Economic Offences

Token measure

Print edition : November 29, 2013

At the entrance of UBS AG bank's branch in Lausanne, Switzerland. Photo: Gianluca Colla/Bloomberg

At the banking and financial services company's office in Zurich. Switzerland apparently has plans to include reciprocity and data protection in the framework of exchange of information. Photo: ARND WIEGMANN/REUTERS

Switzerland signs a multilateral convention on administrative assistance in tax matters, but will it help procure information on illicit fund flows from India to the tax haven?

IT seemed as if the walls of banking secrecy guarding illicit financial activity were finally crumbling when, on October 15, Switzerland signed the Organisation for Economic Cooperation and Development’s (OECD) multilateral convention on mutual administrative assistance in tax matters. Currently, there are 58 signatories to the treaty, including India. The treaty will help developing countries procure information on illicit financial outflows into Switzerland. It is of special relevance to India as Switzerland has in recent times refused several requests for information on the accounts of Indians in its banks. At present, 650 such requests from India are pending with the Federal Council of Switzerland. According to Global Financial Integrity, a Washington-based think tank, Indians stashed away $462 billion in overseas tax havens between 1948 and 2008.

However, the signing of the treaty is seen only as a token measure in ending financial secrecy. Earlier, the Swiss government had put forward a “white-money strategy”, which required clients to declare that they were tax-compliant. It will take a long time for such measures to translate into substantial benefits for the developing world, which is in dire need of tax revenue to finance its developmental activities. Informed sources in the Swiss Ministry of Finance and the banking industry indicate that there is a concerted effort to push for the inclusion of provisions in the framework of the treaty that will create obstacles to the free exchange of information on fraudulent financial activity.

The current OECD multilateral convention also has its limitations. For instance, it falls short of the G20’s commitment regarding automatic information exchange on bank accounts and tax matters. The G20 Leaders’ Summit in St Petersburg in September this year endorsed a clear global tax standard for automatic exchange of information by the end of 2015. The G20 declaration stated:

“Developing countries should be able to reap the benefits of a more transparent international tax system, and to enhance their revenue capacity, as mobilising domestic resources is critical to financing development. We recognise the importance of all countries benefiting from greater tax information exchange. We are committed to make automatic exchange of information attainable by all countries, including LICs [lower-income countries], and will seek to provide capacity building support to them.

“We call on the Development Working Group in conjunction with the Finance Track, to work with the OECD, the Global Forum and other IOs [international organisations] to develop a road map showing how developing countries can overcome obstacles to participation in the emerging new standard in automatic exchange of information, and to assist them in meeting the standard.”

Limitations of the treaty

Speaking to Frontline, Mark Herkenrath of Alliance Sud, the Swiss Alliance of Development Corporations, pointed out the limitations of the OECD multilateral convention: “The convention only provides for information exchange on request. In most cases, a large volume of information is required to file a request itself as evidence to prove that there is a case of financial fraud. Automatic exchange of information is a lot more beneficial for developing countries. Also, the process of information on request is slow and manpower- and resource-intensive.”

Sources in the Swiss Ministry of Finance indicated that Switzerland would emphasise on including reciprocity and data protection in a framework of exchange of information. These two specific provisions within the framework of the treaty could hinder developing countries from seeking information on illicit financial flows and untaxed assets. A source in the Ministry said, “Switzerland has introduced the white-money strategy to ensure that no untaxed assets are deposited in its banks in the future. While Switzerland has agreed in principle to automatic information exchange as a model in June this year, the Swiss government would be pushing for a level playing field on information exchange on the basis of reciprocity in obtaining information from governments. Switzerland cannot be expected to provide information to some governments and not get any information back. Also, we will emphasise the need for data protection and confidentiality when information on bank accounts is provided to governments. When a huge amount of information is provided to a government, it has to ensure that it is only used by the tax authorities and not for other purposes of political vendetta.”

The clause of reciprocity will work to the disadvantage of developing countries and slow down the process of seamless exchange of information. A draft paper titled “Towards Tax Justice”, published by Tax Justice Network on October 30, outlines how the obligations for reciprocal data work to the disadvantage of developing countries. Tax Justice Network is an independent organisation launched in the British Houses of Parliament and involved in research, analysis and advocacy in the field of tax and regulation. The paper states: “The provision for providing reciprocal data does raise some challenges for developing countries. The capacity constraints of developing countries have been clearly identified, and while some developing countries will be able to, or will soon be able to, provide information to other countries, many will not have that capacity—perhaps for some time. On the one hand, a multilateral treaty is clearly the best way for developing countries, with their political and economic power constraints, to gain access to information. On the other hand, multilateral treaties—with reciprocity obligations to many other states—also raise the costs of participating for developing countries, together with the level of capacity building needed before they can join the standard.”

