The turnaround is achieved: The new Swiss legislation on taxation, money laundering and financial market (the secrecy as a clientattorney

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1 Newsletter Zurich, 24 August /037885/TMA The turnaround is achieved: The new Swiss legislation on taxation, money laundering and financial market (the secrecy as a clientattorney privilege only?) I. PRELIMINARY REMARKS Tiziana Marenco Szabó Rechtsanwältin Dipl. Steuerexpertin The Swiss Parliament swiftly adopted the substantial amendments of the Swiss legislation on money laundering, tax and financial market which we had announced in our newsletter of 31 March Retrospectively, despite various distractions, the implementation of the FATF 2012 Recommandations was completed diligently as expected. MARENCO SZABO Rechtsanwälte Steuerberater AG Mühlebachstrasse 54 CH-8008 Zürich T F marenco@marenco-law.com The revised provisions, which will have significant impact on banks, insurances and financial intermediaries, take effect as of 1st January On this date, the second package of amendments to the Federal Act for Implementing the Revised Financial Action Task Force (FATF) Recommendations of 2012 will come into force, together with, among others, the revised provisions on the money laundering relevant tax offences of the Swiss Criminal Code (CC), the Anti-Money Laundering Act (AMLA), the fully revised FINMA Anti-Money Laundering Ordinance (AMLO-FINMA) as well as the new Agreement on the Swiss bank's code of conduct (CDB 16) and the new regulation of the self-regulatory organization of the Swiss Insurance Association to combat money laundering and terrorist financing. Although the latter do not constitute legal basis in the narrow sense, they substantiate the duties and obligations of the financial sector as well as its rules of conduct and provide, inter alia through the CDB 16 and its bank forms, the essential instrument of the "document" within the meaning of the CC. Relevant terms such as the "domiciliary company" gain, in the context of a systematic interpretation, a new and dynamic significance as they are now mandatorily to be qualified for tax purposes. These changes occur immediately prior to the introduction of the automatic exchange of information. Given the newly established nexus between direct taxation and money laundering relevance, all financial institutions and intermediaries are forced to gather new information on both new and already existing customer relationships, to standardize the procedures for obtaining the necessary information, and to qualify or classify, respectively, business relationships as well as individual transactions for tax purposes. These actions must be repeated periodically or upon concrete inducement.

2 2/6 In the course of the internationalization and globalization of process, the financial sector will not unnecessarily deviate from a FATCA-compliant interpretation. The final wording of the new provisions was already available at the beginning of last summer. The long period ahead of the entering into force allows taxpayers and financial intermediaries to check their situation and to take the necessary steps before year end. II. THE MOST IMPORTANT CHANGES AT A GLANCE 1. The money laundering relevant tax offence According to the new art. 305 bis para. 1 and 1 bis of the CC, any person who carries out an act that is aimed at frustrating the identification of the origin, the tracing or the forfeiture of assets which he knows or must assume originate from a felony or, newly, also from a qualified tax offence (before: only from a felony), is liable for money laundering. As qualified tax offences are considered offences within the meaning of art. 186 of the Federal Income Taxation Act (FITA) and art. 59 para. 1 first lemma of the Communal and Cantonal Income Tax Harmonization Act (CCITHA)" (in both cases: "tax fraud"), provided that the tax amount evaded exceeds CHF per fiscal year. Accordingly, a tax evasion that is committed by means of forgery (forged, falsified or incorrect documents such as business records, balance sheets, income statements or salary certificates and other certificates of third parties, according to case-law also including a form A of banks) and that leads to an amount of tax evaded exceeding CHF in a single tax period, is now considered not only a tax fraud according to art. 186 FITA and art. 59 para 1 CCITHA, as before, but also a predicate offence to money laundering according to art. 305 bis para. 1 bis CC. Due to the constitutional principle of non-retroactivity, which is also explicitly stated in the transitional provisions of the revision's draft, the tax evasion must have been committed after the entry into force of the new legal framework to acquire AMLA-relevance. Due to the reference to direct taxes, which indeed cannot be systematically classified but rather finds its origin in the FATF-recommendations, the evasion of inheritance and gift taxes is not considered a predicate offence to money laundering. 2. Reporting to the money laundering authorities According to the revised art. 305 ter para. 2 CC, financial intermediaries are entitled to report to the money laundering authorities (MROS) any observation that indicate that assets originate from a money laundering relevant tax offence or have a connection to such an offence ("mere suspicion"). The entitlement to report becomes a duty to report when there exist reasonable grounds for suspicion according to art. 9 AMLA. The duty

