David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Can you keep a secret?

Bank secrecy is once again in the spotlight with Credit Suisse getting new scrutiny after its recent dramatic collapse. In March, the U.S. Senate Finance Committee released a report about the bank's violation of a plea deal related to tax evasion. However, this isn't the first time banking in Switzerland has been examined for helping taxpayers avoid paying tax. So today, we're taking a look at the history of bank secrecy and how Credit Suisse became the latest example of banking secrecy in action.

Here to help unpack all of this is Tax Notes contributing editor Robert Goulder.

Bob, welcome back to the podcast.

Robert Goulder: Thanks for having me, Dave.

David D. Stewart: Why don't we start off from just the basics of Switzerland and how it became synonymous with bank secrecy?

Robert Goulder: Yeah, well that's a good question, and the answers are very old and historical. If you go back in time to the 1500s and 1600s in Europe, there were these religious conflicts in France between the Catholics and the Protestants. The Protestants identified as Huguenots, which was what they called themselves, and they were basically the losing side of that tension, and they felt like they were being persecuted and they didn't want to have their acquired family wealth in what would've been French banks because they thought the state would seize it.

They were worried about the government taking their wealth and their property, and they wanted a safe place to put it. Somebody realized if you can just get your wealth into some movable form and get it out to Geneva, there are some banks there that have this apolitical posture where there's an informal rule that none of these banks are ever going to tell anyone about who their clients are, they're just not going to talk about it.

Now, it wasn't a government rule — not at that time — it was just an informal policy. Word started to spread. So you had merchants in Northern Italy who didn't want to pay tax to the Italian revenue authorities and they said, "Yeah, Switzerland's not that far away. I think we can get our loot to a bank vault in Geneva or Zurich or Lugano. Let's do that."

So it went along that way, and it just became an informal tradition. Finally, you get to the 20th century and the Swiss government says: "Hey, this banking sector is now like 10 percent of our GDP. This is right up there with Swiss chocolates and Swiss watches and Swiss cheese. This is how we're getting affluence as a country and a high living standard. We need to do something about this."

So they decided to codify these banking rules in the 1930s, and part of what gave rise to that is that there were leaks. There were people who would work for these Swiss banks who on the sly were selling their client lists to other governments. One of the governments that was very interested was the Spanish government of Generalissimo [Francisco] Franco. He wanted to know if any Spanish folks had Swiss bank accounts because he was not going to let them conceal that wealth because he wanted to tax it.

So they had to make it a crime basically for anyone to leak bank information. It defined what banking was, it defined what banking information was. And then it said if you give that to anyone without the client's permission, you're committing a criminal offense under Swiss law. And there you go, you have Swiss bank secrecy codified at the federal level.

David D. Stewart: Now, how does this differ, this sort of level of secrecy, from just general run-of-the-mill bank in New York won't spill the beans on the money that you have in that account? How does one get to that information differently from the Swiss information?

Robert Goulder: Yeah, the whole idea is that you would run into a wall because it was illegal to do what these other people are asking you to do. If some other country is saying, "Give us this information" — the U.S. government wants to find out about Americans with Swiss bank accounts — the Swiss could just say, "We can't violate our own country's laws."

Now the way around that in theory was through the treaty process. This was one of the reasons why nations would enter into tax treaties with each other. Typically, there's an article 26: the model treaty provides for exchange of information between national revenue bodies.

That, however, is very limited because it doesn't allow fishing expeditions. That's the key point there. That's why treaty-based information exchange, or what we sometimes say, on-request information exchange, means that you have to know what you're looking for.

You can't just call up the other side and say, "Give us all the information you have on our citizens with Swiss bank accounts." No, you have to say, "We're interested in this guy who lives at this address." And sometimes you even have to know the account number. You have to know a large degree of granular information, so you have to know what you're looking for.

That made treaty-based information really limited. And one of the big metamorphosis, a big transformational influence that we've seen in the last couple of years is that in the span of a generation, we've gone from treaty-based information exchange to automatic information exchange. But we can get to some of that later.

David D. Stewart: All right. You mentioned that this was a big industry when these laws were put into place. How big did this get in the 20th and 21st centuries?