The paper cites a specific example to illustrate this: “There are concerns that to focus solely on capacity building is to miss the point that developing countries, presently, are different from developed countries. In pure numerical terms, developing countries are very distinct: for instance, in order for sub-Saharan Africa to have the same ratio of tax officials to population as the OECD average, it would require over 650,000 new tax officials. That is not a gap that can be bridged in a short period of time.”

The emphasis on reciprocity shifts the focus away from the responsibility of tax havens to give out information on illicit money. The draft paper further argues, “The direction of financial flows that are of interest are very one-sided: the vast amount of funds flow out from developing countries, invariably into accounts of banks based in developed countries, with very little if any flow into non-tax haven developing countries. As such, it is surely right that the information flows focus on following the flow of money. It is also surely right that countries that have facilitated and benefited from these illicit flows have a duty to provide the necessary information to help address any tax evasion being perpetrated.”

The paper also highlights the practical problems with the demand for reciprocal information from developing countries and calls for a more flexible approach towards reciprocity. “Asymmetry for developing countries would be a complement to capacity building. It would allow capacity building to focus in the short term on providing for security and use of the information—meeting the minimum criteria for international participation, as well as securing the benefits of information exchange —before capacity building resources are expended on ensuring reciprocal exchange. Such an approach not only builds capacity, but also seeks to adapt the international rules to the capacity and circumstances of developing countries. Given the scale of the capacity gap, this is vital if the benefits of information exchange are not to be significantly deferred.”

Switzerland’s move to push for protection and confidentiality of data also poses a challenge to the transparency and accountability of governments. The paper explains, “While the taxpayer data itself should clearly remain confidential, in order to help citizens ensure accountability for governments using data, there must be transparency over the scale and volume of data received (e.g., number of pieces of information, number of people the information relates to, scale of assets involved, and so on)—all broken down on a country basis.” The undue emphasis on data protection will only ensure that the data remain outside of the public domain with the powers that be.

Sources in the OECD, however, affirmed its commitment to automatic information exchange. “The G20 has laid out a clear road map for automatic information exchange on tax matters. The multilateral convention on assistance in tax matters will gradually move towards a framework of automatic information exchange,” a source said.

White-money strategy

In September this year, the Federal Council of Switzerland submitted a set of laws to the Swiss Parliament relating to a proposed white-money strategy. The white-money strategy requires clients to file a self-declaration that they do not have any untaxed funds. But Mark Herkenrath said, “The truthfulness of forms submitted by clients is often doubtful and such self-declarations which have already been voluntarily introduced by banks are hardly adequate to ensure that untaxed assets do not find their way into Switzerland.”

Rudolf Elmer, a former banker who exposed massive tax avoidance schemes by the Swiss bank Julius Baer in 2008, said, “The white-money strategy is not going to work in practice. It is impossible to check if every client has paid taxes in his or her home country. The most effective solution to combat money laundering is automatic information exchange, country-by-country reporting and public registry of beneficial owners in secrecy jurisdiction. This can minimise tax avoidance by multinational conglomerates, large financial institutions and high- and ultra–high-net-worth individuals.”

The issue is of special significance to India. A report published in the Swiss newspaper Neue Zurcher Zeitung on October 27 notes that around 3,000 applications seeking information on bank accounts were made from many countries in August this year to the Federal Council of Switzerland. Of about 1,100 of these still pending with the Council, 650 are from India. The Indian government had given these information requests on the basis of stolen bank data released by France of 700 Indian bank accounts in the Geneva-based HSBC Bank in March 2010. The Swiss government has held back information on these accounts on the grounds that the requests are based on stolen bank data. “This example illustrates the importance of automatic information exchange. In the present circumstances, India can only get access to the data by threatening Switzerland with sanctions,” Elmer said.

Although India has signed a double taxation agreement with Switzerland, automatic information exchange on all investments from India has not been possible as a case is required to be registered in India for such exchange.

Interestingly, Switzerland signed the Foreign Account Tax Compliance Act (FATCA) with the United States in February this year. The Swiss House of Representatives voted in favour of this Act in September. This treaty obliges Switzerland to provide almost automatically information to the U.S. about Americans with Swiss bank accounts. The double standards applied in the treatment of developing countries and the U.S. are perhaps led by concerns about maintaining trade ties with and market access to the U.S.

Switzerland continues to top the list of countries in the financial secrecy index for 2013 released by the Tax Justice Network on November 7. While international pressure on Switzerland has led to some token measures being adopted, it remains to be seen whether the pressure will translate into action against untaxed assets in any substantial sense. This will require strong political will and combined pressure from developing countries, which are losing out on valuable tax revenue because of the stashing away of illicit money by corporations and individuals.

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