US secrecy law to pile pressure on IFSC


The US has holed Swiss bank secrecy below the waterline and its new law – restricting the ability of the worldwide banking system to hide funds from its tax authorities – is heading for an international quid pro quo

IN JUNE 2007 a senior executive at a Swiss bank boarded a plane in Geneva on route to the United States carrying documents that provided evidence for one of the biggest frauds in history.

Bradley Birkenfeld had a meeting scheduled with the authorities in Washington DC so he could fill them in on how his employer, UBS, was involved on a massive scale in facilitating tax evasion by wealthy US-based clients.

In time it emerged that up to $20 billion in undeclared funds were involved, and up to $200 million a year in fees for the bank.

Since then the bank has put its hands up, paid a fine of $780 million, and, following a vote to allow it to do so in the Swiss parliament, has handed over thousands of clients’ names to the US authorities.

The case knocked a huge hole in the Alpine jurisdiction’s reputation for banking secrecy, and has unleashed an attack on global banking secrecy that is gathering pace.

Just last week one of Switzerland’s oldest banks, Wegelin Co, was declared a “fugitive” by a court in New York after it failed to turn up for a hearing there.

The US authorities have alleged that the bank sought to profit from the pressures UBS came under in the years after Birkenfeld’s flight from Geneva, by telling US customers it would be better able to hide their money.

The bank said the US authorities would be less able to put it under pressure as it had no offices outside of Switzerland. In return for this aspect of its service, it sought higher banking fees.

In January the bank sold its non-US operations to rival bank Raiffeisen in a bid to protect its assets as the US assault on it continued to make progress.

The successful campaign by the US authorities on Swiss banking secrecy, and the US government’s need for as much revenue as possible, have fed into the enactment of a new law that is aimed at restricting the capacity of the international banking system to hide funds from the US Internal Revenue Service.

The new law seems set to make new and expensive demands on the international financial system, where Ireland is a huge player.

Fatca, or the Foreign Account Tax Compliance Act, was passed in 2010 and is due to begin coming into effect next year. The law is one of the most significant and far-reaching pieces of national tax law ever enacted.

It requires non-US financial institutions and other entities to identify and disclose accounts and other interests belonging to US customers to the US authorities.

Institutions and entities that don’t comply with the new law will face the prospect of having 30 per cent of the income or proceeds they gain from investments in US shares or other assets, deducted at source.

GIVEN THE COMPLEXITY and enmeshed nature of so much of the international financial industry, the measures have the potential to cascade through it, creating a huge array of reporting responsibilities not to mention the prospect of payments being withheld throughout the system.

Last week draft regulations for how the new system will work, running to more than four hundred pages, were published. It was also announced by the US Treasury Department that Europe’s five largest economies have entered into discussions with the US in relation to the implementation of Fatca.

The Treasury said the five countries – the UK, France, Spain, Germany and Italy – shared the US government’s goal of combating international tax evasion, but that the legislation had raised a number of issues, including the fact that complying with the US law might be illegal for the non-US financial institutions.

The group of countries are now to look at adopting an inter-governmental approach to Fatca in a bid to circumvent this problem and also to reduce the costs to industry that the law creates.

They are discussing a system whereby financial institutions would report to their domestic authorities rather than to the US tax administration, and the domestic authority would then automatically share the information with the US. Not only that, but the system would operate reciprocally between the countries involved.

“The United States is willing to reciprocate in collecting and exchanging on an automatic basis information on accounts held in US financial institutions by residents of France, Germany, Spain and the United Kingdom,” the joint statement said.

“The approach under discussion, therefore, would enhance compliance and facilitate enforcement to the benefit of all parties.”

Importantly, under the scheme being explored by the countries involved, withholding taxes would not be levied against financial institutions from the countries involved in the arrangement.

When the joint statement was issued last week it was noted by many commentators that Ireland and Luxembourg – both major global financial centres – were not party to it. When US presidential hopeful Mitt Romney published his tax returns recently, it showed a substantial part of his wealth was in funds based in Dublin.

A spokeswoman for the Department of Finance said it had no comment to make on Fatca or on any discussions the Irish authorities might be having with the US.

Ireland’s financial services sector plays host to funds with a value of more than $2.4 trillion, with the administration and management of these funds employing up to 11,000 people.

“This is a huge issue for Ireland, particularly because of the size of the funds industry,” said Peter Vale, a tax partner with Grant Thornton in Dublin. “I would imagine some agreement will be reached in time.”

Anne Stopford, head of investment funds tax with Grant Thornton in London, said it will be interesting in time to see if the law influences where funds will be established.

She said the law has the potential to drive a move away from tax havens, because the withholding tax will continue to apply to financial institutions that are not complying with the law or are not resident in countries that are complying. “There are pretty stringent downsides to not complying,” she said.

The industry is concerned at the costs and difficulties the new law is creating for it. All the major financial advice firms are developing expertise in the area so they can sell their services to those who need to deal with the new responsibilities being created.

“At a recent seminar in Dublin it was felt that the amount of tax realised could be significantly less than the cost to all the companies that will have to put in the necessary processes and procedures,” said Niamh Meenan, head of financial services for Grant Thornton in Ireland.

A new survey of the Irish fund administration sector by Deloitte has found that Fatca is generally viewed as a business threat, with the threat of the withholding tax being seen as the single greatest challenge.

Meanwhile the pressure on Switzerland continues. John Christensen of the Tax Justice Network has said the putative Fatca deal between Europe’s five largest economies and the US could embolden the European Union to seek a similar deal with Switzerland.

Anne Stopford believes that other countries will now look at copying the US law.

In a recent paper published in the United States, Offshore Accounts: Insider’s Summary of FATCA and its Potential Future, Prof Richard Harvey, whose work with his former employer, the IRS, included negotiations with UBS and the development of the Fatca law, suggested that the international financial services sector should devise a global model for dealing with Fatca rules, rather than having to develop multiple, expensive responses as other countries’ Fatca-type laws follow the US lead and introduce their own demands.

Multilateral implementation of Fatca would reduce the options available for people wanting to hide money offshore, he said.