The Swiss Banks: Handing Over Data

The tax row with the United States is raising a feeling of uncertainty among cantonal banks, as well as adding a greater administrative burden, even for banks that are not directly concerned, a swissinfo.ch survey of all 24 institutions has found.

At the beginning of July the Swiss government said that it would give special permission to banks to cooperate with the United States justice authorities, as a means of helping them avoid criminal charges that would threaten their existence. This would involve banks asking for authorisation to hand over bank data to the US on a case-by-case basis.

The announcement came a few days after new legislation to enable banks to hand over data to the US authorities without contravening Swiss law was rejected by parliament.

The government’s proposal has caused much debate in the country, not least among its cantonal banks. Fears over how much they will be drawn into the tax spat and the increased administrative burden of staying out of the US justice authorities’ crossfire are mounting, the swissinfo.ch survey – which had 16 replies – can reveal.

It found that the administrative burden had also stretched to the smaller banks whose business strategy had never included actively touting for foreign clients, especially “US persons”, or offering them “tax advice”.

Only two institutions – the Basel and Zurich cantonal banks, whose problems with the US justice authorities are well documented – answered the question of whether their institutions were being investigated by the US with a yes. The other 14 said that they were neither in negotiations nor had any knowledge of ongoing investigations.

And they maintained that they had not taken on any US clients from the big Swiss banks or Bank Wegelin since spring 2009 when UBS was hit with a massive fine.

All cantonal banks have clients known as “US persons” who are subject to tax in the US. Many of them are dual citizens or cantonal citizens who have emigrated but who have kept bank accounts in their home country. Most cantonal banks have, however, severed ties with people domiciled in the US.

Foreign Account Tax Compliance Act (Fatca)

In 2010, the US Congress adopted a piece of legislation called the Foreign Account Tax Compliance Act (FATCA) to fight offshore tax evasion by its own citizens.

The legislation demands that all foreign financial institutions (banks, life insurance companies, investment funds, foundations), including even those not operating in the US, give up names and data of all their customers who are subject to American tax.

This means all American citizens or non-nationals resident in the US, American expatriates, and foreigners with significant holdings in the US.

All financial institutions abroad are required to register with the US Internal Revenue Service (IRS) and to enter into an agreement by which they undertake to identify customers subject to American tax and give their names and bank data to the IRS.

Under the Fatca agreement concluded by the Swiss government banks themselves must send names and data of their customers directly to Washington.

To do this, they must first obtain the customer’s consent. Banks are nonetheless required to notify the IRS of the number and total assets of accounts belonging to customers unwilling to cooperate.

The IRS can then ask for full details as part of a request for administrative assistance to the Swiss authorities. Unlike other European countries, the Swiss government has not insisted that the American side reciprocate.

US domicile

The Zug Cantonal Bank still has US domiciled clients, said Pascal Niquille, its CEO. “The fact that many banks stopped doing business with these clients is not necessarily to do with the tax issue, but more so because of the Dodd-Frank-Act, the US federal law, which was enacted in reaction to the 2007 financial crisis to stabilise the financial market.”

“If you want to do actively do business with clients in the US you have to register with the Securities and Exchange Commission (SEC) and adhere to increasing complex American regulations.”

This is why many banks have preferred to sever ties with US domiciled clients. “We have decided to stop our passive business with US domiciled clients. We have stopped around 100 client relations due to Dodd-Frank. The only exceptions are very particular types of client relationships with very limited product portfolios,” Niquille said.

If a client only works in the US for a few months or years, he may keep his savings or personal account, but he has to give up his custodian account and will not have access to e-banking. He may not telephone his bank during his US stay and cannot correspond by post. And he has to prove that he will comply with his tax liability in the US.

“We currently have around 20 clients from Zug who want to keep their relationship with the bank in this way,” said Niquille.

Zug also has many firms with American employees who also count as US persons, even if they are not resident in the US. “We can and want to have a business relationship with these local clients. This does not pose a legal problem if the US regulations are adhered to and if the clients also sign all the forms according to American law,” he added.

Nothing new

US monitoring of Swiss banks with US clients is nothing new – it has been going on since the Qualified Intermediary agreement of 2001. This compels banks to ask for special forms from their American clients and that they report certain information to the US tax authorities.

“The US tax authorities are therefore informed about all the US persons who are our clients,” said Niquille. The bank is also subject to a regular QI audit and external experts check whether the bank is keeping to the agreement and transmit their results to the US.

 The Foreign Account Tax Compliance Act (Fatca), which will come into force on January 1, 2014, will increase the burden further. “All the banks taking part in Fatca will have to prove that they have done everything that is economically reasonable to identify US persons retrospectively and to recognize new clients as such,” he added.