UK: Swiss Banking Secrecy And The EU Anti-Fraud Agreement - The Beginning Of The End?

Last Updated: 9 April 2009
Article by Sarah Gabriel

Sarah Gabriel is Partner in the Commercial Litigation and Civil Fraud Department.

On 20 April the Anti-Fraud Agreement between the EU and Switzerland will come into force in the United Kingdom. The Agreement's aim is to counter fraud and other illegal activities affecting the financial interests of both the EU and Switzerland. It contains provisions relating to administrative assistance, under which Switzerland will commit to respond to certain requests made by the tax authorities, and to mutual legal assistance in criminal matters. The Agreement covers VAT and Excise duties along with Customs' offences, including smuggling, corruption and money laundering. What is of note, however, is that direct taxation is excluded from its scope.

This is of particular relevance given the United Kingdom's recent public attacks on offshore tax havens. At this time of economic crisis, the UK Government more than ever needs to recover whatever tax it can to shore up the Exchequer. Given the huge public outcry there has been against hedge funds and the use of sophisticated financial products, including credit backed derivatives and securitisations, which rely on the utilisation of offshore jurisdictions, this is potentially a popular and vote winning strategy.

In addition, it is an area in which the UK has a number of significant allies. France and Germany led the pressure earlier this year for Switzerland to be added to the OECD blacklist of unco-operative tax havens. This was only averted at the eleventh hour by Switzerland, along with others including Luxembourg and Austria, agreeing to relax its banking secrecy laws and to co-operate with other countries in cases of tax evasion. It agreed to adopt the international standard for the exchange of information developed by the OECD.

Any change in Swiss bank secrecy is a matter of significance in a country where some 12% of its GDP is accounted for by financial services. Secrecy has been enshrined in the Swiss banking system and is set out in the Swiss Bank Secrecy Act of 1934. It has been regarded as fundamental to Switzerland's pre-emanate position as a destination of choice for international wealth.

The Swiss announcement has resulted in huge publicity and has, in some quarters of the press, been heralded as the end of secret Swiss bank accounts. However, only time will tell whether the reality lives up to the hype. Swiss President Hans-Rudolf Merz has made clear that there will be no change in bank secrecy, other than where countries can provide compelling evidence of tax evasion. It will make decisions on what information to share on a case by case basis and Switzerland has rejected absolutely any form of automatic exchange of information.

Furthermore, the Swiss now have to put in place agreements with some 70 or more countries with the potential for each being separately approved by national referendum. This has led to recent suggestions that Switzerland may try to negotiate a model tax treaty with the United States which could then serve as a basis for the others, so speeding up the whole process.

That Switzerland needed to take some action was dramatically highlighted by the record fine of $780 million levelled by the US authorities on UBS for abetting offshore tax evasion. UBS entered into a differed prosecution agreement with the US Department of Justice and, in addition to paying the fine, agreed not to open new accounts for Americans without notifying the IRS. It is understood that in connection with this deferred prosecution agreement, the Department of Justice is looking to criminally prosecute up to 250 US taxpayers. Not content with this, in February the US Government filed a law suit against UBS in Miami seeking the disclosure of the identities of UBS' US customers with Swiss accounts. The US Government estimates that this may reveal as many as 52,000 customer details.

The UK has, similarly, been trying to crack down on UK taxpayers evading tax by the use of offshore accounts. Its approach, however, has been less confrontational.

HMRC's recent concentration of attack on offshore accounts started in 2006 with a landmark decision by the Special Commissioners ordering Barclays to disclose details of offshore accounts held by UK residents. In 2007 this disclosure was extended to Lloyds TSB, HSBC, HBOS and RBS. The banks wrote letters to their customers informing them of the disclosures that had been made and HMRC followed up later that year with an amnesty. Known as the Offshore Disclosure Facility, it allowed those with offshore accounts to make full disclosure, pay the outstanding tax and interest and suffer only a maximum penalty of 10% of the tax due.

The amnesty was not expressly limited to those holding accounts with the targeted banks. Anecdotal reports suggest that it was largely unsuccessful in revealing details of Swiss accounts and HMRC looked for other routes of access. For example, it announced that it intended to piggyback the mutual assistance treaty entered into between Germany and Switzerland. Such efforts were, however, hampered by the fact that this was not a door to general disclosure but could only be used where specific allegations could be properly made.

The amnesty recovered for HMRC somewhere over £400 million, hardly an impressive figure. This is particularly so when seen in the context of UBS' recent fine, which alone exceeded those total recoveries, ignoring what the US will ultimately recover from the taxpayers themselves.

One of the reasons for HMRC's fairly conservative results may be its reluctance, in direct contrast to the US, to use criminal process. At the time it bought information on UK residents holding Liechtenstein accounts, it was widely expected that there would be high profile prosecutions as a result. None have so far transpired. Similarly, the focus on offshore accounts has not translated into an increase in the number of prosecutions. Whilst they do occasionally take place, for example the conviction of Jonathan Cronin in January of this year for a tax fraud involving the diversion of funds from his UK business to a personal offshore bank account in Jersey, his 18 months jail sentence imposed at Worcester Crown Court was hardly headline grabbing.

HMRC is now expanding its request for disclosure to further financial institutions, including foreign banks with UK operations which could well include the major Swiss banks. It is anticipated that HMRC will offer taxpayers a further amnesty, this time with an increased penalty. Whether it will be any more successful in increasing the tax yield, only time will tell.

The Anti-Fraud Agreement should be a useful weapon in the UK's fight against fraud, particularly VAT fraud. However, the battle to prise open Swiss' banks to the eyes of the taxman continues. To an extent, it will depend on whether Mr Brown's resolve to increase transparency and outlaw offshore tax havens will stand up in the longer term. It should not be forgotten that many of the leading offshore centres, including the Channel Islands, Isle of Man, BVI, Bermuda and Cayman, are themselves all under the sovereignty of the British Crown.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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