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Legislative Process

Two independent draft bills, the first on combating money laundering and terrorist financing, the se-cond on enhancing due diligence requirements in the area of taxation, were submitted for consultation to the Swiss political and economic actors on 27 Fe-bruary 20134.

I. Money Laundering

After the consultation period, the Federal Council adopted the dispatch on the new Federal Act for Implementing the Revised Financial Action Task Force Recommendations (the "first Bill")5 in December 2013. It had to be validated by both chambers of the Swiss Parliament in order to enter into force. After an intense debate on its provisions, the chambers finally reached a consensus on 12 December 2014 and adopted the final Bill6. The

1 For more information, see in French: http://www.news.admin.ch/NSBSubscriber/message/attachments/26274.pdf; in German: http://www.news.admin.ch/NSBSubscriber/message/attachments/26273.pdf.

2 See the Federal Council's report on Switzerland's financial market policy of 19 December 2012 (http://www.news.admin.ch/NSBSubscriber/message/attachments/35765.pdf).

3 The FATF Recommendations 2012 were adopted on 16 February 2012. Switzerland actively contributed to the elaboration of this new international standard that aims at accommodating new developments in international financial crime (see http://www.fatf-gafi.org/topics/fatfrecommendations/documents/internationalstandardsoncombatingmoneylaunderingandthefinancingofterrorismproliferation-thefatfrecommendations.html).

4 Press release of the Federal Council of 27 February 2013 (https://www.sif.admin.ch/sif/en/home/dokumentation/medienmitteilungen/medienmitteilungen.msg-id-47934.html).

5 The Bill and the Federal Council's Message can be found at http://www.admin.ch/ch/f/gg/pc/ind2013.html.6 See http://www.parlament.ch/f/suche/pages/geschaefte.aspx?gesch_id=20130106.

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Implementing the "White Money Strategy" in Switzerland – New Developments

Combating abuses in the areas of money laundering and taxation has been the major objective of the Swiss financial market policy since a couple of years. This strategic orientation in terms of "financial integrity", an-nounced by the Swiss government (the Federal Council) on 28 February 2010 and 22 February 20121, has been detailed on 19 December 20122 soon after the adoption of the revised Financial Action Task Force Re-commendations (the "FATF Recommendations 2012")3. The main reforms aimed to i) facilitate international exchange of information; ii) extend duties of care in relation with untaxed assets and iii) consider all serious offences, including tax offences, as predicate offences to money laundering.

The purpose of this paper is to provide an overview of the options proposed by the Federal Council and the final solutions retained by the Swiss Parliament in order to implement into Swiss law the standard set by the FATF Recommendations 2012 and fulfill Switzerland's international engagements.

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key points provided in the first Bill are discussed hereafter as well as the final solutions retained by the Swiss Parliament.

II. Taxation

The second legislative consultation launched by the Federal Council in February 2013 aimed at preventing the inflow of untaxed assets in the Swiss financial center7. It proposed to enshrine in the Swiss Anti-Money Laundering Act (AMLA; RS 955.0) new due diligence requirements when accepting assets for banks and other financial service providers. Wide criticism towards the draft was expressed from all the Swiss political parties and economic actors. In reaction, the Federal Council announced that it would review its policy8. Clients domiciled in those states with which no agreement on the automatic exchange of information ("AEOI") would exist in a foreseeable future would undergo new due diligence requirements. The Federal Council thus reckoned that Switzerland would recognize the international AEOI standard9 and conclude the necessary implementation agreements with its principal partner states.

In the Area of Money Laundering

The measures first proposed in February 2013 aimed at introducing serious tax offences (in the area of both direct and indirect taxation) in the list of the predicate offences to money laundering,

provisions to ensure transparency of legal entities as well as rules for the identification of beneficial owners and politically exposed persons ("PEPs").

I. Introduction of a New Predicate Offence to Money Laundering

Under the current regime, only felonies [i.e. offences punishable by more than three years imprisonment in the sense of Art. 10 al. 2 of the Swiss Criminal Code (SCC; RS 311.0)] constitute predicate offences to money laundering in Switzerland. Art. 305bis SCC defines money laundering as "an act that is aimed at frustrating the identification of the origin, the tracing or the forfeiture of assets which […] originate from a felony".

