Fortress Switzerland Fissures as Account Secrecy Loses Charm

(Bloomberg) — Fortress Switzerland is showing more cracks.

When U.S. tax authorities asked their Swiss counterparts in April, 2013 for help to probe an American couple they believed were stashing money in Switzerland, the Helvetian nation complied.

Nine months later, the cooperation halted when the Swiss Federal Administrative Court ruled the request was unjustified and questioned whether it was a “fishing expedition.” Four years earlier, the court had similarly sided with UBS Group AG, saying the bank should not have turned over details on 255 clients to the U.S. Justice Department.

Now, a bill winding its way through Swiss parliament is set to curtail the court’s authority and make it harder for suspected tax cheats and others to hide behind secrecy rules. The Financial Market Infrastructure Act will waive the requirement for Finma, the Swiss finance regulator, to pre- inform bank clients that data on them has been shared with a foreign regulator if doing that could compromise the outcome of the investigation. Endorsed by the Swiss government, the act will be voted on next year.

“The big debate is how far you go to protect individuals when states are working together on an investigation and to what extent do you not inform those individuals,” Daniel Zuberbuehler, a former vice-chairman of Finma and chief executive officer of the Swiss federal banking commission, said in a telephone interview. “Given the spate of new treaties to share data internationally, this client procedure should be abolished.”

Chipping Away

If passed, the bill will be the latest assault on Switzerland’s place as a destination for the world’s tax evaders and money launderers, who have depended on the nation’s policies that made violation of bank secrecy a criminal act.

Global efforts to stem such practices have already chipped away at that protection. UBS paid $780 million in 2009 and admitted it helped Americans evade taxes to resolve a dispute with the U.S. government. Credit Suisse Group AG paid $2.6 billion as part of a guilty plea in May, and Wegelin & Co., the country’s oldest bank, last year pleaded guilty to helping U.S. taxpayers hide assets and closed its doors.

Finma, which received nearly 500 requests for assistance from foreign investigators in 2013 — triple the number in 2009 — is not comfortable with the status quo. The clause to pre- inform clients gives them “the chance to evade detection” and poses a “dilemma” for the regulator, its chief Mark Branson told bankers and lawyers in a speech in Geneva in October.

Reputational Risk

Branson, a British citizen who previously worked for Credit Suisse and UBS, pledged a crackdown on individuals because, he said, sanctioning institutions alone hasn’t proven effective.

“Individuals need to know that they have something to lose,” he said.

The Cambridge-educated head of the Bern, Switzerland-based regulator has backed his words with deeds since taking over as Finma chief in April. He hasn’t been shy about going after individuals in other areas overseen by Finma.

Two days before his speech, Finma barred the former chief executive officer of Bank Coop AG from management positions for three years after an investigation into manipulation of the Swiss bank’s shares. In another case, after confiscating $139 million in profit from UBS last month for its role in a global currency-rigging case, Finma began proceedings against 11 former and current bank employees, and is considering banning them from the profession for up to five years.

Although the bill marginalizes the administrative court in these kinds of appeals, lawmakers say its time may have come.

Court Rulings

Daniel Hostettler, general-secretary of Switzerland’s Social Democratic Party, supports the legislation and said Finma needs it to do its job effectively. Banks shouldn’t lobby against the bill, given how times have changed, he said.

“Banks can’t have an interest in weakening Finma as nowadays for them it’s all about reputation,” Hostettler said in an interview in Bern last month.

In the case of the American couple who had banked with Julius Baer Group Ltd., Switzerland’s third largest wealth- management firm, the administrative court ruled that material provided by the U.S. tax authorities didn’t “provide sufficient evidence that they are covered by the term ‘tax fraud or the like,’” under the two countries’ double-taxation accord.

Julius Baer has said it’s expected to pay a penalty to settle a broader tax dispute in the U.S. over allegations it helped American tax evaders. The firm’s chief executive officer, Boris Collardi, said in July he expects it to be “a topic of a few more months and not years.”

Grudging Approval

In the 2010 case involving UBS, the Swiss court rejected Finma’s argument that it ordered Switzerland’s biggest bank to hand over customer information so the bank could avoid criminal prosecution in the U.S., and thereby ensure its survival. Still, the judgement came too late as UBS had already turned over the client data to the Department of Justice.

Driven by the Swiss tradition of protecting individual privacy, not everyone is convinced the new bill is a force for the good of the nation.

The Swiss Bankers’ Association doesn’t oppose the bill provided it is applied where there is a risk a legitimate request for help might be otherwise torpedoed, and Finma justifies each case where a client is not informed, said Sindy Schmiegel, a spokeswoman for the lobby.

The legislation will probably not be debated and voted on until parliament meets next in March, and that would likely mean it won’t become law until 2016, Hostettler said.

‘Big Brother’

Fulvio Pelli, a lawyer who resigned from Swiss parliament in March, has been one of the leaders of the “Yes to the Protection of Individual Privacy” initiative that is seeking to enshrine financial data protection in the constitution.

The rule should really be applied to serious criminals not just Swiss bank-account holders behind on their taxes, or the country risks turning into the ‘Big Brother’ society depicted in George Orwell’s novel “1984,” Pelli said in an interview.

“When Finma exercises this new right, it has to be the exception and not the rule and each exception must be explained,” he said. “Every Swiss must have the right of recourse, otherwise we’re entering a world of Orwell.”

–With assistance from Giles Broom in Geneva.

To contact the reporter on this story: Hugo Miller in Geneva at [e-mail] To contact the editors responsible for this story: Heather Smith at [e-mail] Vidya Root