Ethics and governance in the European Financial centers

The Swiss Bankers Association, which is the leading professional organisation of the Swiss financial centre, did not communicate (yet ?) on the Tax Justice Network index that was released a couple of days ago.

Because of a bad behaviour of Swiss banks in the USA every banker in Switzerland is in the spotlight with suspicion.

But as I wrote last year, there are visible differences between both European jurisdictions that may explain the delta of their respective score:

Switzerland has a Financial Secrecy Index Value of 513.40.
Grand Duchy of Luxembourg has a Financial Secrecy Index Value of 1127.02.

Communication of big four firms on fraud, corruption and other criminal business behaviours

PwC et E&Y in Switzerland participated to « Global Economic Crime Survey » for PwC and « Corruption or compliance – weighing the costs » for E&Y.
They are free to talk about criminal business behaviours.

PwC et E&Y in Luxembourg did not participate to « Global Economic Crime Survey » for PwC and « Corruption or compliance – weighing the costs » for E&Y.

PwC Luxembourg, the audit leader, focuses on the growth in a way that does not comply with IFAC.

Communication of the regulatory body

FINMA largely and regularly communicates on its investigations, its sanctions and cases law especially in the Bulletins.

The CSSF communicates only once a year in its annual report with no details. The small number of sanctions is telling. The CRF, the Luxembourg FIU, does a pretty good job and does not hide issues. The CSSF and the CRF do not describe the same situations.

Communication of judiciary judgements in general

They are available on www.bger.ch in Switwerland.

They are not available in Luxembourg. What exists currently officially is a selection of jurisprudence considered as interesting (Cf. parliamentary question Nº2550 dated 21 May 2008 and Minister of Justice’s answer dated 2 July 2008).

Number of declarations of suspicion while the center is growing

It increased in 2007 in Switzerland (Cf. MROS report dated 2008).

It decreased in 2007 Luxembourg (Cf. Minister of Justice report 2007 pp. 136 to 140)
“Although Luxembourg has steadily enacted anti-money laundering and terrorist finance laws, policies, and procedures, the lack of prosecutions and convictions is telling, particularly for a country that boasts such a large financial sector”. (International Narcotics Control Strategy Report, US Departement of State, March 2007)
“The scarce number of financial crime cases is of concern, particularly for a country that has such a large financial sector.” (International Narcotics Control Strategy Report, US Departement of State, March 2008).

Freedom of media and NGOs as watchdog

Media and NGOs play the role of watchdog in Switzerland.

Because of a public financing the press does not act as a watchdog in Luxembourg all the more than because of conflicts of interest due to the small size there is a pressure. There is no culture of investigation.
This was stated by the GRECO in a report early 2001: “the press, which has strong political affiliations, does not seem to exercise its role of public watchdog with the same vigour as in other countries. ” (GRECO Report dated 15 June 2001).
This was stated as well by the OECD in a report in 2004 : “The “watchdog” role of the media is also very limited in Luxembourg, although in some cases they have played a part, when detailed information fell in to their hands, in bringing to light suspicious behaviour. (…) According to media representatives interviewed, the shortage of financial and human resources available to the Luxembourg media generally preclude investigative journalism and consequently prevent the revelation of bribery cases” (OECD Report dated 28 May 2004).

The censorship like what happened with Rainer Falk's study about Luxembourg would not be possible in Switzerland.

Liability of legal persons

GRECO took a particularly positive view of the seizure and confiscation system and of criminal liability on the part of legal persons (See GRECO Evaluation report dated 4 April 2008).

Luxembourg urgently needs to establish liability against legal persons for foreign bribery and put in place sanctions that are effective, proportionate and dissuasive, according to a report by the OECD's Working Group on Bribery (SEE OECD report dated 20 March 2008)
Nothing is enforced as their is no will.

Transparency International

There is a TI Chapter in Switzerland
1 % of respondents in Switzerland reported they paid a bribe to obtain a service (Cf. TI Global Corruption Barometer 2007)

There is no TI Chapter in Luxembourg

Euronews has reported that Switzerland suspends tax deal with Italy because of a series of raids by Italian police on Swiss banks across Italy last week.

"Switzerland wants to negotiate with other EU member states, but these countries must behave correctly towards Switzerland", Filipppo Lombardi said.

