Get in Line Brother #17 - Thoughts on Swiss/U.S./UBS Settlement

Readers of this blog have surely read the recent barrage of publicity about the settlement between UBS and the U.S., arranged with the involvement of the Swiss Government. The terms of the settlement have not yet been disclosed, but the speculation is that perhaps 10,000 names out of an alleged 52,000 U.S. depositors in UBS accounts will be disclosed. Assuming there will be some method for selecting whatever the number of names, the further speculation is that the names will be those U.S. depositors who used entities to structure the deposits to add an additional layer of "privacy" / secrecy protection. So the simple U.S. tax cheat who just set up a UBS bank account in his or her name will escape disclosure, but the sophisticated tax cheat who interjected further smoke and mirrors by entities of little substance will be disclosed. (There is an interesting story behind all these machinations to obscure the relationship of a U.S. taxpayer to the foreign account, but I won't digress from the focus of this blog.)

I focus on the legal construct that the Swiss will reportedly use to justify the limited disclosures under the exchange of information provision of the U.S. / Switzerland treaty. Switzerland has long distinguished between tax evasion and tax fraud which in U.S. law are synonymous terms. Under Swiss law as interpreted (it's all about interpretation), tax evasion is not criminalized in Switzerland, but tax fraud is. I don't know the precise distinction between the two in Swiss law, but gather that tax fraud (crime) is some egregious form of tax evasion (otherwise civil). The egregious form involves more affirmative steps to hide, evade and deceive. So, looking at the speculated shape of the settlement, if the depositor was an ordinary tax cheat setting up a directly owned UBS account, his name and account will not be disclosed, but if the depositor injected gossamer entity structures to further obscure, his name and account will be disclosed. Apparently, Switzerland will now interpret the latter more egregious conduct as tax fraud, permitting it to disclose at the request of the United States.

If, indeed, this is a reinterpretation of Swiss law and mutual assistance treaties (or provisions of treaties), then the reinterpretation would logically apply not just to UBS but to all Swiss financial institutions. Some other Swiss financial institutions have apparently claimed that they are not like UBS (smaller and did not exploit their enablement activity on U.S. soil) and thus that their U.S. depositors' accounts will not be disclosed. (See the allegations in the Jeff Chernick indictment discussed here.) I am not sure that level of assurance can be given where entities are part of the structuring for the account. And, I expect that the IRS may be licking its chops to make the requests for mutual assistance with respect to other Swiss financial institutions.

From a longer perspective, it seems to me that the dam is breached. It may take a few years, but Switzerland will have to give up its lucrative status as enablers for U.S. and probably other country tax evasion (in the U.S. sense of the word). Tax evasion, of course, is not the only reason that the Swiss find it in their financial interests to assure secrecy for depositors. Secrecy is important for all sorts of rogues and scoundrels even when they are not evading tax. But perhaps this too is now at risk, which means that at least for a time the "smart" money of rogues, scoundrels and tax evades may be to seek other havens and enablers.

Finally, I do not mean to indict figuratively all non-Swiss depositors to Swiss bank accounts. There are undoubtedly many Swiss depositors who are not rogues, scoundrels or tax cheats and simply have or imagine that they have legitimate reasons to establish Swiss financial accounts which, in their minds, justify paying the Swiss the premiums for whatever they imagine the Swiss bank system offers them. But when, piece by piece, the rogues, scoundrels and tax cheats are stripped out of the Swiss financial system, I have no doubt that the Swiss financial system will survive but the heady days of excess profits from premiums for services to rogues, scoundrels and tax cheats may be over.