Tax offences are not legally regarded as felonies, with the exception of Art. 14 al. 4 of the Swiss Administrative Criminal Law (ACL; RS 313.0), which punishes an aggravated tax fraud committed in relation with duties appearing in a case of cross-border movement of goods10. Evasion of direct taxes for instance – whether committed wilfully or negligently and irrespective of the amount of tax evaded – constitutes a mere contravention (i.e. an offence only subject to a fine)11. Similarly, tax fraud, defined as a combination of forgery of documents and use of false certifications in order to avoid direct taxes, only counts as a misdemeanor, punishable by imprisonment up to three years12.

Thus, the Federal Council initially proposed13 to introduce a new criminal offence in the Federal

7 See http://www.parlament.ch/f/suche/pages/geschaefte.aspx?gesch_id=20130106.8 For more information on the results of the consultation (cf. http://www.admin.ch/aktuell/00089/index.html?lang=en&msg-id=51189).9 See OECD AEOI international standard released on 21 July 2014 (http://www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-

of-financial-information-in-tax-matters.htm).10 To be exhaustive, it should be mentioned that the Swiss Federal Tribunal considers that fraud committed by misuse of a fiscal instrument (VAT carrousel

fraud) falls under the definition of a criminal fraud in the sense of Art. 146 SCC and could be considered as a predicate offence to money laundering (ATF 110 IV 24, consid. 2e; TF, 1C_171/2010 of 6 April 2010 and the references quoted by Ursula Cassani in: L'infraction fiscale comme crime sous-jacent au blanchiment d'argent: considerations de lege ferenda, RSDA 1/2013, p. 1ss). According to the same author, a tax fraud committed by a criminal organization could also fall under Art. 260ter SCC, which is a felony.

11 See Art. 175 of the Federal Act on Direct Federal Taxation (LIFD; RS 642.11; http://www.admin.ch/opc/fr/classified-compilation/19900329/index.html) and Art. 56 of the Federal Act on the Harmonization of Direct Taxation at Cantonal and Communal Levels (LHID; RS 642.14; http://www.admin.ch/opc/fr/classified-compilation/19900333/index.html).

12 See Art. 14 al. 2 ACL; Art. 186 LIFD; Art. 59 LHID.13 In parallel, the Federal Council launched in May 2013 a consultation for the revision of the Swiss tax crime regime, notably for the investigation and

prosecution of tax offences. According to the Federal Council's proposal, tax authorities should be entrusted with reinforced powers to investigate any kind of tax offences, including the power to obtain bank records. This proposal was highly criticized as Swiss privacy laws, which include Swiss banking secrecy, are a fundamental cornerstone of the Swiss legal regime. The results of the consultation were published in May 2014 (see in French: http://www.admin.ch/ch/f/gg/pc/documents/2288/Droit-penale-en-matiere-fiscale_Rapport-resultats2_fr.pdf; in German: http://www.admin.ch/ch/d/gg/pc/documents/2288/Steuerstrafrecht_Ergebnisbericht_de.pdf). The draft law proposal to be issued by the end of 2015 shall take into account the numerous objections expressed during the consultation period (see https://www.news.admin.ch/message/index.html?lang=fr&msg-id=53655).

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Act on Direct Federal Taxation (LIFD) and in the Federal Act on the Harmonization of Direct Taxation at Cantonal and Communal Levels (LHID)14. By doing so, it intended, first, to extend the criteria characterizing tax fraud to include any behavior considered as deceptive towards tax authorities and second, to characterize serious tax frauds, i.e. where tax factors of CHF 600'000.- or more have been concealed from the tax authorities, as felonies, considered predicate offences to money laundering.

The results of the consultation procedure led the Federal Council to drop its initial proposal of introducing a new criminal offence in the tax legislations. Instead, it suggested that Art. 305bis SCC should be amended in a way that not only felonies but also tax frauds in accordance with Art. 186 LIFD or Art. 59 LHID would constitute predicate offences to money laundering, provided the amount of tax evaded exceeds CHF 200'000.- per tax period (one year)15.

Concerning indirect taxation [customs duties and value added tax ("VAT")], the Federal Council proposed to extend the scope of Art. 14 al. 4 ACL beyond the cross-border movement of goods in order to include other taxes levied by the Confederation, such as VAT on transactions on Swiss territory and services. No amendment to Art. 305bis SCC was deemed to be necessary as Art. 14 al. 4 ACL already punishes the action as a felony.