This is a very bad reaction. Who did not behave correctly towards other jurisdictions in the first place?

The Wall Street Journal has reported that while the spotlight has been on the aggressive drive by the U.S. government to flush tax dodgers out of Switzerland, bankers here are instead grappling with the loss of a much richer clientele: Europeans

Read article

FATF today published a report about Switzerland.

According to FATF, Switzerland made significant progress.

The “Financial market crisis and financial market supervision” that was published the day before yesterday by FINMA provides a comprehensive analysis of the financial market crisis and the ensuing decisions and actions taken by the Swiss Federal Banking Commission (SFBC). None of those involved recognised in time the origins of the crisis or the full extent of the dangers it posed. Furthermore, the analysis reveals certain weaknesses and a partial lack of effectiveness in banking supervision. The report concludes, however, that the SFBC responded rapidly and decisively, and that fundamental decisions for stabilising the financial centre were made in a targeted and timely manner. The SFBC quickly learned its lessons from the crisis and implemented remedial actions.

Know more

Read the report (French)

Read summary of the report (English)

France gets a list of 3000 French taxpayers with bank accounts in Switzerland, according to a report in the weekly Journal du Dimanche . Minister Woerth interviewed by the newspapers says the accounts contained some euro 3 billion , "some of which is very likely linked to tax evasion." (original text: Nous avons récupéré les noms de 3000 contribuables détenteurs de comptes dans les banques suisses dont une partie correspond très probablement à de l'évasion fiscale).

I think that Switzerland is alone in front of the USA and now France. Where are the allies of March to protect banking secrecy?

A couple of days ago Austrian political parties have just agreed to relax the country's banking secrecy regarding foreigners, paving the way for parliamentary approval. This agreement secures the two-thirds majority needed to pass legislation that would help remove Austria from the Organization for Economic Cooperation and Development's "gray list" of countries not complying with international tax information standard.

Luxembourg was the first "financial center" to quit the OECD "grey list". But the goal was to sign the required agreements as fast as possible knowing that it will be a long shot in practice for foreign tax administration to gather all information required to formulate the request all the more than the OECD tax model includes discretionary loopholes:

In no case shall the provisions be construed so as to impose on a Contracting State the obligation:
 a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;
 b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;
 c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public). 

The culture has not changed in Luxembourg. Definitely not.

To comment the turn over of names of suspected U.S. tax dodgers who have held 4,450 secret accounts at banking giant UBS,  "It's like a dog that's tasted the blood of its first victim (...)It's clear that the concept of a perpetually safe tax haven is a fantasy that no longer exists" said Ron Geffner quoted by Washington Post. He is a former enforcement attorney at the Securities and Exchange Commission who now heads the financial services group at Sadis and Goldberg.

Let's read what said the Department of Justice to comment the agreement:

The Swiss Government has agreed to review and process additional requests for information from other banks regarding their account holders to the extent that such a request is based on a pattern of facts and circumstances equivalent to those of the UBS case.

Associated Press has reported that Swiss banking giant UBS AG agreed today to turn over to the IRS the details of 4,450 accounts suspected of holding undeclared assets by American customers, ending an intense trans-Atlantic legal fight. UBS had feared that it might be forced to hand over as many as 52,000 clients.

In return, US authorities are to abandon their lawsuit against UBS in the US.

Despite the agreement is for only 8.5% of the target, it is a turmoil for banking secrecy.

The deal will give the Internal Revenue Service thousands of long-sought account names, and is expected to provide even more UBS clients who voluntarily disclose their financial details. UBS's American customers have until September 23 to confess to the IRS about offshore bank accounts

"This issue is not going away, and people hiding assets and income offshore will find themselves increasingly at risk due to our efforts in this area," IRS Commissioner Doug Shulman said.

The US Attorney’s Office in California has recently released details of a case involving a man from Malibu whose name is John McCarthy that used the services of UBS to evade tax.

