Global Financial Integrity

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What’s Stalling Switzerland?

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This week’s optimistic hubbub surrounding the Swiss-Indian information exchange seemed to mark a new beginning for Swiss transparency and a major breakthrough in India’s hunt for black money. Unfortunately, little happened:  Switzerland admitted only the amount of money Indians had stashed in Swiss banks and rejected requests for information regarding specific account holders.

Despite the media’s rude awakening when the Swiss revealed that accountholder information would remain confidential, this result should not have been surprising. A quick look at the Swiss attitude towards information exchange—especially automatic exchange of information, the OECD’s biggest step towards financial transparency—shows that the media’s optimism was premature. Instead, India’s request to Switzerland should be viewed as a litmus test of the Swiss attitude towards the future of banking secrecy.

As late as 2009, Switzerland explicitly rejected automatic exchange of information. While this has since changed, the treaties it signed in following years echoed this sentiment: in 2012, Switzerland offered anonymous withholding services to select countries including Britain, Germany, and Austria. Anonymous withholding is generally thought to be counterproductive to automatic exchange of information, as it restricts information transfer to untaxed investments such as interest and dividends, rather than including untaxed principal such as foreign income.

Furthermore, in its double tax agreement with Argentina in January of this year, Switzerland explicitly denied automatic exchange of information as a requirement.

With this track record, it was an ostensibly big step for Switzerland to endorse the OECD’s automatic exchange of information documents this May. Yet without guiding documents and implementation plans, the OECD’s automatic exchange of information is toothless. While many countries have bilateral agreements containing automatic exchange of information provisions for tax purposes, exactly zero countries currently implement the OECD’s automatic exchange of information.

That the OECD’s provisions are only nascent should be concerning to those hoping for a quick end to banking secrecy, especially in Switzerland. Upon ratifying the automatic exchange of information plan in May, Swiss Economics Minister Johann Schneider-Ammann said that signing the automatic exchange of information was only “the start of negotiations” and that Switzerland would only enforce automatic exchange of information when it reached a “truly global nature.”

What exactly defines a “truly global nature” is unclear. However, this vagueness is something Switzerland may use to its advantage to stall implementation.

Even without explicit resistance from the Swiss, numerous considerable challenges to implementing automatic exchange of information suggest that global reach could take a while.

Firstly, automatic exchange of information protocols will be slow and difficult to implement country by country. The proper communications and security infrastructure, data quality, and legal provisions spanning different jurisdictions will be only a few of many significant stumbling blocks.

Secondly, it is unlikely automatic exchange of information will gain traction in offshore trusts and tax havens. Jurisdictions like the Cayman Islands and Bermuda have very little incentive to agree to automatic information exchange, since it is unlikely their citizens have much cash stored abroad and would lose out if foreign assets were repatriated away. As one of the most lauded elements of automatic exchange of information is its ability to increase global compliance in financial reporting, countries that receive a competitive advantage from non-compliance will be digging in their heels. Switzerland could point to recalcitrant countries as examples of an non-globalized automatic exchange of information, thus stalling their own implementation.

Switzerland’s current lack of commitment to information exchange indicates challenges for India. Asset recovery, especially from a secrecy jurisdiction, is a noble but lofty task. Automatic exchange of information is critical to a formal breakdown of banking secrecy, without which the Swiss-India bank debacle will likely remain a stalemate.

In the meantime, should India wish to continue with asset recovery, the government may be best served by solidifying bilateral and multilateral tax treaties with other nations that include automatic exchange of information provisions, contributing on their own to progress towards global compliance.

Alternatively—or even better, in conjunction—India could focus on its domestic financial climate, sealing up loopholes and assessing the integrity of its financial system. In fact, India has been more successful at curbing domestic illicit finance, and since the repatriation of illicit funds back into India is of primary concern, denying those illicit funds entry is a prudent long-term solution.

This isn’t to say that automatic exchange of information, eliminating banking secrecy, or India’s quest for asset recovery are lost causes. Quite the opposite. Switzerland is moving slowly but surely towards ending bank secrecy and certainly recognizes its necessity. However, we must keep in mind that 80 lucrative years of secrecy is difficult to reverse, and current events suggest it will be a long road, requiring both outside pressure and internal motivation. With the OECD and G20 commitments to financial transparency, FATCA, and numerous bilateral and multilateral treaties that institute automatic exchange of information, the world is setting the stage for a new standard.

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