US tax cheat deal mired in legal minefield

Finance Minister Eveline Widmer-Schlumpf Keystone

With the clock ticking down on further prosecutions of Swiss banks, the government is expected on Wednesday to announce a remedy to United States demands for banking data, thus solving a long-running tax evasion dispute.

The US wants Swiss banks to hand over information of their US business dealings, including the names of employees and third-party lawyers and asset managers. Finding a legally compliant solution was complicated by parliament’s rejection on June 19 of the so-called Lex USA bill which aimed to enable the process.

Since then, the government has been working furiously to steer a route between the intransigent US authorities and Swiss legal obstacles which hinder the transfer of confidential data.

Failure to find an answer could result in the US issuing any number of banks with the type of criminal indictment that signalled the annihilation of Wegelin earlier this year. But whichever decision is taken could result in Swiss banks being taken to court in Switzerland or the US.

The government does have a precedent to fall back on, set by itself in April 2012 when it authorised the release of business data to the US by 14 banks under investigation for tax evasion. The information did not include client names or account details, but did name bank employees.

On that occasion, the government sidestepped the need to refer its decision to parliament, despite protest. But the latest proposed data transfer could apply to all of Switzerland’s 300-plus banks and could contain additional information, such as third parties and numbers of clients who have withdrawn assets from Swiss banks (the so-called leavers list).

Deadline or not?

The government was initially unwilling to approve the handover of information on such a massive scale without parliamentary approval.

However, parliament’s refusal to rubberstamp the bill – despite warnings from Finance Minister Eveline Widmer-Schlumpf that failure to do so could cause huge damage to the financial sector – has forced ministers to make the decision alone.

There is already confusion about the urgency of the impending decision. Having rushed through the Lex USA bill to parliament to appease apparent US impatience at a lack of progress, the government has now pushed back its deliberations beyond the June 30 deadline supposedly set by the US.

“There was an agreement to sign off the treaty by the end of June once it had been passed by parliament,” Mario Tuor, spokesman for the Swiss Secretariat for International Financial Matters, told swissinfo.ch. “Since parliament voted against the bill, the US has neither renewed its deadline demands nor given any indication that it is willing to extend the date.”

“We have been left with an uneasy feeling,” said Ruedi Noser of the centre-right Radical Party. “When parliament was being consulted, we always heard of this ominous July 1 date. Now that parliament has rejected the bill, it has disappeared.”

US tax row time line

2009: Switzerland’s biggest bank UBS agrees to turn over more than 4,450 client names and pay a $780 million fine after admitting to criminal wrongdoing in selling tax-evasion services to wealthy Americans.
 
July 2011: The second-biggest bank, Credit Suisse, is under criminal investigation by US. The bank later makes a provision for a potential fine of CHF295 million.
 
February 2012: US justice department indicts Wegelin, Switzerland’s oldest private bank, on charges that it enabled wealthy Americans to evade taxes on at least $1.2 billion hidden in offshore accounts.
 
June 2012: US treasury department reaches a tentative agreement with Switzerland to help banks comply with US tax evasion regulations.
 
June 2012: Bank Julius Baer hands 2,500 employee names to US authorities in a bid to free itself from the tax probe, according to lawyers.
 
August 2012: Global bank HSBC hands over details of current and former employees to the US authorities.
  
November 2012: Private bank Pictet confirms it is also under investigation by the US.
  
December 2012: Two bankers and one former employee of Zürcher Kantonalbank charged by US, accused of helping US clients avoid taxes.
  
January 2013: Wegelin private bank shuts its doors, following a guilty plea to charges of helping wealthy Americans evade taxes through secret accounts. It agrees to pay nearly $58 million in fines on top of $16.3 million in forfeitures already obtained by the authorities.
  
May 2013: Swiss government presents bill to parliament that would let Swiss banks hand over internal information to US to avoid threatened criminal charges – though the banks still face fines likely to total billions of dollars.
 
The bill aims to save the banks from heavier punishment in the United States for helping wealthy tax cheats, by sidestepping its secrecy laws to let bankers disclose data to US prosecutors.
 
June 2013: Parliament rejects the Lex USA bill, telling the government to make the decision.

July 3, 2013: The government is due to make an announcement.

Legal threats

Observers believe that the most likely scenario is the government issuing an executive order under Article 271 of the penal code. This allows the executive to authorise the release of confidential economic data to other countries if it serves the interests of the country.

However, Widmer-Schlumpf has indicated that not all the data demanded by the US could be covered by the clause. “Whether Article 271 covers the leavers list is at the very least highly questionable legally,” she said.

Swiss data protection commissioner Hanspeter Thür has also threatened to take banks to court if they fail to meet expected protocols when handing out information. These include the right for people to know their data is being transferred and giving them the right to challenge the handover.

Following the April 2012 data transfer order, a handful of bank staff have served civil writs on their employers, with one achieving partial success in Geneva’s administrative court.

On June 21, the court slapped a temporary ban on Credit Suisse releasing the employee’s details to the US, challenging the bank to prove that its future business interests depend on the transfer going ahead.

Individual rights

The Lex USA bill, rejected by parliament on June 19, contained safeguards to protect employees’ rights in the event of their data being transmitted to the US.

“With the rejection of Lex USA by parliament, legal uncertainty for bank employees has risen again,” said trade association KV Switzerland in a statement.

The Swiss Bank Employees Association has also expressed concern about the parliamentary “no” vote, while the Chamber of Swiss Tax Advisors and the Association of Swiss Asset Managers have consistently expressed their anger at members being potentially exposed to US criminal charges.

It remains to be seen what the government could do to protect the rights of bank employees or third parties if the data transfer goes ahead, although Widmer-Schlumpf has signalled that these points are being discussed by cabinet.

Lawyer Douglas Hornung, who represents four clients challenging last year’s data handover through the courts, is sceptical that any measures could properly protect employees’ rights, including a CHF2.5 million ($2.6 million) “hardship fund” and a promise by banks to cover legal fees.

“Legal costs will only be borne in the US and the tight criteria for applying for the hardship fund will rule out most people,” Hornung told swissinfo.ch. “There is only one way to protect the rights of employees and that is not to authorise the transfer of their data to the US.”