Robert Goulder: Absolutely massive, Dave. The two banks sort of at the center of this have been UBS and Credit Suisse, very big, very prominent. Look who's sponsoring a Formula One race or a major tennis event or a major golf tournament. These companies have huge budgets. They have branches all over the world. They're internationally engaged. I mean, if you look at Credit Suisse, we found out that the Saudi National Bank basically owned 10 percent of the company.

David D. Stewart: What sort of efforts were made over the years to get through this banking secrecy?

Robert Goulder: Well, it takes a scandal to get progress. If you go back about 15 years or so, we had a fine scandal here in the United States with UBS. It became crystal clear that they were helping wealthy Americans conceal wealth and, in the process, evade U.S. tax obligations, and this all sort of came to a head with this UBS crisis.

There was a famous banker, Bradley Birkenfeld, who ended up going to jail, although he was a whistleblower and ultimately profited from his personal whistleblower claim. But Congress looked at this, they had hearings in the Senate, the Permanent Subcommittee on Investigations had hearings in this, and they called the top corporate brass of these banks to come to Washington and appear before the Senate and answer these very probing, difficult questions. And they all said: "We're sorry, we're sorry, we're sorry. We'll do better." And you had some guilty pleas, right? Or non-prosecution, deferred prosecution agreements, and fines, huge fines.

There was UBS, and in the case of Credit Suisse, they actually pled guilty to all of this in 2014. It was perfectly clear that they were helping Americans conceal wealth and evade their taxes. They pled guilty to it. That's not very exculpatory. They're saying, "Yeah, we did this." And there was a fine. The fine was going to be $2.6 billion. Through a sort of quasi-diplomatic process, it got whittled down to about half of that. So they paid a fine to the U.S. government through the DOJ [Department of Justice] of $1.3 billion.

That didn't help them, though. I mean, they were still doing things even after that plea agreement. It's now become clear that they didn't really change. They had a private banking unit within their overall structure that kept on doing these things.

David D. Stewart: How did this private banking structure come to light?

Robert Goulder: Well, it came to light in a couple of ways. We found out through some whistleblowers that some prominent wealthy Americans were transferring their money out of the Swiss banks to little, smaller Swiss banks. If you go back and you look at the plea agreement that Credit Suisse had back in 2014, there's a clause in there that talks about the leaver list. Well, what is that? The leaver list is the list that the bank keeps of all of its clients who say: "Holy cow, I'm being found out. The IRS is snooping around. There's FATCA [Foreign Account Tax Compliance Act], there's FBARs [foreign bank account report], there's all these rules. I'm going to get my money out of this bank. Wire my funds to some other bank where I'm not going to have the same kind of scrutiny." Now, that's such an obvious way to avoid the heat that it's included in the plea agreement.

It was incumbent on Credit Suisse to provide the U.S. authorities with its leaver list. But it didn't do that. How did it not do about it? Well, you look for loopholes. Are there any loopholes here? You have an issue with dual citizenship.

Some of the people who were involved with this had what we call dual citizenship. They were a U.S. citizen and they were a citizen of some other country. So then they have two passports. And they have a U.S. federal taxpayer ID number, and they go through the trouble of getting a taxpayer ID number for this other country where they have citizenship. Then when they go to transfer their funds out of Credit Suisse or UBS and move it to some other bank, they work with the people inside the banks and they say: "On that wire transfer, don't use my U.S. taxpayer ID number. Just leave that out." There's a form you have to fill out. You have to populate a certain section: "Populate that section, that field, with the other country's taxpayer ID number because I don't want the IRS knowing that I've just moved my wealth from one country to another."

David D. Stewart: Now, you alluded to some of the U.S. measures meant to catch people who are storing wealth offshore. Could you tell us about what the United States has done over the years to try and get at this information?

Robert Goulder: Yeah, there was a long history. Some of it worked, some of it hasn't. If you go back, the first step I suppose were the treaties. You signed tax treaties with these other countries and you try to get them to give you information. But to do that, you have to basically know what you're looking for. It's not ideal.

Then we had something called a QI regime, which is a qualified intermediary regime. This basically said: "Hey, banks, we're going to make you accept some new kinds of due diligence requirements where you have to look at your own client lists and figure out who's an American. And if it's a partnership, you have to dig and find out who the general partners are. Try to find out who the beneficial owners are." And banks would sign these agreements saying, "Oh yeah, yeah, OK, we'll do that."

