Switzerland: The Future Of International Financial Centres Special Focus On Switzerland And Mauritius

International Financial Centres (IFC), Also Sometimes Called Offshore Centres Or Tax Havens, Have Recently Been Pressured To Change. Several International Organisations Have Taken Initiatives To Curb The Activities Or Alter The Way These IFC Are Working. We Will Try To Show The Likely Consequences Of International Institutional Pressure Upon The Future Of These IFC.

From An Institutional Point Of View, Attacks On The Existing Environment Have Been Coming From Several Directions, Namely Taxation, Disclosure Of Bank Information, Global Financial Stability And Money Laundering.

Indeed, The Organisation For Economic Co-Operation And Development (OECD) Targets Tax Issues, And What It Views As "Harmful Tax Practices". It First Published In 1998 A Report On Harmful Tax Competition; Fourty-Seven Countries Were Targeted As Tax Havens To Be Investigated, According To The Following Criteria:

• No Or Nominal Taxation, In Conjunction With
• Lack Of Effective Exchange Of Information
• Lack Of Transparency
• Absence Of Any Real Economic Activity

Thirty-Five Countries Were Included In The List Published On 26 June 2000. Switzerland And Mauritius Are Not On This List. A Second List Will Be Published In July 2001, Giving Then The Names Of Countries Having Not Been Co-Operative And Targeted With Sanctions.

The OECD Also Issued A Report "Improving Access To Bank Information For Tax Purposes". It Stresses The Importance Of The Elimination Of Anonymous Bank Accounts And The Need For Exchange Of Information For Criminal Tax Cases; It Lists Initiatives To Achieve Access To Bank Information For Civil Tax Cases. A Spokesperson For The Swiss Government Insisted That Swiss Bank Secrecy Was Not Negotiable.

The Financial Action Task Force (FATF) Looks At Anti-Money Laundering Laws. It Issued A Report On 14 February 2000 On "Non-Co-Operative Countries Or Territories", Which Defines Procedures To Target Those Not Having Or Not Putting In Place Effective Anti-Money Laundering Laws And Procedures. A Blacklist Was Consequently Published; Switzerland And Mauritius Are Not Included.

The Financial Stability Forum (FSF) Is Concerned By The Global Financial Stability. It Set Up A Working Group In April 1999. This Group Published A Report On 5 April 2000, Which Included A List Of Three Groups Of "Offshore Financial Centres", According To The Perceived Degree They Followed International Standards, Group III Being The Worst. Switzerland Was Included In Group I, Mauritius In Group III. Switzerland Later Issued A Statement Saying That It Did Not Consider Itself An "Offshore Financial Centre", And Should Thus Not Have Been Included In This List.

The United Nations, Through Its Offshore Forum, Also Follows Enactment Of Anti-Money Laundering Legislation. But It Monitors All Countries And Not Just IFC.

The European Union Aims To See All Its Residents Taxed In Similar Ways, Regardless Of Their Residence. It Therefore Pursues Tax Harmonisation And Seeks To Impose Upon All Its Members A Minimum Level Of Taxation, But Also Communication On Tax Matters. This Will Also Be "Negotiated" With Non-Members, Such As Switzerland For Example.

Finally, The Internal Revenue Service (IRS) Of The United States Has Enacted New Rules, Under Which Any US Paying Agent Of Dividends, Interests, Royalties Or Proceeds Of Sale Must Know The Identity Of The Beneficial Owner (BO); The Purpose Of Which Is To Ensure That All Taxes Due By US Citizens Are Indeed Paid. The BO Must Fill Forms Provided By The IRS, To Make Himself Known. However, Starting On 1 January 2000, Under Certain Very Strict Rules, Agreed Foreign Paying Agents (Qualified Intermediary – QI) Can Certify That The BO Is A Non-US Citizen But Without Communicating His Identity To The IRS, And Then Get Tax Relief On His Behalf.

What Is The Reaction Of IFC To These Wide And Strong Attacks? In Fact, Up Until Late Spring 2000, The Almost Unanimous Reaction Of The Targeted Jurisdictions Was To Try To Ignore These Attacks, Under The Following Argumentation:

1. We Are All Sovereign States. Why Would These (Rich And Developed) Countries Impose Upon Us Laws Against Our Will, Which Would Certainly Infringe Upon Our Sovereignty?
2. These Countries All Supposedly Want To Establish A World Where Free Competition Should Be The Rule, Under The Auspices Of The World Trade Organisation. Why In That Case Can They Not Accept Tax Competition?
3. Rather Than Force Upon Us Increased Levels Of Taxation, Would These Countries Not Better Reduce Their Own Level Of Taxation, Often Seen As The First Reason For Their Residents To Try To Keep Income Or Wealth Untaxed Or Less Taxed In OFC?