II. Increased Transparency of Legal Entities

The FATF Recommendations 2012 require countries to implement measures to identify the beneficial owners of legal entities and enhance transparency of unlisted companies issuing bearer shares.

Suppressing anonymous participation in all kinds of legal entities/trusts is indeed, in the eyes of the FATF, as important as suppressing bank secrecy to combat financial abuses.

The legislative solution proposed by the Federal Council in the first Bill required shareholders of companies with bearer shares when they have a stake of 25% or more in the voting rights or share capital at the time of acquisition of their shares (i) to disclose their identity and the identity of the beneficial owners of the shares to the company, which would keep the record16, (ii) alternatively and upon delegation by the company, to disclose their identity to an authorized financial intermediary, which will keep such a record17. It further allows companies with bearer shares (iii) to converse bearer shares into registered shares18 or (iv) to issue bearer shares in the form of uncertificated securities credited to a securities account by a custodian19.

The obligation to disclose the identity of the beneficial owners as soon as a shareholding of 25% is reached would also apply in the case of registered shares of unlisted companies and partners in limited liability companies, although not retroactively (duty limited to new acquisitions)20.

The first Bill also introduced various sanctions to punish non-compliant shareholders, from the suspension of their voting and economic rights21 to criminal sanctions22.

III. Identification of Beneficial Owners

During Switzerland's last evaluation, the FATF identified some unresolved Swiss deficiencies that needed to be remedied, among them the identification of the beneficial owners. The first Bill

14 See supra note 5.15 See proposed Art. 305bis SCC (in French: http://www.admin.ch/opc/fr/federal-gazette/2014/685.pdf; in German: http://www.admin.ch/opc/de/federal-

gazette/2014/705.pdf). 16 Proposed Art. 697i and 697j of the Swiss Code of Obligations (SCO; RS 220).17 Proposed Art. 697k SCO.18 Proposed Art. 704a SCO.19 See proposed Art. 697j para. 3 SCO. Issuance according to Art. 6 of the Federal Intermediated Securities Act (FISA; RS 957.1).20 Proposed Art. 790a and 837 SCO.21 Proposed Art. 697m SCO.22 Proposed Art. 327 SCC.

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therefore sought to amend Art. 4 AMLA by formally including an obligation to identify the beneficial owners of all unlisted companies as well as progressively introduce due diligence obligations concerning the identification of the beneficial owners of all legal entities (i.e. the physical persons controlling the legal entities23), even for operating companies24.

IV. Identification of Domestic PEPs

For due diligence purposes, the FAFT Recommendations 2012 extended the obligation to identify PEPs to include domestic PEPs and persons exercising (or having exercised) an important function at or on behalf of an international organization.

The first Bill suggested to add to AMLA a formal definition of national PEPs25. By doing so, all financial intermediaries would equally apply the PEPs regulations in terms of risk-assessment. Relatives of PEPs would be similarly concerned by these regulations.

V. Regulations on Cash Payments for Purchase of Both Movable and Immovable Property

The first Bill proposed to introduce a new rule in AMLA requiring that all payments in excess of CHF 100'000.- for sales and purchases of movable or immovable properties be arranged through a financial intermediary subject to AMLA.

Until the inclusion of this amendment, AMLA is exclusively applicable to financial intermediaries. However, the suggested amendment would introduce new categories of persons (i.e. professionals negotiating movable or immovable properties) to whom the Swiss anti-money laundering regulations would apply26. For instance, cash payments at auctions would only be possible up to a sum of CHF 100'000.- and the surplus would have to be settled through a financial intermediary27.

VI. Extension of the Powers and Responsibilities of the MROS

The Money Laundering Reporting Office of Switzerland ("MROS") already has the power, since 1 November 201328, to exchange financial information (including name of the financial intermediary, name of the account holder, account number, sum of deposited assets, identity of the beneficial owners and information relating to transactions) with its counterparts abroad, subject to certain conditions29.

The first Bill proposed to enlarge the MROS' powers and allow it, upon request, to obtain all the information it deems necessary for its analysis of suspicious activities from other federal, cantonal and communal authorities.