3 3/6 to report also comprises the duty to immediately freeze the assets in accordance with art. 10 AMLA. 3. The beneficial owner of assets and the controlling person (individual) The revised identification duties of the financial intermediary newly distinguish between the beneficial owner of passive assets and the controlling person (individual) of unlisted companies running operative business. In international taxation, passive income and assets are mainly being treated as fiscally transparent, albeit in different ways. As a consequence, the beneficial owner of those income and assets has to meet specific tax obligations, usually at its place of residence or incorporation. This particularly holds true for: Low-substance domiciliary companies Trusts and foundations that are revocable by the founder or by the settlor, and for which the founder, settlor or the beneficiaries may dispose, directly or indirectly, legally or factually, of the assets. In order to exclude money laundering relevant tax offence in Switzerland, the financial intermediary will have to examine the legal nature and, where appropriate, the taxation of those structures as well as the tax impact in the hands of their beneficial owner(s). During the legislative process, the instrument of the self-declaration of bank customers (business partners) seems to have been abandoned. However, instead or primarily, new declaration forms are introduced (or adapted) in the CDB 16 which have to be filled in by the bank customer in order to open or to keep the account: False or incorrect statements made in these forms (up to now this already applied for the form A "identification of the beneficial owner ) qualify as an act of forgery according to the tax and criminal law and will allow prosecution under AMLA. In view of the above, those newly adopted CDB 16 forms acquire key relevance, as they concretize and illustrate the identification duties and the tax classification rules: Form A ("Identification of the beneficial owner" of assets, especially relating to unlisted and inactive legal entities and domiciliary companies as well as fiduciary/trust relationships), Form I ("Information on life insurances managed through a separate account or safekeeping, so called insurance wrapper", regarding policy holders and, if it differs, premium payers), Form K ("Identification of the controlling person (individual) of unlisted, active legal entities and partnerships, i.e. individuals who control those legal entities by holding 25% or more of the votes or capital, or who actually control them by other means), Form S ("Foundations and similar structures", where particularly the discretionary or non-discretionary character and the revocability need to be registered, and furthermore,

4 4/6 the founder, beneficiaries and other persons entitled to dispose of the assets as well as any previous restructuring must be specified), Form T ("Declaration on trusts" regarding their revocable or discretionary character as well as the identity of the settlor and beneficiaries, and furthermore, the statement co n- cerning any previous restructuring as well as any revocation rights). As explicitly pointed out in each form, the above forms constitute a certificate within the meaning of the CC and, by making false or incorrect statements (when evading taxes), they will accuse the customer not only for a simple tax evasion but for tax fraud. 4. The domiciliary companies (or shelf companies) Originally, according to the Swiss Anti-Money Laundering Act, the peculiarity of the socalled "domiciliary companies" was that the financial intermediary must obtain a written customer's declaration indicating the identity of beneficial owner (art. 4 para. 1(b) AMLA; art. 4 para 2(b) revised AMLA; form A CDB 16). Basically unchanged remains the definition of "domiciliary companies", being legal entities, companies, institutions, foundations, trusts, fiduciary companies and similar compounds that do not operate a trading, manufacturing or other type of commercial business, hence which are not operational active. This definition can be found, inter alia, in the new regulations of the AMLA as well as in the CDB 16. Typically, domiciliary companies neither have staff nor own offices. As a consequence, in international taxation, this is very likely to jeopardize any shielding effects. Not classified as domiciliary companies, according to the above mentioned regulations, are companies whose purpose is to safeguard the interests of their members or beneficiaries by way of mutual self-help, or which pursue political, religious, scientific, artistic, charitable, social or similar objectives, that hold the majority of shares of one or more operating companies in order to comprise them under one joint management, through the majority of votes or by any other means, and whose main purpose is not the management of assets of third parties (holding and subholding companies). The holding or subholding company must actually carry out its management and control autority, which is typically reflected in the consolidated financial accounts of the group. Nevertheless, what has been deleted in the new CDB 16 is the exception for real estate companies which, in compliance with the FATCA, now likely belong to the passive structures, provided that the above mentioned criteria for the classification as operating entity do not apply.