But Today, These Arguments Are Not Heard Anymore. All Blacklisted IFC Want To Be Removed From These Lists. Indeed, Regardless Of The Validity Of The Above Mentioned Arguments, The Sanctions To Be Enacted Upon Such IFC Under The Various Initiatives Would Likely Include One Or More Of The Following: Full Disclosure Of All Parties Involved In Any Bank Transfer, The Refusal To Accept Any Bank Transfer, Freezing Such Funds If Some Suspicion Raised, Financial Sanctions Administered By The International Monetary Fund (IMF). Such Sanctions Would Basically Threaten Their Very Survival As IFC; It Is Indeed Hard To Imagine How Such Countries Would Be Able To Operate In The Financial Arena If Bank Transfers Were Rendered Impossible.

Presumably, The Need For Bank Control And Regulation, In Order To Avoid Any Kind Of Disruption To The Global Financial Stability, Can Not Seriously Be Challenged. It Will Probably Be More A Matter Of Agreeing On Rules, Procedures And Staff Training For Central Banks Of IFC. Switzerland Is Viewed As Having Today The Necessary Legislation In This Domain; Mauritius Is Working With The IMF To Further Strengthen Its Existing Controls And Procedure.

Similarly, Most If Not All Countries Will Be Ready To Follow The Injunctions With Regard To Money Laundering. It Is Safe To Assume That No Single Country Would Want To Be Known Of As Promoting Or Even Condoning Money Laundering. This Includes All Such Actions Derived From Drug Money, Prostitution, "Serious Crime", Arms Trafficking. Appropriate Legislation Has Been Passed In This Area Of Concern, Both In Switzerland And Mauritius. Although The Authority Set Up In Switzerland To Control Anti Money-Laundering Still Seems To Be Understaffed, The Necessary Steps To Guarantee Its Good Functioning Are Being Taken. The Mauritius Economic Crime Office (ECO) Is Working And Already Instructing Several Cases Of Alleged Corruption, Both Onshore And Offshore.

But Resistance Is Encountered For Alleged Crimes Resulting From Tax Evasion, As Defined By The Law In Many OECD Countries. Most IFC Do Not View Tax Evasion As A Crime; It Is Therefore Evident That There Can Be No Money Laundering Resulting From Tax Evasion Under Their Laws. This Is The Case For Both Countries Under Review, Switzerland And Mauritius. Anti-Money Laundering Laws, Both In Switzerland And Mauritius, Provide For Exchange Of Information, But This Is Not Applicable To Tax Evasion. However, It Must Be Pointed Out That The Endeavour To Harmonise EU Taxes As Well As The New US QI Rules Have And Will Further Erode The Banking Secrecy Rules.

Finally, In Order To Be Removed From The OECD Blacklist And No Longer Be Accused Of Carrying Out Harmful Tax Competition, The Thirty-Five Countries Listed Will Be Forced To Levy Some Taxation On All Their Corporate Vehicles. For Those IFC Who Engaged Primarily Into Incorporation Of International Business Companies (IBC) With A Zero Tax Regime, Such Changes Might Hit Very Hard In The Attractiveness Of Their International Financial Activities. If These IFC Do Not Have Other Financial Activities Or Special Expertise To Propose, It Is Very Likely That Their Financial Services Sector Will Shrink Very Fast. Indeed, If A Major Attraction To International Clients Was To Have A Zero Tax IBC, Its Taxation Would Render Such Vehicle Unattractive. Switzerland And Mauritius Are Not On This Blacklist. It Must Be Noted That Mauritius Still Offers A Zero Tax IBC.

As A Conclusion, We Anticipate That Many IFC Will See Their Level Of Financial Activities Decrease Greatly. Indeed, Either They Will Give In To The OECD Pressure And Allow For Some Taxation On Their Corporate Vehicles, And Therefore Lose Their Attractiveness, Either They Will Not Bend To This Pressure, But Will Risk To Be Effectively Locked-Out Of The International Financial Arena.

On The Other Hand, IFC Which Have More To Offer Than Exclusively Tax Based Attraction Will Continue To Grow In This Field. Such Services Include Namely Private Banking, Investment Funds, Holding And Investment Companies, Regional Headquarters, International Tax Planning Using Double Taxation Agreements, Insurance And Reinsurance…This Is In Our View The Case Of The Two Countries Under Review, Switzerland And Mauritius.