Update: June 3, 2013 (see below).
We might have thought that it would be hard to top the Obama Administration’s recent fiascos with respect to the administration of justice. So far the hit parade includes the IRS’s “unintentional” persecution of small-fry Tea Party groups, the US Department of Justice’s (DOJ’s) warrantless spying on a score of AP journalists, and overzealous prosecutions of a record number of whistleblowers, the 27-year old computer genius Aaron Swartz, and an 83-year old Catholic nun.
Of course all this prosecutorial zeal is a marked contrast to the failure to convict or criminally prosecute even a single senior banker for helping to produce and direct the post-2007 global financial crisis.
But now, according to several credible reports, Eric Holder, the Attorney General, and Jacob Lew, the ex-Citi banker who now heads the US Treasury, may be on the brink of surpassing even this dubious track record. If these reports are to be believed, they may be on the brink of signing a “sweetheart” deal with Switzerland and its pirate bankers—with the indulgence of the White House and the enthusiastic support of some of Obama’s biggest guns on Wall Street.
Impending Swiss Deal?
In recent weeks there have been persistent rumors and some news accounts that Holder and Lew may be the brink of signing a mega-“deferred prosecution” deal with Swiss authorities, with respect to their banks’ recent involvement in facilitating tax evasion, fraud, money laundering, and other financial crimes in the US.
This settlement would put an end to US criminal prosecutions and investigations of at least 14 Swiss banks that are already under investigation, and more than 300 other Swiss banks, advisers, consultants and related companies, for their instrumental participation in what really amounts to one of the best-organized criminal conspiracies in US history.
All told, this would be one of the largest prosecutorial settlements in US history—and just the latest in a long series of cases where leading Swiss banks like UBS and Credit Suisse have avoided criminal convictions for such crimes.
Even on the basis of the handful of prosecutions that have already been made public, it is clear that this den of bankster thieves has already facilitated tens of billions of dollars of tax evasion by very rich Americans, at a time when most Americans are still struggling to make ends meet.
Admittedly, some of these reports come from a Swiss Finance Minister who is desperate to show results, head off mounting pressures from other EU countries, and stem the recent hemorrhages of Swiss bank deposits. But as Reuters reported on May 18, Ms. Eveline Widmer-Schlumpf, Switzerland’s Finance Minister, is now telling reporters that such a deal, under negotiation for months, is now imminent.
Indeed, this Monday she also told a leading Swiss newspaper that the Swiss Parliament should be prepared to consider it as early as June. And here’s the ultimate test: the stock prices of Switzerland’s two largest banks, UBS and Credit Suisse, have risen by 22 percent and 10 percent respectively in the last month—which places UBS, in particular, in the top ten best-performing financial stocks in the world during this period.
A Hard Blow To Swiss Secrecy?
The precise terms of this purported deal are not yet public, and when they are, this settlement will actually be subjected to far more rigorous public review in the Swiss Parliament than by the U.S. Congress, where the Senate Foreign Relations Committee has a history of approving such “technical” agreements almost willy-nilly, and where the Swiss have influential allies in both parties.
However, as Ms. Widmer-Schlumpf spins the tale, this settlement will supposedly be very costly to Switzerland.
- First, Swiss banks will have to pay a huge total fine – perhaps as much as $10 billion, a sum that will easily make the headlines one of the largest fines in US history.
- Second, at least some Swiss banks may have to disclose more U.S. client data—although probably not before 2009, when Swiss banks, under the influence of more intense investigations, began to alter the way U.S. client assets are handled an accounted for.
- Third, and perhaps most important for purposes of “eyewash,” Switzerland may also soon declare its public support for the (eventual) adoption of so-called global “automatic information exchange” (AIE).
AIE refers to a system rather like the “information reporting” that workers are subject to in many countries. In theory, this would require countries to automatically report any offshore earnings from foreign bank deposits and other financial assets to each other’s tax authorities, so their (wealthy) citizens can be taxed on these earnings and assets back home.
