Surveying the wreckage of torpedoed US tax deal
Following parliament’s rejection of a deal to solve the United States tax evasion dispute, there are grave doubts in both Switzerland and the US that serious damage to the Swiss financial system can be prevented.
On Wednesday the House of Representatives finally threw out plans to allow banks to pass over confidential data to the US. The biggest fear is that the US Department of Justice (DoJ) will renew the type of prosecutions that sparked the demise of Wegelin bank earlier this year.
“It is very likely that [the DoJ] perceived the Wegelin indictment as a shot across the bows of the larger more influential Swiss banks, and if that shot is not heeded, they very well may see no alternative but to turn the heat up on more economically important banks,” Beckett Cantley, a tax law expert at the John Marshall Law School in Atlanta, told swissinfo.ch.
“The alternative would be to look like they don’t mean what they say to the rest of the offshore banking world. The DoJ is seeking not just to catch the existing crop of tax evaders, but also to permanently deter new tax evaders and their enabling bankers on a worldwide basis.”
Switzerland’s lead negotiator, Michael Ambühl, who is stepping down from his post in August, already painted a bleak picture of life without a US agreement during an address back in February.
“Whether we like it or not, the US has the ability to destabilize the entire Swiss financial centre by taking measures against Swiss banks,” he said.
It is believed that the DoJ already has some 14 other Swiss or Swiss-based banks in its legal cross hairs, including Credit Suisse, Pictet and several cantonal banks.
“I expect to see another Swiss bank indicted in the near future,” Miami tax lawyer Teig Lawrence told swissinfo.ch. “It’s just a question of which one will have to bite the bullet and how big a gun the US wants to fire.”
By rejecting the hastily presented “Lex USA” tax deal, parliament has now thrown the ball back into the government’s court to find an alternative solution that respects the laws of both Switzerland and the US.
This will be no easy task if the results of years of intense negotiations between the two countries are anything to go by. Previous talks ultimately proved a “failure”, according to former Swiss diplomat Christian Blickenstorfer, who served both in the Swiss embassy in the US and as ambassador to Germany before retiring.
“Our diplomacy failed because for many years Switzerland had ignored persistent US pressure to give them information on US citizens who had evaded paying taxes,” he told swissinfo.ch. “There were signs on the horizon – this [deadlock] did not materialise from one day to the other.”
Given the current impasse between the Swiss government and parliament, Blickenstorfer does not see much “light at the end of the tunnel” in solving the US dispute.
It appears unlikely that the US would accept more years of negotiations to find another solution, while the Swiss government is expected to face legal challenges from bank employees and the Swiss data protection commissioner if it unilaterally allows banks to ignore secrecy laws and hand over information to the US.
In 2010, the Federal Administrative Court ruled the handover of UBS client data to the US the previous year as illegal. A later and larger data transfer was only allowed after winning parliamentary approval.
But this time around, parliament appears determined not to cave in to perceived US bullying – a stance that has some sympathy from Beckett Cantley.
“The use of US power to undermine the sovereignty and laws of another country – especially an ally – is a dangerous precedent,” he told swissinfo.ch. “It seems to me that the US could have located undeclared offshore bank accounts through any number of less offensive means.”
“The US has extensive capabilities when it comes to tracking the movement of dollars through the world, especially those that move in and out of the US banking system.”
But for former Swiss ambassador Blickenstorfer, there is no room for sentiment in the cut and thrust world of international diplomacy. Larger countries have always thrown their weight around with less powerful counterparts, he said.
“My experience of negotiating with Americans is that they are tough but fair,” he told swissinfo.ch. “Switzerland normally has no reason to have a complex about its small size – it is not just about square metres or population figures.”
“The smaller country usually emphasises that it is also of interest to its larger partner, such as job creation or investments in that country. But in this particular case there is not much we can argue to balance the negotiations.”
Teig Lawrence is convinced that US undeclared money could still be stowed away in offshore bank accounts – including Switzerland – despite some 40,000 people owning up to the US tax authorities during amnesties.
The majority of people who have employed his services to come clean have been those with smaller sized assets rather than multiple million dollar stashes.
“Those people with greater resources generally feel that they have a greater ability to weather the storm,” Lawrence told swissinfo.ch. “They are more likely to adopt a wait and see approach.”