The international pressure for greater transparency and regulation following the last financial crisis has exacerbated the competition between them in the trust sector. This context has amplified common misperceptions about Jersey and Switzerland regarding fiscal transparency and compliance, as seen by both sides. It is time to take an impartial look at this in order to better understand what will really drive the competition between the two trust centres since they will increasingly be targeting a smaller but richer pool of international private clients.
The views expressed by many Swiss commentators at the height of the attacks against Swiss banking secrecy in March 2009 when Switzerland agreed to adopt Article 26 of the OECD Model Convention on international administrative assistance in tax matters, were rather simplistic and misconceived. They claimed that the Anglo-Saxon trust is the primary tool for tax evasion and, as a result, the best substitute for Swiss banking secrecy. They further argued that the constant attacks from Britain, its overseas territories and the US on Swiss banking secrecy, were nothing less than a way to reorganise the market for international tax evasion in favour of their own system.
The suggestion that Jersey trustees may use, as a business model or otherwise, trust structures to facilitate foreign tax evasion is unfortunate. It demonstrates a lack of awareness of Jersey’s regulations and in particular its Proceeds of Crime (Jersey) Law 1999, which has been in effect for over 10 years and applies to Jersey financial services businesses such as trust companies. It provides for, the confiscation of the proceeds of crime, the establishment of new offences of money laundering and new procedures to prevent and detect money laundering. Foreign tax evasion falls within the definition of “criminal conduct” for the purposes of the law.
It is also worth mentioning that a person who fails to disclose to the police knowledge or suspicion of money laundering shall be guilty of an offence and be liable to imprisonment for a term not exceeding five years or to a fine or to both. Moreover, persons who carry out financial services business have an obligation to maintain procedures for the purposes of preventing and detecting money laundering. This means, in practice, that Jersey trust companies have considered in the past and will continue in the future to consider the tax compliance of their trust structures as an integral part of their regulatory obligations.
Typically this is evidenced once a year during a file review process. If a suspicion of foreign tax evasion arises during the course of the review, or at any point in time of the administration of the structure, the employee identifying it would be obligated to pursue the suspicion and clarify the position. Should the suspicion persist or be confirmed, the employee would have no alternative but to make an internal suspicious activity report to the company’s Money Laundering Reporting Officer, who in turn may decide to submit his/her own report to the relevant Jersey authorities. Failure to do so would be regarded very seriously by the Jersey Financial Services Commission who regulates the local trust industry. It would potentially expose the company to public criticism, sanctions or even revocation of its licence to operate, depending on the gravity of the matter. Finally it may also affect the company’s directors’ principal person status and their future employability in the market.
Misperceptions exist both ways. Several Channel Island professionals have also been sceptical as to the real commitment of Switzerland to embrace change in fiscal matters. Whilst there were some hesitations at the outset, the agreement by Switzerland to adopt the above OECD standards in tax matters has been a turning point. Switzerland will now exchange information for tax purposes with other countries with which it has concluded a double taxation treaty and upon specific request, including situations where individuals need not be identified by name but instead by defined criteria. The Swiss Federal Council has recently stated that it would be prepared to examine different measures, which include the introduction of a final withholding tax in dealings with important neighbouring countries, as well as other measures which promote the tax honesty of bank clients.
Early this year, Konrad Hummler, the Swiss Private Bankers Association’s Chairman, stressed that tax conformity of the banks’ clients and regularising the past were two pillars of the Swiss financial centre’s strategy. More recently Patrick Odier, Chairman of the influential Swiss Bankers Association, stated on CNBC that “Switzerland is not a country where assets should be hidden for tax reasons” and that “bankers are not there to encourage tax evasion”. All these signals demonstrate a fundamental shift of attitude and strategy, which is largely embraced by the Swiss trust industry’s leading players.
In a world moving rapidly towards a level playing field for global tax compliance, the winners are those trust companies able to deal with their clients’ sophistication notably, but not exclusively, in tax matters. These clients will be looking for competitive jurisdictions offering sensible business regulations, a clear legal and tax framework and a multi-lingual qualified workforce. It will be down to both Jersey and Switzerland to accelerate the change needed in their respective jurisdictions to improve their competitiveness in what is certainly going to be a tougher global private client market.