The new Swiss pledge to support AIE is viewed a logical extension of an earlier deal that Ms.Widmer-Schlumpf inked with the US back in February 2013. That so-called “Foreign Account Taxpayer Compliance Act” (“FATCA”) agreement, which also still requires Swiss Parliament approval, committed Swiss banks and certain other financial institutions that want to do business in the US to share (some) data on (some) foreign income (but not transactions) received by the (identifiable) US clients of (some) Swiss financial institutions—except for insurance companies, pension funds, wealth managers, important kinds of trusts, and a variety of other “super private” entities.
As noted, FATCA is trying to implement AIE with respect to foreign financial institutions doing business in the US, the EU is now considering a FACTA of its own, and the EU, the OECD, the G8, and the G20 have all recently endorsed global AIE in principle.
But heretofore the Swiss have always stubbornly opposed AIE. For years they have campaigned to get EU countries to agree to accept lump-sum withholding tax payments collected by them rather than actual data on individual client earnings, in order to protect financial secrecy—and their control over the estimation of how much taxes are due. They succeeded in persuading Austria and the feckless Cameron government in the UK to sign such “Rubik” deals in 2011, despite the fact that they were a Swiss cheese of loopholes. But thanks to vociferous opposition in the upper house of the German parliament, a similar proposal failed there in 2012.
So without any prospect of convincing other key EU countries to sign Rubik deals, Switzerland has “retreated” to supporting eventual global AIE—as soon as other leading havens (presumably including the UK, the U.S., Hong Kong, Mauritius, Singapore, and 70-odd other secrecy jurisdictions) also agree to it.
As Ms. Widmer-Schlumpf’ recently put it, “It is clear that it will not be a pleasant solution… (but) “the automatic exchange of information cannot be stopped.”
A Closer Look: Summary
Apparently some in the US Government have adopted Ms. Widmer-Schlumpf’s view that its pledge to eventually implement global AIE, in conjunction with its FATCA deal, are significant changes. Indeed, the new Swiss pledge is also music to the ears of many tax justice activists, who have long promoted AIE as a key part of their global campaign to clean up havens.
Beneath the surface, however, there is a far more complex story—one that helps to explain the stock price increases noted above, despite all these apparent Swiss concessions.
In fact, a DOJ-Swiss global truce would be of great benefit to the Swiss, but a huge mistake for the US and the EU—especially now. This is true for several reasons.
- It would fly in the face of the dramatic progress that the world is finally making right now toward cracking down on secrecy havens in general and the “leader of the band” in particular. It would also risk dividing the US from the EU and the rest of the OECD, taking the pressure off Switzerland to reform.
- It overlooks the numerous loopholes that still exist even in FATCA, let alone global AIE, especially for secrecy jurisdictions like Switzerland with a long history of untrustworthy behavior.
- Even a $10 billion fine is a tiny fraction of Switzerland’s earnings from doing “pirate banking” for the world’s elite, even from US citizens. And a global settlement would remove the one penalty that Swiss banks fear most—jail time.
- Any settlement still requires Swiss parliamentary approval, which could take years—even while it has already serves as a useful “whitewash” device.
- Most important—the impending DOJ – Swiss settlement, when looked at closely, has a strong odor of justice for sale. This is a clear case where powerful financial institutions, whose principle business is enabling tax dodging, kleptocracy, and money laundering for the world’s elite, would be permitted to commit these crimes over and over again for decades, and then walk away simply by paying fines, with the help of influential friends in high office on both sides of the Atlantic.
A Closer Look: Details
1. A settlement with Swiss banks right now would fly in the face of the dramatic progress that the world is finally making toward cracking down on secrecy havens. It would also risk dividing the US from the EU and the rest of the OECD on haven reform.
