United States is reportedly offering 11 Swiss banks a deal that would allow them to avoid criminal prosecution in exchange for revealing full details of their US offshore business. The challenge to Swiss secrecy laws by the US and several European countries has been steadily growing over the past decade - a momentum fuelled by the global recession that already accounts for hundreds of billions of dollars of bailout packages on both sides of the Atlantic. With tax collections unable to keep pace with the rise in expenditures associated with a recession, resulting in ballooning unsustainable fiscal deficits in the West, several governments have sought information from Swiss banks of accounts held by their citizens/nationals. This information is incidentally readily available to Swiss banks as under Swiss laws all accounts, including numbered accounts, are linked to an identified individual. A look at the history of Swiss banking laws reveals that the Swiss codified their banking secrecy laws in 1934 subsequent to the denouncement of eminent French personalities (including politicians, members of the judiciary, industrialists such as Peugeot brothers as well as church dignitaries and newspaper barons) for hiding their money in Switzerland by French MP Alberty. He added that these personalities were perhaps unaware that the Swiss relent their money to Hitler's Germany. Thus there are two major elements in the Swiss banking laws that irk all those countries whose citizens take advantage of the Swiss secrecy laws: tax evasion that is illegal and punishable under the law of all countries in contrast to tax avoidance which allows a reduction in taxes paid legally; and the inability of the account holder's country of origin to utilise the savings in a manner that would benefit the development of that economy with the in-built danger that the Swiss banks may opt to lend to a country that may be at war with the account holder's country of origin. The UBS, it maybe recalled, was caught red-handed by US authorities while offering tax evasion strategies by 'sending undercover bankers with encrypted computers to the United States,' which led to UBS paying 780 million dollar penalty. In 2009 tensions increased between US/European countries and Switzerland, Lichtenstein, Luxembourg and Austria who were accused of favouring evasion at the OECD and G-20 fora. The outcome was an agreement to implement tax treaties that would facilitate the exchange of banking information in case of suspected tax evasion. Additionally since July 1, 2005, Switzerland has charged a withholding tax on all interest earned in the personal Swiss accounts of European Union and US residents. Thus the Swiss have been compelled to enact a new law that is to applicable with prospective effect, rather than retrospective as requested by several countries including India, but added a rider that "fishing expeditions" to peep into bank accounts of individuals will not be allowed. So what has been the response of tax evaders in light of the revisions in banking laws? Rich clients have begun to use private banks in Singapore (with secrecy laws comparable to Switzerland), Hong Kong (secrecy laws are not as stringent but it does offer flexibility in the creation of opaque companies) as well as Swiss banks that have begun opening their branches in these two countries. Be that as it may, there are several fora where powerful governments including the US and some European states are successfully challenging the secrecy afforded by offshore accounts wherever they maybe in the world. The rich governments are dealing mainly bilaterally with respect to banking secrecy laws. This is extremely unfortunate as countries like India and Pakistan (though to a considerably lesser degree) are aware that several of their own eminent personalities bank in offshore accounts. In the case of the Subcontinent, the concern is not one of tax evasion (given the avoidance of double taxation agreements) but of money laundering as well as corruption. Regrettably the Swiss are unwilling to deal with small countries unable to take counter-measures like the West. It is to be hoped that such deals on offshore accounts be made at multilateral fora rather than bilaterally or through a trading bloc. Copyright Business Recorder, 2011
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