Swiss Regulator Broke Law By Handing Over Tax Records To US
The old saying about no use crying over spilled soon to be hyperinflated commodity products will not help the thousands of people with formerly anonymous Swiss bank accounts, but will at least provide some closure. Earlier last year, when the entire financial system was collapsing and the viability of UBS depended on the generosity of the US, the Obama administration did the sneaky thing and in a blatant example of quid pro quo, demanded Swiss banks release the holy grail - full details of their account holders. Today, however, we learn that while the US decision may or may not have been just, the Swiss response to agree to US demands was illegal. Unfortunately, some fatal consequences of this dubious action are already starting to surface.
Switzerland’s financial markets
regulator broke the law when it ordered UBS AG to give data on
255 of the bank’s clients to the U.S. last year, a court ruled. The Swiss Financial Market Supervisory Authority, known as
Finma, exceeded its authority when it told the bank Feb. 18 to
deliver the information to the U.S., the Federal Administrative
Court in Bern ruled today. The case is separate from a larger
agreement made in August to turn over data on as many as 4,450
This decision begs the question of what the legal basis for the administration's demands for such disclosure is, and whether a court review would not find comparable such illegality domestically. Of course, any such review is a pipe dream. More from Bloomberg:
Finma ordered UBS to hand over customer information so the
bank could avoid criminal prosecution in the U.S., which may
have led to the bank’s insolvency, according to the regulator.
The Justice Department accused UBS of conspiring to defraud the
U.S. by helping Americans hide accounts from the Internal
Revenue Service. The five judges rejected Finma’s argument that action was
needed to prevent the bank’s insolvency and ensure the stability
of the Swiss financial system. The government and the parliament
are the only institutions with the authority to implement state
of emergency laws, the judges said in their 60-page ruling.
Alas, America's ability to become global tax regulator, if even for a year, is cold comfort to both accountholders and a Swiss banking industry that will have an uphill battle to convince depositors they can be safe in their anonymity.
Finma’s order was an “extremely grave, difficult decision,
on the occasion of an emergency-like situation,” the Bern-based
supervisor argued before the court.
A day after UBS agreed to pass on the client data and pay a
$780 million fine, the U.S. sued the bank to force disclosure on
as many as 52,000 American accounts. UBS shares fell 23 percent
over the following three days. The stock rose 3.2 percent to
17.11 francs by 4:04 p.m. in Swiss trading today.
UBS and the Swiss government settled that lawsuit in August
by agreeing to reveal data on as many as 4,450 U.S. clients
suspected of evading taxes through an administrative assistance
procedure between the U.S. and Switzerland.
“This decision strengthens the banking secrecy,” Hans
Geiger, a former professor of banking at the University of
Zurich said by telephone today. “However, it won’t change the
trend that Switzerland will assist more and more in cases of tax
At the end of the day, America's attempts to push the balance of power using financial strength and Bernanke's printing machine has been temporarily rebuffed in the political arena, but not before the IRS is privy, and able to collect, on billions in new tax penalties. Whether or not this will help the already insurmountable budget deficit is irrelevant (it won't). However, this is merely yet another example of how the reserve currency holder rules the day, and the tremendous political leverage it affords in even such topics as bank independence in legendarily neutral countries such as Switzerland.
As for other, more tangible implications stemming from the loss of banking anonymity, we draw your attention to an article in Vanity Fair, in which the author William Cohan speculates that the IRS' forceful actions were the cause of multi-millionaire Finn Caspersen's suicide:
The day after the memorial service, The New York Times weighed in.
Citing an unnamed source, reporter Lynnley Browning wrote that
Caspersen “was suspected of dodging many millions in federal taxes” and
“the authorities, it seemed, were closing in.” She wrote that they
“asserted he might have owed as much as $100 million in back taxes and
fines or, possibly, even have faced prison” and that the Internal
Revenue Service had “learned” that Caspersen “held an account at LGT,”
a private bank controlled by Liechtenstein’s royal family. She noted
that Liechtenstein had agreed in December 2008 to disclose the names of
wealthy Americans with accounts at LGT, “but it was unclear if Mr.
Caspersen’s name was among them.”
The financial pressure on Caspersen had no doubt ratcheted up
exponentially in February 2009, when U.S. federal prosecutors entered
into a “deferred prosecution agreement” with UBS, the giant Swiss bank,
whereby UBS agreed to pay a $780 million fine. From 2000 to 2007 the
bank had “participated in a scheme to defraud the United States” and
the I.R.S. by “actively assisting” American clients to create and then
conceal offshore accounts. After further negotiations, UBS agreed to
turn over to the I.R.S. the names of 4,450 well-heeled Americans who
were suspected of using the offshore bank accounts to avoid paying
billions of dollars of taxes to the I.R.S. The U.S. government had
hoped to get information on more than 50,000 secret Swiss bank
accounts, but agreed to the lower number as part of the settlement with
UBS. In March, the I.R.S. offered amnesty from
criminal prosecution to Americans with offshore accounts who had not
properly been paying taxes. To take advantage of the amnesty program,
taxpayers had to come forward voluntarily, tell all, and agree to pay
back taxes plus interest, plus a penalty (in an effort to encourage tax
evaders to “get right” with the I.R.S., Commissioner Doug Shulman
said). The I.R.S. coffers are expected to swell by billions of dollars
in otherwise uncollected taxes as a result of the UBS deal.
The UBS agreement “sent a shock wave around the world,” Shulman
later observed. “It has showed we are serious about piercing the veil
of bank secrecy.” The original I.R.S. deadline to obtain the amnesty
was September 23, 2009, 16 days after Caspersen committed suicide. That
date was later extended to October 15.
The money-management firm Boxwood Strategic Advisors observed that
since Caspersen’s tax basis in Beneficial stock was so low—his father
had helped to nurture and grow the business 78 years before it was
sold—any sale of the Household stock or HSBC stock that Caspersen
received after the acquisition would have been subject to gargantuan
capital-gains taxes. It is possible that in order to minimize those, he
might have sought offshore tax advice and considered offshore tax
Whittemore, for one, says Caspersen was “very aware” of the
September 23 amnesty deadline and he made numerous decisions based upon
what could be looming problems for him with the government, “some
subtle and foolish, some thoughtful.” Whittemore was not surprised that
Caspersen would have sought advice about minimizing the taxes that
needed to be paid. “I don’t know how he avoided the I.R.S. for so many
years and then got in trouble,” Whittemore says. Caspersen’s tax
problems “had been under discussion and brewing for some time, I’m
told.” Whittemore believes the dispute with the I.R.S. was about “the
way he accounted for some of the profits from the sale of the company”
and not “one of these tax residency things.” (The I.R.S. will not
Unfortunately, as the IRS investigation progresses, we sadly expect many more such developments in the land of the ultra wealthy.