The first Bill also suggested to delay the obligation to freeze the assets imposed on the financial intermediary. In the event of a suspicious activity report ("SAR")30, the freezing would only take place in cases where the MROS communicates its suspicions to the competent criminal authority31. The

23 Proposed Art. 2a al. 3 AMLA allows the determination of the controlling shareholders of a company on the main basis of a participation threshold of 25%. It however also mentions other means of control over the legal person (see FATF Guidance on Transparency and Beneficial Ownership of October 2014 which provides examples of control over the legal person through other means; see also Art. 54 ff Revised AMLO-FINMA, infra section VIII).

24 Art. 4 AMLA indeed only imposed the identification of the beneficial owner when the customer was not the beneficial owner, when the customer was a domiciliary company or when a cash transaction of considerable financial value was being carried out.

25 Proposed Art. 2a AMLA.26 Proposed Art. 2b and 2c AMLA.27 Including for auctions regulated by the Debt Collection and Bankruptcy Act; RS 281.1 (http://www.admin.ch/opc/fr/classified-compilation/18890002/index.

html).28 Amendment of AMLA of 21 June 2013; FF 2012 6449 (see in French: http://www.admin.ch/opc/fr/federal-gazette/2012/6449.pdf; in German, BBl 2012 6941:

http://www.admin.ch/opc/de/federal-gazette/2012/6941.pdf).29 For example, no original documents are transmitted abroad. The information is sent in the form of a report and is coupled with a disclaimer of liability

reminding foreign partners of their obligation to respect the principles of administrative cooperation.30 Proposed Art. 10 AMLA.31 The current system obliges the financial intermediaries to freeze the assets subject to the SAR until they receive a decision from the MROS or the criminal

authorities, which could take up to maximum five business days. During that time, they are prohibited from informing the client of the SAR and of the freezing of the account (Art. 10 and 10a AMLA).

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MROS would have thirty business days to complete its analysis of the case32. If, within those days, the financial intermediary suspects that contaminated funds may leave Switzerland (upon the client's instructions), it should alert the MROS and delay the execution of the transfer for five working days. If the MROS agrees with the transfer or does not reply within five days – and only in this case – the financial intermediary could execute the transaction.

VII. Adoption of the Bill

The final Bill, which amends eight different laws, was adopted by the Swiss Parliament on 12 December 201433. The Federal Council will set the date of entry into force, which should happen before the next FATF country exam of Switzerland in spring 201634, unless a referendum is requested by the Swiss population35. This is however unlikely, since the Bill does not directly concern the interests of a majority of the Swiss citizens.

The final Bill differs from the first Bill on the following points.

New Predicate Offence to Money Laundering

The new version of Art. 305bis SCC is amended in a way that not only felonies but also tax frauds in accordance with Art. 186 LIFD or Art. 59 LHID constitute predicate offences to money laundering36. Yet, in the final Bill, the amount of tax evaded must exceed CHF 300'000.- per tax period (one year) to qualify as tax fraud and not CHF 200'000.- as initially planned. If the tax offence was committed abroad, the Swiss authorities will apply the principle

of double incrimination of Art. 305bis al. 3 SCC to decide whether it falls under the narrow definition of tax fraud under Swiss law (i.e. combination of forgery of documents and use of false certifications towards tax authorities in order to avoid direct taxes). Also, Art. 305bis SCC only applies to tax offences committed after the date of entry into force of the final Bill37.

Increased Transparency of Legal Entities

The final Bill upholds the suggested amendments regarding companies with bearer shares as well as sanctions to punish non-compliant shareholders in the form of the suspension of their voting and economic rights38. However it did not adopt the criminal sanctions39.

In this regard, it is interesting to mention that the EU 4th Anti-Money Laundering Directive (AMLD4) under consultation includes rules according to which the ultimate owners of companies and trusts would have to be listed in public registers, accessible to people with a "legitimate interest" such as investigative journalists. If the final text of the directive is adopted, EU countries will have to implement it into their national law40.

Identification of Beneficial Owners

The proposed Art. 4 AMLA was adopted without any amendment (see supra section III). The persons to whom the Swiss anti-money laundering regulations apply have the obligation to identify the beneficial owners of all listed companies, i.e. the natural persons controlling the legal entities.

