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Swiss banks don’t want to deal with dirty money

The safes of Swiss banks have been a popular destination for tax evaders Keystone

In 2018 Swiss banking secrecy for foreign clients will be a thing of the past. Parliament has endorsed the legal basis for the automatic exchange of information (AEI) of banking clients’ private data. “Switzerland changed its strategy just in time to actively participate in drafting the international standard for the exchange,” expert Aymo Brunetti told 

Brunetti is a professor of economic policy and regional economy at the University of Bern. He headed two expert groups on the strategic repositioning of the Swiss finance industry and has led the government’s advisory committee on the future of the Swiss finance industry since March 2015. Only three years ago it was considered a sacrilege to even think about automatic exchange of information. Now parliament has adopted it, and nobody has bat an eyelid. What has happened? 

Aymo Brunetti: The international environment has changed drastically. It started with the financial crisis, which in its second phase led to a surge in public spending and a massive drop in revenues. Governments tried hard to find money to fill the holes in their budgets. Tax evasion used to be tolerated and all of a sudden there was a global consensus that it should be prevented. 

For a while Switzerland banked on withholding tax, however, it was a lost labour of love. This became clear when the German parliament rejected withholding tax at the end of 2012. This was the final blow. Our finance industry is a global player and if we want to keep this status, we cannot be permanently on the black list. 

Nobody in Switzerland has fallen in love with the model of AEI. It’s clear that data collection will be huge and that it will probably be pretty inefficient. The withholding tax was a good concept, but it came too late. 

Aymo Brunetti Reuters Your working group’s report from June 2013 also advised the Swiss government to actively take part developing the standard for the AEI within the OECD. It meant being proactive and no longer accepting everything with great reluctance. Switzerland agreed and took part. Was it successful? 

A.B.: Of course, it was successful. Up to that point, Switzerland had not participated in the drafting of the international standard as at the time, AEI had not been an option for us. Fortunately we changed our strategy just in time to help develop the draft, which gave Switzerland a voice and the opportunity to position itself. It’s already clear that not all countries will endorse AEI. Due to the banks’ pressure, parliament has rejected the additional duty of care the cabinet wanted to impose on financial institutes that are handling money from non-AEI countries. Was this a wise move? 

A.B.: I do understand that the banks were not so keen on this bill. It’s a lot to ask of a bank to know enough about the tax systems of different countries just to know whether the assets have been taxed properly or not. However, the problem remains. We can exchange tax information with similarly functioning constitutional states, however, there are many strongly growing markets the AEI will not work with. We have to be extremely careful not to run into the same problems we had with OECD countries. 

If you look at how radically certain banks already reject misappropriated funds I can see that most banks are willing to be very careful in this respect. Can banks actually still be interested in accepting untaxed assets or would the risk of losing their reputation be too high if such misappropriated money were discovered? 

A.B.: Definitely. I don’t think any bank with a long-term business model would accept illegal money. If it did, it would be extremely ill advised. In the short term they can certainly make a good profit. For this reason, the strategic management of a bank has to state clearly that profits will not be maximised in the short term, but that the long-term reputation risk is of a much higher importance. However, this is not 100% certain… 

A.B.: No, it’s not, and nobody can demand that. Due to its past, Switzerland is currently in the spotlight, however, the longer it abides by the new rules the less extreme will the reactions be if a difficult case emerges. Everybody will accept that it is impossible to prevent every single individual case. But to systematically make a profit with illicit money will no longer work in the future. It’s only a few months ago that untaxed assets invested in Switzerland was a big issue. Once endorsed, the AEI will shed light on some of these demons of the past. Could this problem be solved by withdrawing old undeclared assets, voluntary disclosure or tax amnesties of the various countries? 

A.B.: I can’t really judge every individual country in detail, however, the problem is more or less solved in big countries, where there is no conflict of interest. On the day the AEI is introduced and account information is disclosed, the Swiss National Bank will have a very big interest in finding untaxed assets. The government of the country in question has the same interest: if it does not guarantee regularisation opportunities, no untaxed money will be in the bank accounts on that day because everyone knows that all banking information will be disclosed and the money will have been withdrawn. The bank wants its clients to leave their money in its bank accounts, and the states are interested in collecting taxes. Hence I was not surprised that most countries offered regularisation opportunities. Some countries have stolen client data of tax dodgers, who have invested their money in Switzerland. For this reason, the cabinet wants – due to the pressure of the OECD – to grant administrative assistance even if the data is stolen. It’s almost a dead certainty that parliament will reject this. Can Switzerland actually afford a ‘No’ vote? 

A.B.: We have to weigh up the different evils. De facto legalising the stolen data in this way is extremely irritating. However, these cases are a transitional problem and on the whole it is probably even more irritating to be permanently on the black list. I can imagine that the principles will be discussed in parliament and when it comes to weighing up the pros and cons it will decide that even though it is an ugly transition compromise, it will have to accept it. Has the Swiss finance industry been rehabilitated with these new reforms? 

A.B.: Once Switzerland adopts the international standard, pressure will be eased. At the moment I don’t see any other issue that could be similarly damaging. Switzerland has dealt with the most pressing questions. Of course, new questions can arise, however, we have taken the most important steps. What about domestic banking secrecy, which is not subject to AEI? 

A.B.: When it comes to our domestic banking secrecy there is no international pressure whatsoever. This decision can be made autonomously. It is a domestic question, which I don’t think is very urgent at the moment. For this reason, our expert groups have never spent much time on dealing with this. 

The “Matter Initiative” aiming at embedding domestic banking secrecy in the Swiss Constitution will bring some clarity in this matter. If the initiative is rejected, the way will be paved for more discussions in that direction. Domestically speaking it is an important issue, however, I don’t think it matters much for the functionality of our finance industry.

Translated by Billi Bierling

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