But it really boiled down to tax enforcement on the honor system. Because the U.S. government didn't really have a very effective way to gauge whether those QI agreements were being complied with. We now know in hindsight that some of these foreign banks would just ignore them while the ink was still drying on the contract. They said one thing and did another.

So when it became clear that the tax treaty route isn't working and the QI regime isn't working, they had to come up with something and they came up with FATCA. That was a whole ball of wax, we could talk about FATCA forever. But FATCA has been good for certain things. It basically sends its message that: "You can't conceal wealth offshore. We're going to find out." And through one of these IGAs, these intergovernmental agreements, the United States isn't acting alone. We now have IGA partners who are out there in the other contracting states that are helping us. It's trying to replicate what domestic banks have with a basic Form 1099.

And of course, FATCA's a one-way street. We get information, but we don't give other countries information. The OECD came up with something called the common reporting standard, which is used now in over 100 jurisdictions. In fact, Switzerland in 2018 signed on to CRS. So if you sit and talk to a Swiss diplomat, they will say: "As of 2018, Swiss bank secrecy no longer exists because we are a participating member in the CRS network. Thanks to the OECD, we're now sharing information with other countries." So either through CRS or through FATCA, we're in this age of automatic information exchange.

But there are holes because of shell entities, shell banks, people with dual citizenship. We're only 10 years or so into FATCA. People are figuring out, "What are the holes? What are the loopholes? How can I still keep money offshore and get away with it?"

You mentioned the new Senate report that came out. One of the bullet points from that report is that $700 million [was] offshore still after the plea agreement, after FATCA, after CRS, after the QI regime, after all of this, Credit Suisse was still sheltering $700 million. And when the United States pressures them, a very interesting thing happens, right? There was a change in management at Credit Suisse last year, and right after this change in management, they wanted to sort of make nice to the U.S. government because they knew the Senate is looking at them. They just came up with a list of: "Oh, here are 10 accounts that you didn't know about. Each one is over $20 million, and the account holder is a U.S. individual, and we don't think they've declared it for tax purposes."

So just a new change in management and here are 10 accounts that somehow fell through the cracks because CRS didn't get them, and FATCA didn't get them, and the QI regime didn't get them, and the treaty exchange didn't get them. And then just before the Senate report came out, they found another 13 of them. So it's like every time you squeeze, you get more juice out of the fruit.

Can we just keep on putting pressure on them and they'll just keep on disclosing accounts that we should have known about years ago and that we didn't? So that's very interesting.

David D. Stewart: Is there any sense of why between the plea agreement and all these various reporting systems, why these accounts are still secret after all these years?

Robert Goulder: It's what the market asks for. The banks are in a business of responding to what the market wants. We always hear about tax savings. People want to pay low taxes. Well, sometimes they're not chasing a low tax rate. Sometimes they're more interested in secrecy than a tax break.

So there's tax havens and secrecy havens. And in the long run, I think secrecy havens are going to be the harder nut to crack just because the demand is there. As long as you have people saying, "I want to conceal this." Who knows what their motives are. You talk to some American millionaire or billionaire who wants to have more yachts and stuff and doesn't want to pay taxes, well, you could say, "Oh, he's just being greedy."

If you're a wealthy person in some countries, the government might not like you, you might not feel that it's safe to have your family's acquired wealth in a local bank. So whatever the motives are, there's a huge market for bank secrecy. Just like the Swiss hundreds of years ago, they were just responding to what the market needs.

David D. Stewart: Now, the other thing that has Credit Suisse in the news lately has been the end of Credit Suisse. Along with the crisis in the banking sector with Silicon Valley Bank failing, Credit Suisse just seemed to fall apart. What happened there?

Robert Goulder: It's done. It's dead. It ceases to exist. It is an ex-bank. Yes, shed a tear for them because they've been around for a long time. 1856, based in Zurich, before our American Civil War, an old historic institution. What went wrong? A lot of things went wrong.

There was one day recently where the bank lost 24 percent of its value. It's a publicly traded company. And on the stock exchange, they just lost a quarter of its value. What triggered that was an announcement from the Saudis that they were no longer going to up their investment in it.