32 Proposed Art. 23 al. 5 AMLA.33 FF 2014 9465 (in French: http://www.admin.ch/opc/fr/federal-gazette/2014/9465.pdf; in German, BBl 2014 9689, http://www.admin.ch/opc/de/federal-

gazette/2014/9689.pdf).34 http://www.fatf-gafi.org/media/fatf/documents/assessments/Global-assessment-calendar.pdf.35 If enough signatures are collected, it is possible to contest laws or legislative acts through an optional referendum. The contested legislation would then be

put to popular vote. The optional referendum could be rejected, and the contested legislation upheld, by a majority of the valid vote cast (simple majority) (for more details, please see https://www.ch.ch/en/referendum/).

36 Adopted Art. 305bis para. 1bis SCC and Art. 9 al. 1bis AMLA.37 Adopted transitory disposition for the amendment of 12 December 2014, FF 2014 9465, p. 9472 (in French: http://www.admin.ch/opc/fr/federal-

gazette/2014/9465.pdf; in German, p. 9696: http://www.admin.ch/opc/de/federal-gazette/2014/9689.pdf). 38 Adopted Art. 697m SCO.39 See proposed Art. 327a SCC.40 See http://www.europarl.europa.eu/news/en/news-room/content/20141216IPR02043/html/Money-laundering-Parliament-and-Council-negotiators-agree-

on-central-registers.

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Identification of Domestic PEPs

Another important change regards the definition of PEPs41. In addition to the amendments discussed supra section IV, the final Bill extends the definition of PEPs to people exercising an important function in an international sport federation. Because of the recent corruption scandals at FIFA, the Bill has thus been nicknamed lex FIFA.

Regulations on Cash Payments for Purchase of Both Movable and Immovable Property

One of the much discussed amendments of the first Bill dealt with capping cash transactions to a maximum of CHF 100'000.-. The final Bill does not follow on this requirement. However, new actors42, up until now unaffected by AMLA, will be obliged to undergo increased due diligence requirements for cash transactions exceeding CHF 100'000.-43: written track of the sale, clarification of the background of any unusual operation, and information sent to the authorities in case of discovery of any probable link with criminal activities. Additionally, an auditor must be in charge of verifying compliance with these due diligence requirements44. If the buyer refuses to subject himself to these requirements, he then would not be authorized to conclude the transaction other than through an electronic transfer of money.

This issue is likely to return to the Swiss agenda quite soon. Indeed, the European Union already has a more severe regulation, according to which any cash payment above EUR 15'000.- is subject to an increased scrutiny45.

Extension of the Powers and Responsibilities of the MROS

The final Bill gives the MROS twenty business days after the SAR to decide if it communicates its suspicions to the competent criminal authority46. During this lapse of time, and provided the case is not related to terrorist financing, the financial intermediary can continue to execute transactions on behalf of the client47. The client should indeed not be informed of the SAR unless the financial intermediary needs to safeguard its own interests with regard to a civil, criminal or administrative procedure48.

VIII. Consultation on the Revised An-ti-Money Laundering Ordinance

Following the adoption of the FATF Recommendations 2012 and the final Anti-Money Laundering Bill in December 2014 as well as insights gained from supervisory practice and recent market developments, the Swiss Financial Market Supervisory Authority ("FINMA") opened, on 11 February 2015, a consultation on the draft revised version of the FINMA Anti-Money Laundering Ordinance (AMLO-FINMA; RS 955.033.0). The main material adjustments of the AMLO-FINMA are described below.

Firstly, it requires from fund management companies, investment companies and asset managers pursuant to the Collective Investment Scheme Act (CISA; RS 951.31) that they identify both the subscriber of fund units exceeding CHF 15'000.- and the beneficial owner of collective investment schemes49. Due diligence requirements could be lowered in certain circumstances50.

41 Adopted Art. 2a AMLA.42 Adopted Art. 2 al. 1 let. b AMLA. 43 Adopted Art. 8a AMLA. The due diligence requirements will be described in a new Ordinance of the Federal Council (Art. 8a para. 5 AMLA).44 Adopted Art. 15 AMLA.45 Art. 7 lit. b of the Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system

for the purpose of money laundering and terrorist financing (http://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1423668121153&uri=CELEX:32005L0060).46 Adopted Art. 23 al. 5 AMLA.47 Adopted Art. 9a AMLA.48 Adopted Art. 10a al. 6 AMLA.49 Art. 39 para. 1 and Art. 40 para. 1 Revised AMLO-FINMA.50 Art. 39 para. 2-3 and Art. 40 para. 2 Revised AMLO-FINMA.