The world really is at an historic crossroads with respect to putting secrecy jurisdictions like Switzerland out of business once and for all. In the wake of the ‘offshore leaks’ and many other recent haven-related scandals, there is global pressure to crack down on secrecy havens. We are seeing unprecedented advances in policy by the EU, including commitments by a growing number of countries to accept U.S. standards on automatic information exchange. There is also the prospect of further progress in the next few months at the OECD, the G8, the G20, and the UN.
This is exactly the wrong time to let up the pressure on Switzerland.
This is especially true because in the EU, Switzerland is facing perhaps the strongest united front ever with respect to the demand that it end, once and for all, its distinctive role as the planet’s leading serial offender when it comes to organized tax dodging and kleptocracy.
We have already noted Switzerland’s desperate attempts to negotiate so-called “Rubik deals” with its European neighbors. As indicated, that effort has lately been running out of steam, especially with respect to Germany, France, Spain, and Italy.
Partly in response to the US FATCA, just last month France, Italy, Spain, Germany and the UK also announced that they would pilot an AIE platform that other EU countries can join, and the OECD and the G20 finally endorsed AIE as a global standard.
Of course, officially, Swiss wealth managers still say they prefer the traditional slow-motion “upon request” system of information exchange, based on bilateral tax treaties. But given their insider knowledge about how the game is played, the time it will take to implement AIE, and the value of whitewashing, the “smart” Swiss money actually likes AIE.
Key members of the EU parliament and the tax justice movement are just starting to understand what many experts on Switzerland and many FBI agents already know—that even if Switzerland now accepts AIE, it is only because the Swiss wealth management industry believes it has figured how to delay it and game it.
This realization is partly based on the fact that EU tax enforcement efforts, which have lagged US efforts up to now, are finally catching up—ironically, even as the US DOJ is thinking seriously about cutting a Swiss deal.
Just last month German authorities at the state level raided 200 clients of leading Swiss banks, including Credit Suisse/Clariden. French and Spanish authorities are also becoming more aggressive. Just last week, the key German state of Rhine Westphalia announced that it will be investigating Swiss bank activities with even more intensity, including the use of data from bank whistleblowers.
Partly as a result of such individual investigations, there is also now growing support in the EU not only for AIE, but for a much more systematic investigation of Switzerland. EU citizens have recently launched a citizens petition aimed at compelling the EU to establish a “Commission for Truth and Justice on Switzerland.” It also calls for the EU to require its public officials and their families to take the “Foreign Wealth Pledge”, declaring, under penalty of law, whether they do any offshore business or own, control, or have ever transferred any wealth abroad, either directly or indirectly, and if so, whether they have properly declared it to tax and other regulatory authorities.
All these pressures on Switzerland are coming to a head right now in multiple policy venues. The EU Parliament in Strasbourg and the 47-member Council of Europe in Brussels met last week and examined fresh proposals to crack down on Switzerland’s special role with respect to tax evasion and PEPs. The UK has announced that cleaning up tax havens will be an important theme of the June G7/G8 in London. Although Swiss influence on the leadership of key G20 members, including Argentina, South Africa, India, Brazil, Russia, and Mexico, as well as the US an the UK, should not be underestimated, the September G20 in Moscow may provide another opportunity to tackle the special Swiss role in managing dubious ultra-secret wealth.
All told, it is clear that ordinary taxpayers of EU countries have simply had it with Swiss chicanery, which has been corrupting their officials, undermining the rule of law, and making democracy and justice for sale to the highest bidder.
With all this momentum, this is precisely not the time for a DOJ-Swiss settlement, but for closer US collaboration with the EU and the other members of the G7/G8 and the G20.
2. The Swiss FATCA agreement, the impending DOJ settlements, and AIE in general are riddled with numerous loopholes.
Switzerland likes to pretend that it is just one of many havens, merely on a par with other “offshore financial centers” like the Cayman Islands, Jersey, the BVI, or, upstream, the UK and the US.
