over how much of its prosperity Switzerland will lose if illicit funds migrate to other tax havens. Some believe that the economy will be able to make up for lost jobs in the financial sector and that because of its stability the country will consistently remain attractive as a financial center, especially for customers from emerging economies. Others fear a slow decline in the high standard of living. But an even bigger issue in this dispute is Swiss identity. The country is experiencing an identity crisis, because it is having trouble accepting the notion that it is no longer seen as a model pupil by the Western world but more like a villain. In the past, Switzerland benefited from the special path it took in Europe, by not being a member of the European Union and only partly associated with it via bilateral treaties. But for years now, Switzerland has been primarily focused on waging battles over withdrawals from old positions instead of developing an idea for its future. Private banker Hummler, who can no longer leave his country, described this widespread feeling in a book he edited last year: "For 30 years now, our country has worked hard on Page 4 of 5

5 its positioning on the European continent and the rest of the world." He continues: "We wear out former successful positions, and then we abandon one or the other, but we don't develop any comparative advantages over other countries. Meanwhile, our young people get bored or throw parties to celebrate their lack of a future with the recklessness of inherited wealth." Translated from the German by Christopher Sultan Page 5 of 5

Ignorance is bliss, but taxes are nothing to ignore, even when owed to a foreign government

July 2015 Ignorance is bliss, but taxes are nothing to ignore, even when owed to a foreign government Nobody likes paying taxes; but ignoring tax obligations in the United States and Canada can have disastrous