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Secondly, the new concept of "controller"51 – directed at all financial intermediaries – is introduced in order to identify the natural persons behind operationally active legal entities and partnerships52. This concept is a concretization of Art. 2a al. 3 AMLA with regards to the identification of beneficial owners53.

Thirdly, the Ordinance prescribes due diligence requirements for new payment methods54 (cash-less payments such as prepaid credit cards, payments by smartphones, etc.) and virtual currencies (bitcoins, etc.)55.

Then, in order to be aligned with the newly adopted AMLA which authorizes financial intermediaries to continue executing client instructions even after the filing of a SAR to the MROS, the Ordinance indicates that significant assets may only be withdrawn, during the MROS' analysis, in a way which enables the authorities to follow its trail (paper trail)56.

Lastly, the internal organization of financial intermediaries would be extended in order to adapt to money laundering risks and emerging new technologies. Financial intermediaries should also define a clear division between their anti-money laundering competence center and their business units57.

The consultation will end on 7 April 201558.

In the Area of Taxation

I. Enhanced Due Diligence Requirements

The initial proposal of the Federal Council was a risk-based approach, where financial intermediaries should use pre-defined risk indicators – analog to the risk indicators for money laundering – to make an assessment of the tax situation of the clients59. In practice, when a financial intermediary comes to the conclusion that the assets of the client are undeclared, it should refuse the assets deposit. It should also verify that the assets already under custody are tax-compliant by, if need be, asking the client to straighten them within a reasonable timeframe. If the client refuses, the financial intermediary should terminate the business relationship. The duty to send a SAR to the MROS would be limited to cases where the assets are suspected to derive from predicate offences to money laundering.

The almost unanimously negative reaction60 of the Swiss political and economic actors during the consultation period forced the Federal Council to review its policy. It instructed to draft a new proposal that would impose these strict due diligence requirements only to those clients domiciled in states with which Switzerland has no agreement on AEOI61.

51 Also contained in the 2015 draft Agreement on the Swiss banks' code of conduct with regard to the exercise of due diligence ("CDB") to be released shortly by the Swiss Bankers Association (see Explanatory Report, p. 11 in French: http://www.finma.ch/f/regulierung/anhoerungen/Documents/gwv-finma/eb-gwv-finma-f.pdf and p. 13 in German: http://www.finma.ch/d/regulierung/anhoerungen/Documents/gwv-finma/eb-gwv-finma-d.pdf).

52 See Art. 54 ff Revised AMLO-FINMA.53 See Art. 54 Revised AMLO-FINMA. Also supra note 23.54 Art. 12 Revised AMLO-FINMA. 55 Art. 50 and 59 Revised AMLO-FINMA.56 Art. 32 Revised AMLO-FINMA.57 Art. 22 Revised AMLO-FINMA.58 For more information, please refer to http://www.finma.ch/e/aktuell/pages/mm-revision-gwv-20150211.aspx.59 Increased risk would for instance consist of a client's wish for greater discretion or investments to be carried out in complex structures without justification.

Whereas lower risk would arise where there is an international double taxation agreement between the client's country of domicile and Switzerland.60 Most actors raised concerns that the new duties (the "Swiss finish") would be a competitive disadvantage for the Swiss financial centre. 61 The new Swiss Financial Institutions Act (FinIA), for which consultation ended in October 2014, ensures in its Art. 11 para. 1 that a financial intermediary

when accepting asset values verifies if there exists a high level risk that, in breach of applicable tax obligations, these assets are not or have not been taxed. The establishment could however renounce to these requirements for clients domiciled in states with which Switzerland has concluded an AEOI agreement according to Article 11 para. 3 FinIA (see http://www.swissbanking.org/en/fidleg.htm and for the text of FinIA [in French: http://www.news.admin.ch/NSBSubscriber/message/attachments/35442.pdf; in German: http://www.news.admin.ch/NSBSubscriber/message/attachments/35441.pdf]).

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II. Automatic Exchange of Information

Switzerland signed, on 15 October 2013, the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters (the "OECD Convention")62.

The Federal Council also launched two parallel consultations on 14 January 2015 on international exchange of information in tax matters to prevent cross-border tax evasions.

The first consultation relates to the ratification of the OECD Convention by Switzerland. Since 2009, Switzerland has provided for exchange of information upon request in a number of double taxation agreements and tax information exchange agreements. However, the new OECD Convention increases the exchange of information upon request to a significant number of partner states.