Credit Suisse had been losing money for some time, and then they could go to the Saudi National Bank, which owned about 10 percent of them and say, "Hey, can you bail us out please?" And when the Saudis said — they didn't say, "We're going to get out." They didn't say, "We're going to give up our whole stake in you." They just said, "We're not going to get any deeper into this." The market took that as a sign that things are going south.

So everybody tried to dump their shares. That had a ripple effect because of the types of bank debt that Credit Suisse was issuing. There's this thing called an AT1 bond, which is a particular type of bond that banks in Switzerland can issue. Under the terms of that, if the bank goes under, it doesn't have to be repaid, so it's a conditional debt. Assuming that the bank doesn't go out of existence, that bond is worth something. But if the bank collapses, it's worthless. There were a lot of those out there, and everybody started to dump those because when you read in the newspaper that it's lost 24 percent of its value in a single day, you don't want to hold those AT1 bonds. So it wasn't a bank run, it was just people dumping all of that, which made it impossible for them to raise any capital. They had made a lot of bad investments. They were heavily involved in some capital management structures — they were deep, deep into them and they all went bankrupt.

So what do you have? You have a situation where you look at Credit Suisse, they value it to be worth about $8 billion. The Swiss government comes up to UBS and says: "You really don't have a choice in this matter. This is like a shotgun wedding. You are going to acquire Credit Suisse." So what does UBS do? They say, "OK, if they're worth $8 billion, if we buy them, we're taking on a lot of the debts that they owe. Those are going to become our debts." So they figure they only want to pay about $3 billion for this asset that's worth $8 billion.

And at the same time, the Swiss government had debt obligations issued from Credit Suisse to the tune of about $17 billion. UBS said, "We're only going to do this if you just wipe that out." That's money that Credit Suisse owed to the Swiss government. UBS said, "We're not paying that. So wipe that out."

So where does that leave them? They get this asset that they've bought sort of at a discount. Maybe this is actually a good deal for UBS. If you're getting an asset worth $8 billion and you only paid $3 billion for it. Who knows?

What we care about here in this country is going back to that 2014 plea agreement. It was agreed that the fine would be $2.6 billion. And as part of this plea agreement, the fine was bartered down to about half of that. But that was conditional. That was conditional on Credit Suisse keeping their word that they were no longer going to engage in the criminal acts of helping Americans evade their tax obligations. Since they've violated that, if you read between the lines of the press release from Senator [Ron] Wyden of the Senate Finance Committee, it now very much looks like the United States wants to go back to the successor in interest, which would no longer be Credit Suisse, but would be UBS, and say: "Hey, you know that $2.6 billion fine? You owe us half of that."

So it'll be very interesting to see how that plays out. Of course, we're dealing with Switzerland. So there's a nontax context here, because one of the ways that the Swiss government has positioned themselves to make sure that it's on friendly relationships with the United States is that they do us all sorts of favors with countries that we don't have diplomatic relations with. Think of Iran, kind of an important part of the world when you think about what's going on internationally, right? There's no Iranian embassy in the United States. There's no U.S. embassy in Iran. If we want to have a conversation with them, that goes through the Swiss, and that has some value to us.

So you might look at the face of it and think, "Gee, there's a case here for the United States really cracking down on UBS as successor in interest to Credit Suisse." But then at the same time, they might be helping us diplomatically in how we engage with the Cubans or how we engage with North Korea or how we engage for sure with the Iranians. They're diplomatically useful to us, which means you could have this scenario where the U.S. Treasury Department is saying: "We need to really get tough with these guys. They need to write us a check for well over $1 billion." And the State Department's like: "No, we don't want to offend these guys too much. We have to work with them next week." So it'll be very interesting to see how all of this plays out.

David D. Stewart: Well, now that Credit Suisse is a part of UBS, I guess it's relevant, how has UBS responded to this crackdown on bank secrecy? Are they behaving themselves or are we going to get a similar report about them from the Senate Finance Committee?

Robert Goulder: Well, stay tuned. I think there have been some issues with UBS. How we're going to resolve those issues I think remains to be seen. But they're such a global player, so I think UBS is going to survive and the Swiss government will make sure they do.