According to court documents, Switzerland’s largest bank, UBS AG, turned over records showing that McCarthy was the beneficial owner and, therefore, had a direct financial interest in a UBS bank account opened in Switzerland in 2003 in the name of COGS Enterprises, Ltd., a Hong Kong entity. In court documents, McCarthy admitted skimming money from his domestic business and, after funneling the money through a U.S. account, wire transferring the skimmed funds into his COGS Enterprises account in Switzerland. McCarthy admitted that, with the assistance of UBS representatives and his Swiss lawyer, he directed the investment activities and transfers of funds into and out of the COGS UBS Swiss bank account, as well as from other UBS Swiss accounts he controlled. UBS representatives worked closely with his Swiss lawyer to keep McCarthy's funds from leaving Switzerland and helped McCarthy move additional monies out of the United States undetected by the federal government, according to the plea agreement

McCarthy admitted that he transferred more than $1 million of money skimmed from his business to the COGS Enterprises account at UBS in Switzerland. As a result of the money transfers, McCarthy admitted that he failed to pay at least $200,000 in federal income taxes and that he now owes the government interest and penalties.

“Tax prosecutors in my office, working with IRS-Criminal Investigation agents and Department of Justice attorneys, are aggressively pursuing those who shirk their federal tax obligations by hiding funds in secret bank accounts in Europe and Asia,” said United States Attorney Thomas P. O’Brien.

Eileen C. Mayer, Chief of IRS-Criminal Investigation, stated: “The prosecution of John McCarthy is the tip of the iceberg. In conjunction with the United States Attorney’s Office here in Los Angeles and prosecutors around the country, our agents continue to investigate existing leads, as well as develop and follow-up on additional leads uncovered in the course of their investigations on others similarly situated. Today's actions show the IRS is committed to pursuing people hiding income offshore. Anyone in this situation needs to immediately come in through our voluntary disclosure process and get right with your government or face stiff criminal and financial penalties”.

John McCarthy Plea Agreement was circulated on the internet.

Richard Murphy has analysed the agreement between UBS and its client John McCarthy.

He observes:

First, active involvement of UBS in what they knew to be tax evasion.

Second, active involvement of a Swiss lawyer in what he or she knew to be tax evasion.

And third repeated money laundering offences in Switzerland, Hong Kong, Cayman, Liechtenstein and the BVI.

As Richard says, this is not just a matter of a bank not identifying an offence: this is evidence of a bank being an active party in criminal behaviour.

A bank that was supported by TI for its Corporate Social responsibility:

“UBS was instrumental in creating the Wolfsberg Group, named after their own management training center in Switzerland. With the help of the anti-corruption organization, Transparency International, 12 of the worlds largest banks – banks which would normally be guarded about sharing internal procedures with their competitors, collaborated to develop and publish the “Anti Money Laundering Principles” called the “Wolfsberg Principles” …which have received worldwide recognition as good practice – filling gaps in national laws and regulations.”  (Jermyn Brooks, Director, Transparency International)

The AP has reported that the  U.S. government and Swiss banking giant UBS AG have reached a long-awaited agreement in a case over secret Swiss bank accounts for alleged American tax evaders, lawyers for both sides told a federal judge Wednesday.

The deal was announced during a telephone conference with the judge that lasted only long enough for lawyers to say an agreement had been reached. No details were announced.

However OBAMA tax views are clear enough: as a US law firm observes:

The Qualified Intermediary ("QI") program seeks to ensure that appropriate U.S. withholding is imposed on foreign persons. The proposed rules would require foreign financial institutions to withhold and report on foreign income and accounts of U.S. and foreign persons. Foreign financial institutions would be required to enter into agreements with the IRS to share information about their U.S. customers. Currently, the IRS has the burden to show that an account holder of a QI is a U.S. person if the account holder attests to being a non-U.S. person.

The President's plan would require QIs to identify all account holders that are U.S. persons and file IRS Form 1099 with respect to payments to U.S. account holders, including income from foreign sources. Any withholding agent making a payment to a nonqualified intermediary would be required to withhold 30 percent. Withholding agents paying gross proceeds from the sale of any security to a non-qualified intermediary not located in an income tax treaty jurisdiction would be required to withhold 20 percent. To get a refund of the amount withheld, account holders would be required to disclose their identities and demonstrate compliance with U.S. tax laws.

As Richard Murphy observes, this wording looks like something close to Automatic Information Exchange. If so, why not roll it out? After all, once people have systems in place for the US the extra cost for the rest of the world is marginal.