5 5/6 When classifying complex structures the financial intermediaries have an enhanced due diligence obligation rather than the ordinary one, because such complex structures may indicate an increased risk of money laundering. This holds true specifically for complex structures consisting of several domiciliary companies In light of the new qualified, money laundering relevant tax offences, the controlled foreign domiciliary companies and especially their use in the context of complex structures gain new relevance. These companies are excluded from shielding effects, not only in the area of the AMLA but also in the area of tax law. Due to their lack of substance, they are quite often, depending on the specific constellation, subject to taxation either based on double taxation treaties or because such treaties are not in force, not only in their home country but also in the country of the effective place of management. Alternatively, their income will be attributed to the controlling person by means of the pass-through principle or based on the CFC-legislation (Controlled Foreign Corporation) and taxed in her hands. The Swiss Supreme Federal Court already indicated in the UBS case in an obiter dictum e contrario that interposing several domiciliary companies when aiming at a tax evasion typically represents an act that is likely to go beyond the scope of a mere tax evasion but rather, as a rule, should be regarded as a fraudulent act. At the presence of such structures, the financial intermediaries will have to clarify in all details the origin of the assets and their taxation at the place of fiscal residence of the beneficial owner or controlling person, respectively. Moreover, the forms of the CDB 16 will apply: In case of false or incorrect statements, they will constitute an element of forgery and hence, also as a tax fraud. If the bank customer, whether being an individual, fund, company or corporate group, nevertheless, in the future for any economic or legal reasons whatsoever, wishes to establish such structures with domiciliary companies, he will have to provide the financial intermediary with a detailed technical statement on the taxation environment. 5. The secrecy as attorney-client privilege only? The "Know your customer" principle becomes increasingly significant for financial institutions and financial intermediaries: They must gather and document comprehensive information on their customers, by law. This information can be (or, under certain conditions, must be) handed over to Swiss authorities, among others also for cross-border exchange of information purposes. As a matter of fact, due to the periodically amended terms and conditions, the customer is forced to agree in advance on the exchange of this information, otherwise he will not be entitled to carry out banking transactions, i.e. to open or continue to keep a bank account. The importance of the bank secrecy, as it is enshrined in banking law, has thereby been diminished substantially.

6 6/6 While for many customers the bank relationship and/or asset managers used to be the person who was entrusted with almost everything, being of personal or professional content, in the future they will have to control better and more efficiently the quantity and quality of information they hand over, unless they feel comfortable with the idea to find later on in the archives of the bank one s own personal and professional diary in form of memorandum on customer's phone calls and bank visits. In this world in which there are almost no secrets left, the attorney-client privilege can become increasingly important. The professional confidentiality according to art. 321 CC extends to profession related activities of an independent and (in most cases) registered attorney at law. In this context, to be distinguished are the (not protected) non-profession related activities of an attorney at law, for instance the mere performing of an executive function (directorship within a board of directos) and especially also financial intermediary activities carried out by an attorney at law, such as the asset management or a directorship within domiciliary companies. Mixing profession related with non-profession related activities will be, henceforth, even less recommendable than in the past. * * * * *