Swiss Banks

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What Have They Been Getting Up To?

Swiss banks, once a byword for secrecy and for so long the gold standard for wealth management, have been in the firing line from international organisations, governments and tax authorities for years. Even worse, their previously impenetrable defences have been completely undermined by employees stealing confidential information and selling it to foreign tax authorities. The light that this data has shed on Swiss banking practices has not been flattering.

As a result, certain Swiss banks have been indicted in the US, charged with conspiracy to defraud the IRS, obliged to pay massive fines and hand over client names. Bankers have been arrested and jailed–some have also been handsomely rewarded on release for shopping their customers. Outside the US, Switzerland has been obliged to enter into a number of bilateral agreements and treaties to “regularise” accounts of foreign nationals.

The most recent bank to be ushered into the spotlight is HSBC in Switzerland, which has been heavily criticised and much embarrassed by allegations that it assisted UK taxpayers to conceal assets and avoid (or evade) UK tax. A BBC documentary made reference in particular to “undeclared accounts” owned by British residents. Of course the leaked cache of data included the details of taxpayers in many other countries. I will focus on the UK for the purposes of this article but the principles will apply elsewhere.

The reality is there is no such thing as an undeclared account. The UK tax system works on the basis of self-assessment. This means that anybody resident in the UK must file a return that details all income and capital taxes due and payable. A UK tax form does not ask for details of individual accounts, assets or sources of income. In other words UK taxpayers don’t need to declare accounts.

Those who are resident but not domiciled in the UK are only taxable on UK-source income and foreign income that is actually remitted to the UK. If a “non-dom” has a bank account in Switzerland that generated income, they would not be required to declare that income unless they remitted it to the UK. It is up to each taxpayer to get such professional advice as they need in order to complete the tax form correctly. Failure to declare due to ignorance is no excuse. In most cases, whether or not income or capital gains is taxable will be patently obvious.

All sources of income and capital gains are taxable irrespective of where they arise if you are UK resident and domiciled. Income belonging to non-UK companies and trusts is likely to be attributed to a UK beneficial owner or settlor under the anti-avoidance rules, so this is also declarable and taxable even though, technically, it does not belong to the taxpayer.

The implication on the TV programme and press articles was that these accounts were funded with capital on which the correct amount of (or any) tax had not been paid. That lump sum was then invested and generated income which also was not declared. It is not up to a bank to ensure that a taxpayer fills out their tax form correctly. Indeed even if they wanted to check whether a taxpayer has declared any income earned on an account, they would be unable to do so unless they had intimate knowledge of all that persons financial affairs.

If, for instance, a bank knows that a customer has received income from an account, it would have no way of knowing whether any income that the customer has declared for tax purposes was the income they had helped them to generate because the tax return does not identify the particular sources of income. Banks are not agents of the UK HMRC and can’t be expected to interrogate a customer about their tax return.

There may be many legitimate reasons for opening accounts with a Swiss bank. First and foremost is that they have a level of international experience and expertise that can be hard to find elsewhere. Swiss banks have traditionally been focused on investment business and generally don’t take risks by funding speculative ventures or making loans. Swiss banks are therefore safe and secure and generally have long track records of generating good returns. Are we seriously trying to suggest that UK taxpayers can only use banks situated in the UK and should be prevented from making investments abroad? Of course not. UK taxpayers should be free to put their money wherever they like.Exchange controls were, after all, abolished in the UK many years ago.

There are many expatriate UK taxpayers who can also benefit greatly from banking outside the UK. If they bank in the UK, tax is deducted on interest at source. If they are not UK taxpayers they would ordinarily not need to pay that tax – so matters are much simplified if they bank outside the UK where tax is not withheld.

Switzerland has a reputation of being one of the most stable countries in the world. Swiss banks rarely go bust and thereis seldom any government interference in the running of a bank, let aloneany sequestration of assets by the Swiss government. You only need to look at what happened in Cyprus. When the Eurozone crisis struck, the government imposed a 30% haircut on accounts held in Cypriot banks to help pay off its national debt. In other countries banks simply go bust and everyone loses their money. These things don’t happen in Switzerland.  That is why people like Swiss banks.

The problem with HSBC is that it appears to have gone much further than simply allowing UK persons to open accounts. The allegation is that it knew that certain of these accounts were funded by money upon which tax should have been paid but had not. That could well be classed as money laundering because tax evasion is a criminal offence in the UK. Happily for the Swiss, tax evasion – as opposed to tax fraud –is not a criminal offence in Switzerland, so handling the proceeds of tax evasion is not classed as money laundering.

Internal memos would seem to suggest that HSBC knew that UK taxpayers were not making correct tax declarations for the income they were earning on their Swiss accounts and, further, it seems to have gone to great lengths to assist those taxpayers to receive the money in cash deliveries. Again, it is arguable that this is not their problem – but assisting the taxpayer to conceal the account for the stated purpose of escaping tax is surely conspiracy to defraud the UK revenue authorities. Advising the taxpayer that they should declare any income generated on their account and refusing to handle any monies on which it knew that tax had not been paid would have been both legally and ethically correct.

Many governments around the world are currently providing taxpayers with the opportunity to regularise undisclosed foreign accounts – often with reduced financial penalties and no criminal prosecution – in advance of the implementation of automatic exchange of tax information. The UK has the particularly helpful Liechtenstein Disclosure Facility for example. But these “amnesties” are generally not available to any taxpayer that is already under investigation and can be closed at short notice. Anyone who has concerns about the tax status of any foreign assets, whatever advice they may have received in the past, would be sensible to seek expert guidance sooner rather than later or they may miss the boat and end up stranded.

Sovereign has operated as a specialist provider of tax planning, asset protection and cross-border services to individuals and corporations worldwide for over 25 years. With offices in all the major international finance centres, Sovereign monitors global legislative and fiscal developments and devises solutions for the most significant issues affecting individuals who either have or are contemplating offshore arrangements.