The OECD Convention also introduces spontaneous exchange of information, i.e. information that would no longer deal with bank accounts but would also cover all types of information that appear relevant under the Convention. This could, for instance, lead to Swiss authorities informing their foreign partners about a taxpayer who benefits from a special cantonal tax status or from a special treatment due to a tax "ruling", as well as to enable evaluating transfer pricing within groups of companies63.

Switzerland, though, will declare upon ratification that it will generally inform affected persons about

the forthcoming exchange of information and forbid foreign authorities from conducting tax audits in Switzerland64. Additionally, the Federal Council proposes to restrict the applicability of the Convention to intentional tax offences subject to criminal sanctions committed after 1 January 201465. Apart from that, Swiss cooperation will refer to the tax periods commencing on 1 January directly following the entry into force of the OECD Convention in Switzerland66, which should be on 1 January 2017.

AEOI is also included in the options provided by the OECD Convention. Nevertheless, additional agreements with interested states is a required prerequisite of AEOI. The second consultation involves such an agreement67.

Indeed, the second consultation relates to the signature by Switzerland, on 19 November 2014, of the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information ("MCAA"). The MCAA provides for the automatic exchange of information collected in accordance with the OECD AEOI standard68.

The OECD AEOI standard encompasses the following information: account and tax identification numbers, names, addresses and dates of birth of foreign taxpayers with accounts in a country other than the country of origin, and all types of income and account balances. The taxpayers could be natural persons or legal entities, but the actual beneficial owners of the account must be identified69.

62 For the official text of the OECD Convention in French, please see: http://www.news.admin.ch/NSBSubscriber/message/attachments/37908.pdf; for the translation in German: http://www.news.admin.ch/NSBSubscriber/message/attachments/37906.pdf).

63 Fabien Liégeois, L'échange de renseignements: "hic et nunc" http://www.cdbf.ch/lechange-de-renseignements-hic-et-nunc/#.VMoDDmZbDcs, 26 January 2015.

64 Art. 2 of the Federal Decree on the approval and implementation of the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters (cited: "Federal Decree"), in French: http://www.news.admin.ch/NSBSubscriber/message/attachments/37910.pdf; in German: http://www.news.admin.ch/NSBSubscriber/message/attachments/37909.pdf.

65 Art. 1 al. 3 Federal Decree.66 Art. 4 Federal Decree.67 Eveline Widmer-sChLumpf, lettres aux organisations of 14 January 2015 in French: http://www.news.admin.ch/NSBSubscriber/message/attachments/37912.

pdf; in German: http://www.news.admin.ch/NSBSubscriber/message/attachments/37911.pdf.68 For the official text of the MCAA in French, please see: http://www.news.admin.ch/NSBSubscriber/message/attachments/37929.pdf, for the translation in

German see: http://www.news.admin.ch/NSBSubscriber/message/attachments/37928.pdf. For the text of the OECD's AEOI standard or Common Reporting Standard ("CRS"), please see: http://www.oecd.org/ctp/exchange-of-tax-information/automatic-exchange-financial-account-information-common-reporting-standard.pdf.

69 Federal Department of Finance, Questions and answers "Automatic exchange of information" of 14 January 2015 in French or German: http://www.efd.admin.ch/themen/wirtschaft_waehrung/02779/index.html?lang=fr.

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According to MCAA, the Swiss financial intermedi-aries should transmit the relevant data to the Swiss tax authorities. The OECD AEOI standard set out in the MCAA describes the due diligence procedures that must be followed by financial intermediaries to identify reportable accounts70. Once per year, the Swiss tax authorities will then send the data to the relevant foreign partners71.

In order to implement the provisions of MCAA and the OECD AEOI standard, which are not all directly applicable, the Federal Act on the International Automatic Exchange of Information in Tax Matters ("proposed AEOI Act")72 has to be enacted73. This Act will govern the implementation of the MCAA, the organization, the procedure, the judicial channels and the applicable criminal provisions in Switzerland. The Data Protection Act74 will govern the rights of the affected persons75.

Around 100 States are willing to adopt the OECD AEOI standard as early as 201776. The countries with which Switzerland will establish AEOI still remain unknown. The bilateral implementation will be discussed at a later stage, says Federal Councilor Eveline Widmer-sChLumpf77.

