Since 2009, Switzerland lost its dominant position in offshore private banking to competing jurisdictions such as the US, UK and China. With a 100% Swiss trust, some lost ground could be recovered.
It has been a decade-long desert crossing, since Switzerland had to give up its offshore private banking paradigm, together with international banking secrecy in 2009. The shock, initially caused by the U.S. probe into the UBS role in helping Americans avoid taxes, extended to Europe’s assault on Swiss secrecy practices. Swiss banks were in for difficult times, having to ensure regularization of undeclared assets.
More than 80% of EU assets in Switzerland were undeclared at that time. Millions were paid by private banks to law firms specialized in US or EU taxation rules, to help them get out of the offshore mess. Banks had to ask private clients to declare hidden assets or leave. They had to close legacy accounts. In some instances, they helped clients spend hidden money in Switzerland so as to get rid of the cross-border issue. The most proactive private bankers had seen it coming since 2004 (with the EU withholding tax) and converted clients’ physical person accounts into legal entity structures, domiciled offshore.
Discretionary trusts, in particular, were a sure-fire way to regain confidentiality, but are more expensive. Switzerland had to sign FATCA (Foreign Account Tax Compliance Act), a law unilaterally enforced by the US, that requires all non-US financial institutions to report (to the US Treasury) assets they hold of US persons. The problem is that the definition of US persons is notoriously very wide. Switzerland also capitulated to the automatic exchange of tax information (which became a reality in 2017) and brought all of its practices in line with EU and OECD standards, including in the corporate taxation area.
The only problem is that meanwhile, big financial centers, such as the U.S, were less eager to comply, themselves, with the international standards they imposed. As of today, the U.S. has signed neiter FATCA nor CRS (the OECD's automatic exchange of information standard). If a Brazilian opens an account at a US bank, it will not report the account to Brazil, unless a request is made (or unless the USA and that country have signed a reciprocal agreement – but very few exist).
To avoid even the request, the Brazilian citizen can open the account under a Panamanian company, and the US bank can claim that the account holder is Panamanian. The US has overtaken Switzerland and become one of the first countries helping individuals hide their finances from the rule of law, according to the latest «Financial Secrecy Index 2020» released by Tax Justice Network. The ranking stresses that the US, UK and the Cayman Islands are swimming against the tide and becoming more opaque, even while other jurisdictions are striving to become transparent.
So it is no surprise that the US has become today one of the biggest offshore centers for cross-border assets. One of the key instruments of confidentiality in the Anglo-Saxon world has been trusts. This tool has always been even more powerful than plain banking secrecy. This is due to the great sophistication afforded by trusts, which are perfectly legal instruments, as long as no authority proves they are a sham.
Swiss wealth managers have long known about offshore trusts and have used them extensively for their private clients, for tax minimization and estate planning purposes. There are plenty of trust jurisdictions, mostly of common law (Anglo-American law) tradition, while civil law (Roman-Germanic) jurisdictions have been specializing in foundations. The big trust jurisdictions are overall compliant, their courts are cooperative in case of international request for information.
But many others are dubious, opaque, corrupt, and unreliable, with uncooperative courts. Domiciling a trust in the Marshall Islands or Cook Islands means dealing with local banks, which are not known for their safety, as they can be easy to corrupt. Information can be given away in exchange for money. Let alone the risks attached to the trustee. The principle of a trust is that the owner of the assets (settlor) divests them in favor of a legal structure, managed by a trustee. The latter, endowed with fiduciary powers to act in the beneficiaries' interest, obviously needs to be perfectly reliable. But risks of theft, or phony accounting, cannot be neglected.
So far, Switzerland never had its own Swiss-domiciled trust. But things are changing. A clever move from Swiss law experts from Zurich and Geneva is aiming at developing the legal framework for a 100% Swiss trust. Among the creators of the concept, Mr. David Wallace Wilson, partner and tax expert at Schellenberg Wittmer, is helping to adapt the Swiss Code of Obligations. He believes a Swiss trust would level up with the finest trust jurisdictions. This work is being done as we speak.
A Swiss-based trust will put Switzerland on a level-playing field with competitors, providing it with a regulated and legitimate tool. Such a tool for asset protection can bring Switzerland back in the top league of the likes of Jersey, Guernsey and the Bahamas, who are already taking notice of the coming Swiss competition. Liechtenstein, too, is unsettled by the news. The neighboring financial center has specialized in Anstalten and foundations. But it has been losing ground since the Kieber scandal (2008) that uncovered millions of undeclared German assets hidden in the Principality through Liechtenstein structures.
Switzerland now has an opportunity to assert its trademark in the trust business: namely the qualities ascribed to Swissness, and to Swiss Made oversight, says expert David Wilson, earnest and professional approach, trustworthiness, integrity of the trustee. Swiss trustees will be licensed, supervised and audited (like financial intermediaries) and will have to comply with the highest standards.
London trustees, in contrast, are not licensed. Family offices in Asia, Latin America or Russia prefer regulated structures, says David Wilson. Wealthy Swiss families, too, who currently resort to foreign trusts, might prefer Swiss trusts. Another Swiss strength lies in arbitration procedures, a discrete conciliatory approach to litigation, where families chose their experts, and hearings are closed to public scrutiny. Playing by the rules of competitors, while adding a Swiss touch, might be the right strategy in order to deal with the tough geopolitics of financial centers.