Credit Suisse Group AG (CSGN) can’t disclose a client’s account data to U.S. tax authorities because a request for assistance last year addressed only tax evasion, which isn’t covered by a 1996 treaty, a Swiss court ruled.
The “search criteria” for the identification of bank clients “are formulated in terms encompassing above all mere tax evasion, for which administrative assistance cannot be granted,” the Federal Administrative Court said in a April 5 ruling published today.
The court’s decision follows an appeal by a Credit Suisse client. That came after Switzerland’s second-biggest bank last November told some customers that the U.S. Internal Revenue Service had sent a request on Sept. 26, via the Swiss Federal Tax Administration, for the names of Americans with accounts owned through a “domiciliary company.”
Switzerland and the U.S. are holding talks to resolve an investigation involving 11 Swiss financial firms, including Credit Suisse, after the Department of Justice indicted Wegelin & Co. on Feb. 2 for allegedly helping customers hide money from the IRS. Switzerland, the world’s biggest center for offshore wealth, is trying to shed its image as a haven for undeclared assets following a crackdown on tax evasion by U.S. authorities.
“The IRS and the Swiss administration tried to stretch the Swiss legal framework as far as possible,” said Franco Taisch, a professor of business law at the University of Lucerne. “However, the Swiss judiciary has set the boundaries.”
Marc Dosch, a spokesman for Zurich-based Credit Suisse, declined to comment on the judgment or its possible impact.
The Credit Suisse request came under Switzerland’s 1996 tax agreement with the U.S. Under that accord, “administrative assistance shall not be granted for presumed tax evasion, even if high amounts are at stake,” the administrative court said.
“The U.S. will have to explain the search criteria to identify the account holders in more detail,” the Swiss State Secretariat for International Financial Matters said in an e- mailed statement. “The negotiations to resolve the dispute on untaxed assets by U.S. account holders in Swiss banks will be continued.”
While “some clients” appealed the decision to deliver the data, details on another 150 have already been handed over to the U.S., the state secretariat said.
“It’s definitely not an isolated case,” said Peter V. Kunz, head of the business law department at the University of Bern. “It will have a general impact on the U.S. requests for administrative assistance.”
Sindy Schmiegel Werner, a spokeswoman for the Swiss Bankers Association, declined to comment on the ruling, adding that “the judiciary in Switzerland is independent.”
Switzerland, ranked at the top of a financial secrecy index by the London-based Tax Justice Network, agreed in 2009 to meet international standards to avoid being blacklisted as a tax haven by the Organization for Economic Cooperation and Development.
While the 1996 double-taxation treaty only covers cases of tax fraud and severe tax evasion, a new accord agreed on in September 2009 was extended to tax evasion. Once in force, the new agreement will cover cases starting in September 2009. Credit Suisse in November told its clients that the U.S. requested data for certain accounts held between 2002 and 2010.
In 2009, prosecutors charged UBS AG, the largest Swiss bank, with aiding tax evasion by U.S. clients. UBS avoided prosecution by paying $780 million, admitting it fostered tax evasion, and giving the U.S. Internal Revenue Service data on more than 250 accounts. It later turned over data on another 4,450 accounts.
The cost to Credit Suisse of resolving the probe “could be” higher than the 295 million Swiss-franc ($322 million) provision that Switzerland’s second-biggest bank set aside for U.S. tax matters in the third quarter, Chief Executive Officer Brady Dougan said on Feb. 9.
To contact the reporters on this story: Paul Verschuur in Zurich at email@example.com; Klaus Wille in Zurich at firstname.lastname@example.org
To contact the editor responsible for this story: Craig Stirling at email@example.com