In fact, since at least the 1970s, we have seen a continuing parade of scandals that underscore Switzerland’s truly distinctive role in the global haven banking system—and the distinctive role played by leading banks like UBS, Credit Suisse, Julius Baer, and many others, together with obscure partners in “private wealth management.”
By Switzerland’s own admission, it is still the world’s largest recipient of cross-border private investments. On the Tax Justice Network’s latest “Secrecy Jurisdictions Index”, of 73 havens, Switzerland ranks #1, well ahead of #2 and #3, the Cayman Islands and Luxembourg.
Further, TJN’s recent studies of haven wealth have shown that standard estimates for the value of offshore wealth in Switzerland—$2.1 trillion is of 2012—are far too low.
The global total for offshore private financial wealth is at least $21-$32 trillion, not the $10-$12 trillion implied by Switzerland’s official numbers. And we have also recently uncovered the fact that a huge fraction of Switzerland’s investments from offshore are simply off the books, not recorded in official wealth or bank data—especially since the UBS scandal erupted in 2008.
This implies that there are numerous loopholes in FATCA as well as most conventional AIE schemes—especially for the ultra-rich. Just to name a few: (1) as revealed in the recent Wegelin case, so-called “omnibus” accounts, officially in the names of Swiss wealth managers or banks for multiple clients; (2) vaults for gold, art, diamonds, 500€ notes, and other “portable chattels;” among other things, Switzerland appears to be the world’s largest gold market, mainly just to feed the enormous appetites of kleptocrats, criminals, and embargoed states for alternatives; (3) insurance and pension funds—explicitly left out of the Swiss FATCA, despite their important role in laundering private wealth; (4) transactions in Swiss corporate securities, like bearer bonds; (5) certain kinds of “sham trusts.”
All this is in addition to Switzerland’s role as a residential haven for the truly ultra-rich with a net worth of at least $100 million—like Tina Turner, Ingvar Lamprad, Ikea’s founder, and many other magnates and celebrities who now rank among Switzerland’s more than 5664 so-called “forfeits“.
In the last year, we have also been reminded of Switzerland’s unique role in accumulating and protecting the stolen wealth for the world’s “Politically-Exposed Persons” (“PEPs”)—from Angola’s Dos Santos to Mubarak’s Egypt to Qaddafi’s family dictatorship in Libya to Putin’s Russia to Mugabe’s Zaire, to senior public officials in France, Spain, Canada and Greece.
The depths of this dirty business is truly astonishing—but it has little to fear from the kind of superficial “automatic information exchange” that Switzerland may now “begrudgingly” accept.
The norms of AIE might not be exploited by some countries. But Switzerland is the Lance Armstrong of secrecy jurisdictions. It is truly “first among equals,” with a long history of dominating the global pirate banking industry, of recruiting “politically-exposed persons” as a conscious strategy, of laundering money for the world’s worst kleptocrats, and of cooking the books with respect to the cross-border wealth that it gathers, conceals, and manages.
While many good and decent Swiss citizens—perhaps a majority—are absolutely appalled at the damage that this global pirate banking industry has done to the country’s reputation, the fact is that Swiss democracy is not really a level-playing field—even less so that the US or the UK.
Switzerland’s most influential industry, its super-rich owners and clients from all over the world, and its numerous political allies in high places, including the US, can only be “trusted” to be fundamentally untrustworthy.
3. What Swiss Banks Fear Most Is Not Large Fines, But Jail Time, the Inability to Travel, and the Ill-Repute Associated With Criminal Convictions.
The large fines already imposed by the U.S. DOJ on banks like UBS, Wegelin, and HSBC may have been impressive to some. But from an economic standpoint it was not the banks’ shareholders or senior managers who paid them. Ultimately they amounted to less than 5 percent of bank profits, were easily passed along to customers and clients, and were insignificant, compared with the huge amount of undeclared wealth under management.
