Having surrendered its treasured banking secrecy in the war against tax evasion, Switzerland is refusing to concede more ground until trusts and other opaque offshore structures give up as many secrets as private banks.
Switzerland has been accused in some quarters of employing time wasting tactics, but even independent tax reform campaigners concede that the trust model has got off relatively lightly in the recent welter of anti-tax haven legislation.
“So far there has been a lack of equality between [clamping down on] Anglo-Saxon varieties of secrecy and typical banking secrecy,” Markus Meinzer, a German-based consultant for the British-based NGO Tax Justice Network, told swissinfo.ch.
The Swiss fear that wealth will pour out of its banks into offshore constructs if the alpine state agrees to automatically share tax information with other countries.
Secrecy is itself a prized asset for many rich clients, protecting their millions from unstable governments, former spouses, business rivals and squabbling family members - as well as tax collectors.
Scratching the surface
The opacity of trusts, shell companies and other constructs has not gone unnoticed by governments, prompting a series of regulatory changes to shine a light into the shady corners of the wealth management business.
The United States Foreign Account Tax Compliance Act (Fatca) and the European Union’s proposed Savings Directive (EUSD) amendments are leading the way in this respect. Britain, the birthplace of trusts, has also demanded transparency from its many dependencies that specialise in the business, from Jersey to the British Virgin Islands.
John Christensen, Director of Tax Justice Network, is content that the new rules are a step in the right direction, but at present he believes they only just scratch the surface of the problem.
“The regulations are piecemeal and open to major loopholes,” he told swissinfo.ch. “It is an open question whether Fatca fully addresses this issue as it is still a work in progress that applies differently to different jurisdictions. I would accept that this is an issue.”
“As things stand, if I was advising clients on how to escape government attention I would tell them to use an offshore discretionary trust arrangement.”
The Anglo-Saxon trust model is believed to have its roots in the 13th Century when English knights embarking on crusades would entrust their estates to a third party to manage on behalf of their families if they did not return.
A set of rules under the English common law system grew up over time around these arrangements to settle disputes and establish an accepted framework of operating such structures.
Trusts became particularly useful for the monied aristocracy to keep control of sprawling estates, that might include assets in different countries, and to manage the distribution of inheritance in large families.
In the 20th Century, trusts also took on another useful purpose of shielding wealthy people from rapidly increasing inheritance taxes by legally separating assets from individuals.
The trust fund itself has no separate legal identity - only the contract between the person who contributed the assets (the settlor) and the manager of those assets (the trustee) is recognized by the common law system.
Structures with a similar purpose, foundations, exist under codified Germanic law but these are identified as legal entities, just as a company has a legal identity.
The legal difference between trusts and foundations is another impediment to Switzerland fully adopting trusts that could be set up and managed in Swiss territory.
Who moves first?
Meinzer believes that public registers revealing the identity of trust beneficiaries are required to properly enforce the new transparency regulations. “Without such registers we may end up with a beautiful set of rules on paper, but policing them may prove impossible,” he told swissinfo.ch.
However, both Christensen and Meinzer point out that the unsigned EUSD amendments - that have been on the table since 2008 - go some way to leveling the playing field between private banks and trusts by forcing credible transparency on these opaque offshore structures.
Instead of using trusts as an excuse to stand still, Switzerland should sign up to enhanced exchange of tax information to give vital momentum to the rising tide that aims to wash the global financial sector clean, they have argued.
But Switzerland at present does not appear terribly inclined to make the first move, insisting first on a set of international rules that defines minimum standards of information exchange covering all jurisdictions and financial instruments.
Finance Minister Eveline Widmer-Schlumpf has repeatedly called for tougher regulation for trusts, shell companies and other such shady structures that hide assets from governments.
At the G20 meeting of finance ministers and central bank governors in Washington in April she rounded on Switzerland's critics by highlighting the double standards applied to "offshore financial centres which adhere to Anglo-Saxon law".
"The identification of beneficial owners of trusts has to be improved in many countries," she said.
If you can’t beat them
The Offshore Leaks global media exposé earlier this year opened the lid not just on how trusts and shell companies work, but also how they operate hand in hand with banks, asset managers and lawyers.
Several media stories linked suspected tax cheats with Swiss-based professionals who set up and managed opaque funds overseas. Alexandre von Heeren, President of the Swiss Association of Trust Companies, blamed a lack of regulations in Switzerland that has allowed some rotten apples to operate unethically in Switzerland.
“It is unfortunate that trusts are considered to be structures for hiding assets,” he told swissinfo.ch. “Trusts and secrecy have nothing to do with each other.”
Rather than criticise trusts from the sidelines, von Heeren would like Switzerland to embrace the industry. This idea has been taken to parliament with a proposal by the centre-right Christian Democrats and other parties to adopt laws to allow trusts to operate fully within Switzerland.
The government has spoken out against the motion, arguing that it could attract further mistrust and suspicion of the Swiss financial sector.
“The government will not deal with the issue because it considers trusts too much of a hot potato,” von Heeren told swissinfo.ch. “They are hoping that trusts will simply go away, but they won’t.”