The consultations will end on 21 April 2015. The Federal Council's dispatches to the Parliament are expected in the summer of 2015. It could thus be possible that an entry into force of these provisions be expected around the beginning of 2017, with the first exchange of information occurring in 2018, if the Parliament and possibly voters agree78.

According to the above, tax-related banking secrecy in Switzerland will no longer apply to foreign clients. The Swiss Department of Finance declared that, as

a result, competitiveness will be boosted as legal certainty should increase and "the key strengths of the financial center, such as neutrality, political and economic stability, own strong currency, high-quality services and international expertise, will be shown to greater advantage"79.

The implications of the implementation of AEOI on taxpayers will be twofold. First, foreign persons abroad with assets in Switzerland need to evaluate their exposure and possibly reorganize their international tax planning. Second, persons residing in Switzerland must be aware that exchange of information being reciprocal, undisclosed assets and accounts in a partner country should either be removed, or spontaneously disclosed to Swiss tax authorities in order to avoid any possible future penalty.

The transparency regime established by AEOI will most certainly cause another paradigm shift in Switzerland. Despite a popular initiative launched in October 2014 demanding the Swiss banking secrecy for Swiss taxpayers to be enshrined into the Federal Constitution80, the banking secrecy may be equally at risk for Swiss taxpayers.

Conclusion

Swiss political authorities, together with the protagonists of the financial sector, consider that the effective prevention of financial sector abuses is a prerequisite for a successful financial center.

The newly expanded anti-money laundering regulations adopted by the Swiss Parliament in December 2014 will affect financial intermediaries

70 See supra note 68. 71 Idem.72 Federal Act on the International Automatic Exchange of Information in Tax Matters, in French: http://www.news.admin.ch/NSBSubscriber/message/

attachments/37933.pdf; in German: http://www.news.admin.ch/NSBSubscriber/message/attachments/37932.pdf.73 Art. 1 al. 2 let. a proposed AEOI Act.74 Data Protection Act; RS 235.1 (http://www.admin.ch/ch/e/rs/2/235.1.en.pdf).75 Art. 17 proposed AEOI Act.76 Federal Department of Finance, Fact sheet "Automatic exchange of information" of 14 January 2015, in French or in German: http://www.efd.admin.ch/

themen/wirtschaft_waehrung/02779/index.html?lang=fr.77 Eveline Widmer-sChLumpf, Letter of 14 January 2015, in French: http://www.news.admin.ch/NSBSubscriber/message/attachments/37935.pdf; in German:

http://www.news.admin.ch/NSBSubscriber/message/attachments/37934.pdf.78 See Federal Council's press release of 14 January 2015, http://www.admin.ch/aktuell/00089/index.html?lang=en&msg-id=55889.79 See supra note 76. 80 Initiative "Oui à la protection de la sphère privée" launched in October 2014 (see in French: http://www.admin.ch/opc/fr/federal-gazette/2014/8473.pdf; in

German: http://www.admin.ch/opc/de/federal-gazette/2014/8641.pdf). If the initiative is successful and is not subsequently retracted, the enactment of the amendment to the Constitution will be put to the popular vote and needs to be approved by a majority of the electorate and the cantons (a "double majority"). On 11 February 2015, the Federal Council recommended to reject the initiative and did not propose a counter-project.

Bär & Karrer Briefing - 10

and professionals negotiating movable and immov-able properties. The adoption of the OECD AEOI standard will impact Swiss financial intermediaries as well.

In practice, they will be subject to significantly increased risk factors and will need to reduce their exposure by verifying tax conformity at the beginning and in the course of the relationships with clients domiciled in certain states and to report evaded taxes above CHF 300'000.- as the results of tax frauds committed in Switzerland or abroad.

If the Swiss mechanisms are today largely compatible with international standards and should expand the possibilities for Swiss authorities to assist their foreign colleagues in combatting tax offences, the practical challenges and the costs related to the implementation of these new mechanisms should not be underestimated. They will most certainly require further adjustments.

Author:

Anne Valérie Julen Berthodanne.julen@baerkarrer.chT: +41 58 261 50 00

With the valuable help of Fatemeh Fannizadeh, trainee.

Further Contact:

Saverio Lembosaverio.lembo@baerkarrer.chT: +41 58 261 50 00

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