David D. Stewart: All right, so the last thing I wanted to talk to you about is that, we discussed FATCA, we discussed CRS, which seemed to have cut off a lot of avenues for hiding money around the world. So what's the next big thing that policymakers need to address to bring more wealth out from the shadows?

Robert Goulder: Well, I'm going to look at the buzzword of the day, beneficial ownership, Dave, because when you're putting money offshore, people tend not to do that directly. I wouldn't have Bob's bank account with UBS in Switzerland, right? I'd form some sort of a shell entity where you could never figure out who was behind it.

A corporation where the shareholder is a partnership. And the partnership, the general partner is an LLC, and the members of the LLC are in escrow, and you just have layer after layer of complication that makes it difficult for anyone to figure out who's really behind that bank account, whose money is that really? If there's progress on that front on beneficial ownership, that would be I think the next nut to crack.

David D. Stewart: Now, how would you go about getting these reported? How would you dig into, let's say, an LLC in Delaware that owns an offshore bank account? How do you get to the beneficial owners?

Robert Goulder: Yeah, good question. Because we don't want to do it. The United States does this as well, whether it's Wyoming or whether it's Delaware or some other states. The United States is great at this, which causes some people to question how serious we really are about it.

If you think about blacklists, every once in a while there's some group in Europe that puts together a tax haven blacklist, and there's always a discussion about whether Delaware is going to be on it. And the last thing that the United States wants is for us to be put on some sort of a tax-saving blacklist. Like that can't be correct. We have clean hands. We don't do any of these nefarious things. We don't want any damage to our reputation.

So is it sort of hypocritical for us to say: "Hey, Bahamas. Hey, Bermuda. Hey, Cayman Islands, we're going to get tough on you guys? Hey, Singapore. Hey, Vanuatu, we're going to put pressure on you to get you be serious about beneficial ownership registers."

I think the progress is probably going to come out of Europe. Brexit actually helps that because when the United Kingdom was in the EU, they could veto a lot of these things because it would affect these little tax havens around the world that have ties to the Crown or the U.K. government through status as a U.K. territory or a dependency. Now that they're out of the picture, the European Union can get more serious about going after beneficial ownership.

David D. Stewart: All right. So I guess we will leave it off with your prediction of, is beneficial ownership going to be dealt with in a way that ends effectively this secrecy? And if so, how long is that going to take?

Robert Goulder: Oh, I'm going to be the optimist here and I'm going to say this is going to happen and some countries will have to be drawn into it grudgingly, and the United States might be one of them. But I would look for some kind of a European Union directive that basically says, "If you're not going to go along with our beneficial ownership expectations and compliance, then we're going to do some kind of a measure to foreclose you from the European single market."

Put countries in a position where they have more to lose if they don't cooperate. And once you get something like that, as soon as the United States jumps on board, then it's pretty quick to becoming a global standard then.

David D. Stewart: Well, all right. Bob, thank you so much for being here. This has been great.

Robert Goulder: Thank you, Dave.

David D. Stewart: And now coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?

Jasper B. Smith: Thanks, Dave. In Tax Notes Federal, Bradley Borden uses a hypothetical dialogue between a tax advisor and an exchanger to debunk the section 1031 holding period myth. Adam Wallwork explores how recently proposed regulations and the end of the COVID-19 pandemic could affect qualified Opportunity Zone businesses.

In Tax Notes State, Annette Nellon examines a 2023 proposal in Massachusetts to add a credit to the personal income tax for local newspaper subscriptions. Ryan Maness examines tax expenditure reform and lawmaker efforts to propose approaches that are more adversarial to taxpayers.

In Tax Notes International, Angelo Nikolakakis and Jinyan Li clarify and expand on their criticism of the OECD's UTPR, examining the potential legal and ethical consequences of its application. Doron Narotzki and Vered Kuperberg examine the federal income tax implications for non-resident alien digital nomads working in the United States.

In Featured Analysis, Ryan Finley argues that Eaton Corp.'s claim to a constitutional right to indefinitely apply a transfer pricing method accepted in an expired advanced pricing agreement is misguided.

And finally, on the Opinions page, Ryan Finley explains what's at stake in Facebook's tax dispute.

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