FATCA Brings an End to Swiss Banking Secrecy

Eugénie Rousak, Translated by Kayla De Nardi
19 Juillet 2013

Tax haven, tax evasion, fiscal exile and expatriation, constitute the legal jargon surrounding the Swiss Confederation, as it finds itself in a delicately fatal situation, stuck between banking traditions and new demands from Washington.

Photo credit : Arnd Weigmann/Reuters
Photo credit : Arnd Weigmann/Reuters
A trend that could even be qualified as 21st century-cult is the increasing apparition of fiscal or tax-related expressions in modern vocabulary. The press is teaming with examples of the dysfunction of the financial system from « tax haven », a territory where the tax rate is significantly inferior to that of countries of the OECD, to « tax evasion » or the displacement of assets or financial activities to non-EU countries. More include « fiscal exile » defined as the changing of the fiscal residence to take advantage of more favourable tax rates, or even « fiscal expatriation » which is a term some find more appropriate to define the former, since it implies that the departure from the country is not forced. That being said, in order to protect themselves, certain countries, namely the United States, where taxation is determined by nationality and not by residence, have introduced limitations on their tax law. Thus, the territoriality principle is not respected insofar as it has an extra-territorial effect, the extent of which could be defined as a form of modern fiscal colonialism.
In this way, ever since the FATCA law (Foreign Account Tax Compliance Act) has been adopted, Swiss banking secrecy, which is ever-so cherished, poses a fundamental problem of transparency and taxation under American law.


After over already two years of negotiations with Washington, Bern is seeing banking secrecy bastions such as Austria, Luxemburg, and Singapore, yield one by one to the American “dictum” that is FATCA. This law, which was adopted by the American Congress in 2010, aims to fight American citizen tax evasion, whether these citizens find themselves on national territory or are expatriated, whether they are foreign residents on national territory or living outside the US, but possessing sizable holdings there. In other words, with this new law, Washington is entitled to demand that all foreign banking organisations provide personal data on all of their clients subject to American taxation. More concretely, all foreign financial institutions, be them banks, life-insurance agencies, investment funds, or other, must come to an agreement with the American tax authority, the IRS (Internal Revenue Service), that would bind itself to having to provide information about clients subject to American tax authorities.


EU countries have already reciprocally come to conclusions regarding the FATCA agreements concerning model #1 (the automatic exchange of financial information between respective authorities). As for Switzerland, who is subject to model #2, they will have to provide information directly to American tax authorities.  However, in order to do so, they will have to advise the client and obtain consent. Should this person show himself/herself «recalcitrant», he/she will face a 30% tax withholding and the bank will nonetheless have to inform the IRS of said client’s overall assets. Additional information regarding the customer’s accounts and data can be made although such information will not be provided unless said request is put through.  
A system of transfer of information as such goes completely against Swiss banking secrecy traditions. However, financial intermediaries who refuse to conform to American demands will be forced to say «goodbye» to the American dollar and capital. As Beat Bernet, professor of banking economics at the University of Saint-Gall, puts it, «In theory, one can always refuse, but in practice it would be impossible. Institutions that do not cooperate will be virtually excluded of the international financial system»Christoph A. Schaltegger, professor of political economics at the University of Lucerne, shares this tragic forecast of the Swiss future and states: «if Switzerland wants to make a place for itself financially speaking, it cannot avoid international regulations». All banks are closely linked to one another through the international interbank payment system. If the United States risks being heavily sanctioned on account of a particular bank, said bank will be excluded from interbank agreements and would lose customer trust and funds.


Finding itself in a critical situation with banking conflict, North American economic instability, and a fight against banks which have been incriminated for encouraging tax fraud, the Swiss Federal Council proposed an urgent law that aims to solve the financial disagreement between Washington and Bern. The National Council (Lower House of Parliament in the Federal Assembly), voted on the law on Wednesday June 5th, 2013. According to the main Swiss press agency, ATS (Swiss Telegraph Agency), the National Council voted 100 against 90 to halt the situation by adopting a Swiss Socialist Party motion that would promote the refusal of emergency debates until Washington agrees to officially publish the content of the programme, which until now has been refused.


While the programme, qualified as «unilateral» by Swiss Minister of Finance Eveline Widmer-Schlumpf, does propose more transparency, Swiss parties are quite resistant in the face of this law. Socialist Member of Parliament, Carlo Sommaruga, came down against the matter saying, «FATCA is a reflection of the imperialist drive of the United States. However, it’s a step in the right direction if the law leads to automatic exchange of information». On the other hand, the right is firmly against this law regardless of the conditions as explained by Peter Föhn of the Swiss People’s Party (UDC) when he said, «As an independent country we cannot allow other states or organisations to force us to change our legislation unilaterally. Additionally, FATCA would force us to green light future changes to American legislation ». Parties of the center are the only ones who do not show any resistance towards FATCA.
With a critical situation in the Swiss banking system at-hand that could cost the banks in question over 10 million dollars in fines on one side, and with talks frozen as voted on by the National Council on the other, Parliament’s Economic Committee was pushed to meet on Thursday June 6th, 2013 in the afternoon in order to establish a list of demands that will then be sent to the Federal Council so as to set up talks.

On Wednesday June 12th, 2013, after a near 7 hour-long debate, the Council of States decided to accept the agreement with the United States with a 24 against 20 result. About 30 speakers came forth on the matter, including finance Minister Eveline Widmer-Schlumpf who defended the project by saying, «with this solution we are in a position to comply with legal demands ». All the information can be found on the Swiss Parliament ’s website. Voting has now been passed onto the National Council who will make a statement on Tuesday 16.
Thus Swiss banking secrecy finds itself in a delicate predicament. If Switzerland concedes to American demands, FATCA would be a chip in the beginning of the end of this historical tradition, along with a programme of international standards that the OECD is preparing and the fiscal transparency that the EU wishes to impose on all members, Switzerland included. In so accepting to sign the agreement, the Swiss Confederation would lose its status as guarantor in the private sphere and would open doors to negotiation with all the countries, which up until now, have been «victims» of banking secrecy.