On the other hand, what does seem to really get Swiss banks’ attention is the prospect of real jail time for their CEOs, senior private bankers, wealth managers, and other white collar professionals. As one reporter recently noted, Swiss bankers have lately become international pariahs, rather like some Russian officials. They have to stay at home for fear of being arrested if they travel abroad.
This implies that any settlement deal with the US that substantially reduces the risk of prosecutions for individual Swiss bankers would be less effective than a deal that maintains it, even at the cost of a lower financial settlement.
Once again, the recent reports of an impending Swiss-DOJ deal still necessarily remain somewhat speculative. But given what we’ve already seen in the UBS and HSBC cases, as well as the DOJ’s lame prosecutions of other big bank cases, it is appropriate to be concerned that the DOJ really might be on the verge of giving up this key source of leverage for Swiss behavior.
4. The U.S. Can Afford to Wait, Since Swiss Ministers Really Have No Authority to Conclude A Deal
Precisely because of the pressures outlined above, the U.S. is actually in the driver’s seat with respect to this settlement negotiation. Indeed, the Swiss Finance Minister recently admitted as much when she stated last month that she is very happy with what’s already on offer: “We could sign it tomorrow if the United States wants to do it.”
However, last month the Swiss Parliament also severely restricted the discretion of any Federal Counselor (or Minister) to sign any secret information exchange agreement without yet another round of parliamentary approval. In practice this means that even if the settlement were signed today, it could face a lengthy ratification process in Swiss parliament. Indeed, that has often been the case – for example, it took five years for the Swiss Parliament to ratify the European Convention on Trafficking in Human Beings. Given the growing opposition to “compromises of bank secrecy” on the Swiss Right, as well as popular Swiss revulsion at the 2010 UBS deal, it is not clear what kind of settlement would even survive such a review.
This implies that any “agreement” signed now by the U.S. and Switzerland should really be regarded as a marketing ploy—an attempted white-wash—on Switzerland’s part, rather than a solid agreement. Switzerland is obviously desperate to present itself as a clean “offshore financial center” just like any other, rather than what it really still is: the global leader in illicit wealth management from all sources derived.
Why on earth should the U.S. Government become a party to such a white-washing exercise?
5. The real question at stake in this matter is this: Is U.S. justice for sale?
Overall, therefore, there is very little for the US to gain by not completing its existing investigations and prosecutions of Swiss banks—aside from $10 billion, the monthly cost of stationing US troops in Afghanistan.
This would support U.S. allies in the EU, the rest of the OECD, and the G8/G20 in their reform efforts.
It would provide an opportunity to fix the glaring loopholes in Swiss asset and income reporting even under the U.S. FATCA.
It would also enable the U.S. to work more closely with rich and poor countries alike to address the glaring global PEP/kleptocracy problem—while strengthening the offshore asset non-recovery problem that so many Swiss wealth managers have contributed to.
Is this all just about the $10 billion that the US would realize from a settlement? At all costs, we need to avoid the perception that justice is for sale—that if you are a big-enough bank or banking center, with friends in high places, your criminal behavior—no matter how recurrent—can always be forgiven with a fine.
Update: In just the past few days has come word that the Justice Department has reversed course and told Swiss officials that they will have to comply with U.S. law, full stop.This has compelled the Swiss government to switch gears to a much slower settlement process, bank by bank, over the next year. This will give the GA and other NGOs an opportunity to increase transparency and put political pressure on the Justice Department and EU countries to insist that a real audit of Swiss bankers, private wealth managers, and other key players is conducted. It will also help ensure that potential jail time remains on the table. The largest Swiss party, the UDP, has issued a statement complaining loudly that the Fed Council had mishandled this negotiation and threatening to block parliamentary approval of the US-Swiss FACTA that was signed in February. All told, this represents a major blow struck against the global pirate banking and kleptocracy businesses, which, despite the existence of many other banking havens, still counts Switzerland as its true North.