Financial Transparency Coalition

In less than a year data will start to flow under a new scheme for countries to share information automatically across borders, to help each other collect taxes from their taxpayers and fight financial crimes and abuses.  The scheme is the Common Reporting Standard (CRS) which was set up by the OECD, a club dominated by rich countries. The scheme will start to deliver global automatic exchange of information from 2017.

We have generally welcomed this development, but we have also warned about many loopholes, especially ones preventing access to necessary information by developing countries, which are the most vulnerable to state looting and offshore hiding.
The CRS basically works like the dating app Tinder (or perhaps LinkedIn): exchanges of information are only possible between countries that have ‘liked’ each other.  The OECD recently published the lists of matches, and among other things we observed that Switzerland, that long-standing rogue in global transparency efforts, only had agreements with EU countries.*

But a week after we wrote our blog on the CRS’ dating system, Switzerland signed agreements with other developing countries including Argentina, Mexico and Uruguay to automatically exchange information. Of course, Switzerland’s motivation wasn’t necessarily transparency: the aim may have been to ensure that the Swiss financial industry will get something:

“Aside from the signing of the AEOI by State Secretary Jörg Gasser for Switzerland, both countries also conducted negotiations on the framework conditions for investments and market access for financial services and the basic principles of Swiss financial market policy.”

But the Swiss have, inevitably, tweaked the rules unilaterally, in a characteristic ‘screw-you’ gesture to the OECD and the community of responsible nations. Even though Switzerland appears in the OECD webpage as promising to exchange information in 2018, at least with these developing countries, it has now said that it will only start collecting information in 2018, while exchanges will only start in 2019.

Why is this a problem?

First, the obvious: these countries will need an extra year before they receive much-needed information on their crooks and miscreants. As a sign of how serious this is, Switzerland in March 2016 rejected a request of information by Argentina on 3,000 accounts related to the HSBC leaks.

Second, tax dodgers will have extra time to rearrange their affairs, especially to exploit a loophole for some “pre-existing” bank accounts, for which no reporting of any information is to happen at all.  Bear in mind that for most Early Adopters (that is, countries exchanging information from 2017) an account was considered pre-existing if it was opened before December 31^st 2015 (though they announced this in 2014, so many “new” accounts actually benefited from this “pre-existing” status). In the case of Switzerland, accounts will still be considered pre-existing if opened before December 31^st 2017! The same applies to currently existing accounts that will have plenty of time to be closed, without any information being disclosed (the CRS doesn’t require much information on closed accounts, anyway).

This makes little sense, especially for Switzerland

If a developing country like Argentina can exchange information with other countries by 2017, why can’t a far more sophisticated country like Switzerland do the same? Not only that, but it is asking for two more years. It could comply, but its banking industry simply doesn’t want to.

In fact, Argentina (like most countries) only found out about the CRS’ details between February and July of 2014, and still managed to get their legislation ready. Switzerland found out even earlier, since it was responsible for designing the CRS:

Thanks to our constructive and well-founded suggestions, and thanks to the support of the Swiss authorities, the OECD made allowances in the standard for the Swiss financial industry’s key concerns (particularly in the commentary). Switzerland’s constructive contribution to the development of the standard was expressly acknowledged by the OECD

This also allowed Switzerland to impose more obstacles, such as requiring full reciprocity** and thus preventing many low income developing countries from joining the CRS (because they don’t have the capacity to provide information, and don’t generally have much useful information to provide – who would stash their hidden wealth in Nigeria for safekeeping?). But developing countries would have benefitted enormously from receiving information from financial centres like Switzerland.

Switzerland also required the principle of “speciality”, which pretty much means that information cannot be used to tackle corruption or money laundering, but only to collect more taxes. It is perfidious behaviour by the Swiss, as we’ve long come to expect.

Finally, the suspension of AEOI until 2019 makes no sense because Switzerland already has the information it needs to exchange. Most of the burden of AEOI lies on financial institutions that need to collect and report information on all of their account holders. Authorities simply aggregate this information, sort it by country of residence, and exchange it.***

All Early Adopters (countries exchanging information in 2017) chose the wider approach, so their banks will have already collected information on all of their account holders (regardless if they are resident in a jurisdiction joining the CRS or not). Among jurisdictions exchanging information in 2018, most countries also chose the wider approach except for well-known tax havens: Nauru (with one of the highest secrecy scores in the Financial Secrecy Index or FSI), Hong Kong and Switzerland (the second and top FSI jurisdictions respectively).

* Switzerland sends almost the same information to the U.S., as required by U.S. domestic law called FATCA.

** While Switzerland required full reciprocity from other countries in the CRS, it signed a non-reciprocal agreement with the U.S. where Swiss banks send information to the U.S. but Switzerland receives no information in return. Most other countries signed partially-reciprocal agreements, receiving at least some information from the U.S.

***It was actually banks in most countries who asked countries to establish the “wider approach”, which would allow them to look at all their account holders at once (even if they are not resident in a country participating in the CRS), collect their information to determine their tax residence, and report this information to the authorities. Otherwise (in the “narrow approach”), banks would have to collect information only about account holders from countries with which Switzerland is exchanging information (say the U.S. and EU), and then re-do the whole due diligence again every time Switzerland signs an agreement with a new country, say Argentina. If banks had to do this whole due diligence every time, it would be extremely costly.