Today, Oct. 1, 2010, brings to a close a story of grand presumption appropriately dubbed “This is just the beginning” by the tax-dependent American congregation, and its ideological brethren abroad, that worships at the altar of transfer-payments. We have followed this saga from the beginning, and our readers will recall that it started with the Union Bank of Switzerland (UBS) scandal.
In mid-2008, U.S. federal authorities accused the Switzerland-based bank of advising certain American clients to evade taxes owed the IRS and abetted to that end. UBS eventually admitted to this, and in Feb. 2009 agreed to pay a US$780 million fine as part of a deferred prosecution agreement with U.S. officials. Also included in the agreement was the U.S. demand for the names and account information of 52,000 UBS customers claimed to be in violation of the U.S. tax code.
However, paying a fine is one thing. Demanding that UBS release information in violation of Swiss constitutional law is quite another.
As you can imagine, an admission of guilt by a major national bank, the latest scapegoats du jour, and a hefty fine acted as chum in the me-too waters of cash-strapped welfare states fiscal authorities. And the U.S. fist-pounding on release of information on thousands of accounts, and the potential tax revenue windfall this implied, precipitated a flurry of despicable sediment in the grand European test tube known as the envy-driven welfare state. The summer of 2009 turned into perverse European theater.
It started when a DVD surfaced in the hands of the German government containing stolen account information on clients at a Liechtenstein bank. It was later revealed that the DVD was purchased by German officials and that they encouraged the theft. The French chimed in that they were behind this move and sought to curry favor with the Germans to share any information on French citizens that might reside on said DVD. The British, too, wanted in on the action and went so far as to offer their own reward for anyone supplying similar information on English citizens. Expediency trumped ethics. The bandwagon was standing room only as Berlusconi jumped on board.
To prove they meant business, the Germans began systematically interrogating the occupants and searching cars with German plates at the German-Swiss border. In particular, owners of up-market vehicles where targeted. The lines at the border stretched for many kilometers and interrupted commerce. Anyone caught with “large” amounts of cash became suspects, and absent a good reason to be in possession of their own money, it was confiscated. The Italians installed cameras at their Swiss border points and began tracking the movements of their citizens. The program’s debut was loudly announced in the media for full effect.
However, the law of unintended consequences soon took the stage. The blatant intimidation tactics enraged the Swiss government as well as its people. Popular sentiment shifted decidedly against cooperation with U.S. prosecutors, aggravated by their threat to shut down all of UBS’s American operations if their demands were not met and expanding the prosecution to over 80,000 accounts. The Swiss government was now trapped between its desire to settle with the U.S. and the constitutional constraints limiting its options, and an aware public unwilling to support any compromise.
That is where it stood last August. Let’s now pick up the story.
On Sept. 1, 2010, the Swiss Federal Council (roughly the equivalent of the U.S. Cabinet) adopted the Administrative Assistance Ordinance contained within the new double taxation agreement with the United States. What does that mean? In the Council’s own words:
“If a country submits a request for administrative assistance on the basis of a DTA [double taxation agreement] concluded with Switzerland, then the Federal Tax Administration will conduct a preliminary examination. The prerequisite for the request is that it is in line with the principle of good faith. Requests for administrative assistance will be rejected if they are based on information which was obtained or forwarded due to actions which are punishable under Swiss law.”
I have highlighted two important items in that statement. The first, “in line with the principle of good faith,” is a diplomatic way of saying that Switzerland will not cooperate with “fishing expeditions” into client bank account information. And further, that any request for administrative assistance (the request for information by a foreign government and its agencies) must proceed according to judicial process of the governing law. In Switzerland, that means constitutional law.
Indeed, this was the reason for the year-long delay in releasing the requested information on UBS accounts. For the Swiss government to simply hand over account information would violate the country’s constitutional protections. Before doing so, a referendum to change the constitution would be mandated. And polls of voters showed that it would go down in defeat handily. The U.S. government’s initial request for account information on 52,000 clients (deep-sea fishing) was whittled down to 4,500. These requests have now been judicially reviewed and “about half” will be turned over to U.S. authorities.
The second item is probably more significant. The Swiss Federal Council has ruled that any information obtained via methods deemed illegal under Swiss law cannot be the basis upon which an administrative assistance request is made. In the age of envy and ethics-challenged leadership, this is a huge decision.
In closing, I want to underscore that we are not in any way suggesting that anyone attempt to hide money in Switzerland. At Casey Research we identify smart speculations; hiding money in Switzerland is a stupid gamble, and the odds are you will get caught.
With that warning in mind, there is nothing illegal about taking your money to Switzerland as long as you comply with the laws of the IRS and Treasury Dept. In fact, moving some of your wealth should be part of any asset protection strategy, and Switzerland, with its strong constitutional protections and strong currency, might be an advisable jurisdiction.
