Last updated: 19:38 / Thursday, 28 August 2014
CISA Trust Co

Switzerland in The Age of Transparency, Information Exchange and Anti Money Laundering

Switzerland in The Age of Transparency, Information Exchange and Anti Money Laundering

Although collective efforts to combat international tax evasion are not new, the 2008 financial crisis saw the industrialized countries team-up against the financial centers with dramatic results. Under threat of sanctions from the OECD and FATF, the financial centers changed their laws and practices, became more transparent, adopted stricter KYC and anti-money laundering rules, and implemented mechanisms to exchange information with on-shore jurisdictions.

The 2011 OECD peer review found that Switzerland was not compliant with certain aspects of the OECD transparency standards, regarding availability of information mechanisms were lacking to identify beneficial ownership of Swiss bearer share companies and foreign companies with a permanent establishment in Switzerland and regarding access to information the Swiss authorities have no ability to access bank information under the older Double Tax Treaties (DTTs) except in cases of tax fraud. To deal with these and other concerns, Switzerland introduced legislation in October, 2013.

Traditionally, Switzerland did not exchange information in tax matters and DTTs did not contain exchange of information clauses. This practice evolved, and exchange of information clauses were gradually introduced for cases of tax fraud, not tax evasion, and were limited to enforcing the DTTs but not enforcing the domestic laws of the requesting state. Under pressure from the OECD, Switzerland abandoned its longstanding reservation to Article 26 of the OECD model Convention and agreed to implement the OECD “foreseeably relevant” standard, to eliminate the distinction between “tax evasion”and “tax fraud,”  and to amend its DTT agreement accordingly.

The new OECD standard calling for automatic information exchange was announced on February 13, 2014.  On July 21, 2014, the OECD approved and released the complete version of the new automatic standard, with annexes. The new standard will require jurisdictions to exchange information automatically on a yearly basis, including investment income (interest and dividends), account balances, and sale proceeds. Financial institutions will be required to adopt a “look-through” approach and report information on beneficial owners of legal entities and trusts. However, the OECD has apparently exempted the United States from this requirement.

As an OECD member, Switzerland has endorsed the new automatic standard, including the adoption of a “look-through” approach. Prior to adoption of the standard, Switzerland raised concerns of a level playing field. After the new standard was announced, Switzerland stated that it expects that the exemption given by the OECD to the United States from adopting a “look through” approach to be of a temporary nature. Switzerland has also stated that in implementing the new automatic standard, priority will be given to countries with which Switzerland has close economic and political ties that will provide regularization opportunities to non-compliant taxpayers and market access to Swiss institutions.

In respect of Recommendation 3 of the FATF to treat tax crimes as predicate money laundering offenses, in December, 2013, the Swiss government submitted enabling domestic legislation treating “tax fraud” as a predicate money laundering offense. The legislation, which is still pending, is expected to have broad repercussions in the Swiss banking industry as banks tighten rules on the acceptance and retention of untaxed assets to mitigate exposure to money laundering offenses.

In respect of suspicious  activity reports, the Financial Intelegence Unit of Switzerland is the Money Laundering Reporting Office Switzerland (MROS), which receives and analyses Suspicious Activity Reports (SARs) filed by financial intermediaries. The Swiss FIU historically did not share financial information contained in SARs with foreign FIUs due to legal impediments under Swiss secrecy laws. However, under pressure from the FATF and The Egmont Group, Switzerland amended its anti money laundering legislation to authorize MROS to exchange SAR information with foreign FIUs.  MROS may now share information with foreign FIUs provided the foreign FIU guarantees that it will use the information solely for purposes of analyzing the SAR and that it will not share the information with third party authorities without the express consent of MROS. Furthermore, MROS may consent to the foreign FIU referring such information to its domestic authorities for prosecution, provided that the crimes are predicate offenses under Swiss law.