Loophole in Swiss Offshore Banking Closed — Wealthy Americans Face More Scrutiny

Thousands of wealthy American investors will be checking with their financial advisors this week on the implications of an agreement between the U.S. government and UBS, the large Swiss bank, to turn tax records over to American regulators.

It is understood that the tentative agreement, initialed this week and set for final approval next week, will lead UBS to release the financial records of thousands of Americans suspected of using Swiss wealth management accounts to evade taxes by hiding assets. Earlier this year, UBS agreed to pay $780 million to the U.S. to settle tax evasion charges.

“Hopefully, this will mark the end of offshore banking designed to help citizens of other countries evade taxes,” says Wharton finance professor Franklin Allen, who added that final judgment should await the formal signing of the agreement.

Allen calls it unacceptable for one country’s banks to use tax avoidance in another country as a “comparative advantage and selling point.” While it is difficult to tell just how the new rules will affect the highly sophisticated offshore banking industry overall, it may just take them in stride, he added. One big question remaining is whether countries that specialize in offshore banking “will still be willing to take funds from dictators and criminals.… This will be the next big issue in this area, hopefully.”

Wharton operations and information management professor Maurice Schweitzer says, “This is a watershed moment for offshore banking” and bad news for wealthy Americans who have evaded taxes. “For the rest of us, this levels the playing field.” In the past, Switzerland had the world’s most credible reputation for banking secrecy. Now taxpayers “are on notice that no banking transaction is beyond the view of the U.S. government.”

Until recently, UBS, along with the Swiss government, argued that releasing such tax records would violate bilateral tax agreements and Swiss law. Then, earlier this year, Switzerland agreed to do away with the strict distinction between tax fraud and tax evasion. Tax fraud has always been treated as a crime under Swiss law, but until now tax evasion was considered a civil offense. And until recently, the Swiss government’s bank secrecy policies had steadfastly prevented the release of any financial records with the exception of clear cases of tax fraud.

Wharton legal studies professor Philip Nichols says that Swiss banking rules generally “frown on the use of accounts for illegal purposes, so a fairly strong argument existed that they would have had to disclose a fair amount of information anyway.” Swiss banking does not want to accrue the type of reputation thrown at, for example, Lichtenstein within Europe, Nichols adds. “But holding out as long as they did gave them a better bargaining position and preserved some of their reputation.”

Regarding the future of Swiss banking, “they have an unparalleled global brand and a great number of clients who are not in the slightest bit worried about what the United States does," Nichols points out. “I have not heard of anyone who has reacted to the disclosure of U.S. clients by withdrawing their own monies. There are a lot of clients whose governments are decades away from applying pressure to the Swiss government.”

The latest agreement is said to have the potential to affect more than 50,000 wealthy Americans.

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