Court rules in favour of Credit Suisse client

The IRS was looking for the account details of suspected tax evaders Keystone

Switzerland’s Federal Administrative Court has ruled in favour of a Credit Suisse client who had complained about his banking data being sent to the United States tax authority.

The Swiss finance ministry said negotiations with Washington would continue to settle a dispute over banking secrecy and alleged tax dodging.

In a statement issued on Wednesday, the court said that evidence of tax evasion – such as failing to declare possession of a Swiss bank account – was not reason enough for the American Internal Revenue Service (IRS) to receive account data.

The IRS filed a request for administrative assistance last year based on the Swiss-American double taxation convention, involving 650 cases. This was approved by Switzerland’s Federal Tax Administration (FTA).

In particular the IRS was looking for the account details of suspected tax evaders. Credit Suisse employees in the US were criticised for helping clients to hide their assets from the IRS. No client names were included in the request.

Credit Suisse gave the FTA the requested data in early November. In January, the FTA concluded that all conditions had been met for granting administrative assistance – yet put a stop to the data transfer because of the client’s legal complaint.

The FTA concluded that while some of the bank employees could be accused of fraud, the bank clients could at best be accused of evasion, which is not illegal in Switzerland.

The court ruled that according to its agreement with the US, single instances of tax evasion are not eligible for administrative assistance – even if large amounts are at stake. The judges also maintained that failure to report an account is not fraud under Swiss law.

The verdict cannot be appealed.

Precedent

The president of the Federal Administrative Court, Markus Metz, said the verdict was based on the 1996 Double Taxation Agreement with US under which tax evasion is permitted.

An amended treaty which will allow administrative assistance in cases of tax evasion has been approved by the Swiss parliament but the US Congress is holding up ratification.

Metz told Swiss public television that 30 other complaints by Credit Suisse clients were still pending.

Peter V. Kunz, professor of corporate law at Bern University, says the latest court is setting a “limited precedent”.

He said the ruling in principle applied to all American clients of Swiss banks, but only those with a similar case could benefit. 

Kunz added that it would become easier for Washington in the future to receive banking information, once the amended tax agreement with Switzerland was ratified.

“Actually the US only have themselves to blame at the moment. The sooner they ratify the new accord the easier it will be to gain access to the information they are seeking,” Kunz told public television.

The ruling makes it clear that Credit Suisse had some “very questionable methods” of attracting clients and that the IRS made a far too general request, according to Rainer Schweizer, professor emeritus of criminal law at St Gallen University.

Further talks

The State Secretariat for International Financial Matters (SIF) said the court verdict showed the difficulties that so-called group enquiries face under the 1996 tax accord.

The office, a unit of the Swiss finance ministry, said it will point out the advantages of a new amended agreement in talks with the US authorities aimed at settling a tax dispute with 11 Swiss banks, currently under investigation.

Washington could file new requests for legal assistance if they are more clearly defined, according to a statement by the SIF. 

Already in early 2010, the court blocked the delivery of data on American clients of another major Swiss bank, UBS, for lack of a legal basis.

However, in June that year, parliament approved an agreement with Washington on mutual assistance regarding UBS account data.

The IRS then demanded comprehensive data on the number and assets of wealthy US customers at 11 other Swiss banks. In September 2011, Switzerland delivered some statistical data without giving specific information about the individuals concerned.

US banking woes

UBS was the first Swiss bank to find itself under scrutiny by US justice. It was fined $780 million in 2009 for aiding American citizens in defrauding the tax authorities. 

The following year the Swiss government signed an accord on handing over to the US authorities the details of 4,500 American clients of UBS. The accord was ratified by parliament in 2010.

  

US tax amnesties led to more than 30,000 tax evaders being identified. The US justice authorities were able to find evidence that Swiss banks were complicit in this tax evasion.

  

Several Swiss bankers and lawyers have been arrested or put under investigation in the US in recent months. They include three managers with the private Wegelin bank. At the end of January, Wegelin announced it was selling most of its business to the Raiffeisen Group. 

Several days later, the Justice Department charged Wegelin with aiding and abetting US clients to defraud the tax authorities. It is the first time a foreign bank has been formally charged for such practices in the US.

  

Eleven banks in Switzerland, including Credit Suisse, are under investigation by the US.