Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality Annette Alstadsæter (Norwegian University of Life Sciences) Niels Johannesen (CEBI, University of Copenhagen) Gabriel Zucman (UC Berkeley and NBER) December 27, 2017
After a French court had heard that UBS, the biggest Swiss bank, had engaged in “James Bond”-like tactics to illegally solicit French clients and help launder more than €10bn, a judge on Wednesday imposed a €3.7bn fine and ordered the bank to pay €800m in damages following a guilty verdict of aiding tax evasion. Five of six ex-bankers were convicted and given suspended jail sentences together with combined fines of €950,000.
UBS said in a statement following the verdict:
“No evidence was provided that any French client was solicited on French soil by a UBS AG client advisor to open an account in Switzerland. As no offence in France was established, the decision effectively applies French law in Switzerland. This undermines the sovereignty of Swiss law and poses significant questions of territoriality. The judgement does not depart from preconceived notions, incriminating the bank based on the fact that it offered certain legitimate and standard services under Swiss law that are also common in other jurisdictions.”
The defence here is that tax evasion is not a crime in Switzerland. In effect UBS until last year could solicit clients in other European countries and facilitate them engaging in what is tax fraud in their own countries while maintaining Swiss account secrecy.
Under Swiss law tax evasion that is intentional, or resulting from negligence or claimed amnesia, can only be punishable by a fine while tax fraud is a crime but must involve falsification of documents or certification of facts that are known to be false.
Assisting tax evasion by foreign residents is not a crime unless it is fraud but why would a Swiss banker or lawyer be expected to know the tax laws of foreign jurisdictions?!
Hervé d’Halluin, the former head of UBS’s branch in Lille, France, described “a nauseating practice of widespread poaching of clients, done in an almost industrial way,” by UBS’s Swiss bankers.
The French unit would identify potential clients and then a team from Zurich would arrive incognito, following the UBS “security clearance manual” and meet at high society arts events and hunting gatherings. Hotels would be changed frequently and the manual had details on how to conceal documents in hidden pockets in jackets and backpacks.
UBS has appealed the verdict and if upheld it would wipe out a year’s profit.
Efforts to settle the case in 2014 and 2016 failed, mainly because the bank did not want to admit guilt. UBS has another case to face in the US on selling of mortgage securities.
In 2009 UBS got the permission of the Swiss government to disclose 4,450 American client names and account details. It paid a fine of $78m for activities similar to its operations in France.
The evolution of a tax haven
From their experience of the Thirty Years War of 1618-1648 that brought ruin to central Europe, the Swiss appreciated how neutrality was associated with “profit, virtue and good sense," according to one historian.
In 1815 at the Congress of Vienna following the defeat of France’s Napoleon Bonaparte, Swiss neutrality was formally recognised.
Because of the isolated location of the city of Geneva, jutting into France, the centre of Calvinist Reformation had focused on commercial trade rather than manufacturing. Banking became prominent in the 1700s.
At the start of the 20th century, Switzerland was experiencing strong growth and half of the employees in manufacturing worked in the textile sector.
In the 1902 novel 'L'Immoraliste' by André Gide, the renowned French writer and winner of the 1947 Nobel Prize in Literature, the main character Michel along with his wife, is travelling through the Alpine country in May 1897 and to Algeria in the spring of 1898, but he is not impressed with Switzerland: "I detest these honest folk. I may have nothing to fear from them, but I have nothing to learn from them either. And they have nothing to say...Oh, these honest Swiss. Where do their good manners get them?...They have no crime, no history, no literature, no art...They are like a sturdy rosebush without thorns or flowers."
Gross domestic product (GDP) per capita data for 1910 based on original estimates of Angus Maddison, the late British economic historian, has a comparison relative to the US at 1.0, Australia is at 1.21 and Switzerland third at 0.77. Table 4
During World War 1 and its aftermath, funds flowed into Switzerland, in particular from France and Germany. Swiss conservatism and right-wing governments providing stability was also attractive for investors.
According to a League of Nations report, owing to the importance of foreign assets in 1929, Switzerland possessed by far the highest per capita total of bank deposits in the world.
In late 1932 French police and revenue officials raided secret Swiss bank branches in Paris and among the records of tax evaders discovered were funds of bishops, army generals and other rich people.
In 1934 Switzerland made a breach of banking secrecy a criminal offence.
Since January 2018, Automatic Exchange of Information (AEOI) is effectively applicable and it’s now possible for the Swiss Tax Administration to provide to its partner countries banking and financial information about foreign taxpayers who have an account in Switzerland.
A 2008 report by the Swiss National Bank reported 154 foreign institutions and branches. That number gradually fell to 107 in 2016.
