Further efforts needed to curb illicit flows, Switzerland told
More should be done to stem the flow of “dirty money” through the Swiss financial sector despite the progress made on this front, a UN rights expert has suggested.
by Kanaga Raja
GENEVA: While the Swiss federal government has undertaken several efforts and achieved progress in curbing illicit financial flows in recent years, there are several areas in which there is room for improvement in the fields of accountability, regulation and supervision of the Swiss financial market.
This was the assessment of Juan Pablo Bohoslavsky (of Argentina), the UN Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, at the end of his first official visit to Switzerland.
“Progress has been achieved, but further efforts are necessary to make sure that dirty money stemming from tax evasion and corruption is not entering the Swiss financial market,” he said in a UN news release issued on 4 October.
“Illicit financial flows undermine the rule of law and human rights. In particular, they reduce the ability of developing countries to finance essential public services, such as healthcare, education and basic social security schemes,” the rights expert added.
“Despite significant efforts in adopting legislation and improving procedures to detect suspicious transactions, the risk that the Swiss financial market is used for money laundering remains,” said Bohoslavsky.
In a separate end-of-mission statement also released on 4 October, the rights expert pointed out that illicit financial flows are financial transfers of an unlawful nature. These can be, for example, funds deposited offshore in order to evade taxes, which deprive states of needed resources to ensure the realization of rights such as to education, food, housing and healthcare. The assets can also stem from other criminal activity, such as corruption, misappropriation of public funds, trafficking of persons, drug trafficking or illegal arms trade.
“As the so-called Panama Papers scandal has underlined, more prone to siphon money abroad are the rich, corporate and political elites and their entourage. Among them there are also human rights abusing rulers, the Abacha’s, Marco’s, Duvalier’s and Ben Ali’s of today [sic],” said the rights expert.
“It is obvious that States have to make concerted efforts to make sure that criminal conduct and robbing people of public resources does not pay and that stolen assets are returned to their legitimate owners.”
It has been estimated that the total volume of illicit financial flows leaving developing countries amounts to over $1 trillion per year. This is more than 10 times the development assistance provided to these countries.
While illicit financial flows affect all countries, including European countries that struggle to fund their public health and social security systems, their impact on the enjoyment of human rights is particularly severe in low-income countries, which are struggling to fund essential public services.
Role of Switzerland
The Independent Expert noted that the Swiss financial centre is a leading global location for cross-border management of private assets, with a market share of 25%. Its financial sector contributes 9.1% to the GDP and assets held in Swiss banks by non-resident custody account holders amount to CHF2.92 trillion.
Switzerland is also a hub for commodity trading, with an estimated global market share of 35% for trade of crude oil, 50% for sugar and about 60% for coffee and metals such as zinc, copper and aluminium. The commodity trading industry closely depends on the services of local banks which provide financing.
“It is my view that Switzerland can play a key role in curbing illicit financial flows and can also become a frontrunner in integrating human rights in the public and private financial sector,” Bohoslavsky said.
According to the rights expert, his general impression is that official policies in relation to illicit financial flows have seen a positive change over the years. In the 2030 Agenda for Sustainable Development, all States have pledged to significantly reduce illicit financial flows by 2030.
Since 2008, many initiatives have been undertaken in Switzerland to restore the reputation of its banking sector, which has suffered under revelations that banks domiciled in the country assisted foreigners in tax evasion or lacked adequate due diligence procedures to prevent politically exposed persons from using its jurisdiction to hide stolen assets.
Before 2009 there was widespread cross-border tax evasion by foreign nationals from various jurisdictions facilitated by banks operating in Switzerland. The data relating to tax evasion by US taxpayers is revealing in itself, said the rights expert.
In 2009 UBS reached a $770 million settlement for facilitating tax evasion of US taxpayers and by August 2013 US authorities had started investigations against 12 additional Swiss financial institutions.
By the end of January 2016, 76 further banks operating in Switzerland had entered into non-prosecution agreements because they had reason to believe that they had committed tax-related criminal offences under the law of the United States in connection with undeclared accounts of US residents. The list of banks includes Swiss branches of many well-known international commercial banks. These non-prosecution agreements include statements of facts providing details about how the respective banks or client relationship managers working for them had organized tax evasion schemes for their clients.
Under the so-called “Swiss bank programme”, respective financial institutions would receive a penalty based on the value of the assets held in undisclosed accounts. In total, penalties have amounted to more than $5.5 billion.
Yet as the Chief Executive Officer of the Swiss Financial Market Supervisory Authority (FINMA) pointed out in April 2016, despite significant efforts in adopting legislation and improving procedures to detect suspicious transactions, the risk that the Swiss financial market continues to be abused for the purpose of money laundering is not fully over.
“This is in particular highlighted by the involvement of several Swiss banks in the Petrobras corruption scandal [in Brazil] and in the suspicious cash flows linked to the Malaysian sovereign fund 1MDB,” said the Independent Expert.
Particularly troubling is the fact that these events are not from years ago – the money was still accepted until quite recently – that evidence points to very obvious cases of corruption and that the sums are vast with individual transactions running into hundreds of millions, which should have raised red flags in the concerned financial institutions.
“Media reports about Swiss financial institutions suspected to be involved in facilitating tax evasion or being used for money laundering have continued to appear in 2017,” said Bohoslavsky.
Returning stolen assets
Both the effectiveness and speed with which stolen assets can be returned are of paramount importance, he said. In addition, it is important that sanctions on those financial institutions that have failed to exercise due diligence are imposed in a timely, transparent and proportional manner in order to make sure that neither robbing funds nor hiding them pays off.
Bohoslavsky welcomed the impending participation from next year of Switzerland and its financial institutions in the Automatic Exchange of Information for Tax Purposes (AEOI) with 38 states and territories. However, he expressed concern that “the new system could remain an ineffective tool for curbing tax evasion in certain developing countries that lack the technical requirements to participate in the new system.”
He also noted that the commitment of the Swiss government to curb illicit financial flows is underlined by its efforts to freeze and return illicit assets deposited in its jurisdiction belonging to authoritarian rulers. Over the last 30 years, Switzerland has returned $2 billion of illicit assets pertaining to politically exposed persons and frozen suspicious assets valued at hundreds of millions of dollars.
“It is my impression that there is a clear political will in Switzerland to return stolen assets to the legitimate owners. This is also demonstrated by technical assistance that Switzerland has offered to countries that have requested the return of stolen assets,” the rights expert said.
“Indeed, I would encourage other countries that have received stolen assets to follow the Swiss example and adopt similar policies and legal regulations to facilitate their freeze and return and report annually in public about the amounts frozen and returned.”
A balanced and nuanced role of the state is of paramount importance to ensure accountability, transparency and fairness in the financial sector when dealing with human rights abuses and illicit financial flows, said Bohoslavsky. The supervision of Swiss banks through self-regulatory norms set by the Swiss Banking Association and regulation by FINMA is therefore crucial.
The rights expert said investigations of recent cases show that the majority of banks fulfil their duties under the Swiss Anti-Money Laundering Act, but a minority do not. In the Petrobras case, for instance, FINMA has revealed that 75% of Swiss banks involved were in conformity with Swiss legal prescriptions in applying their money-laundering rules. However, it noted that for the remaining percentage of banks there were “concrete indications that the measures those banks had in place to combat money laundering were inadequate”.
“It is my view that the staffing, resources and powers of FINMA need to be proportional to the size of the Swiss financial market and the volume of assets managed by its financial institutions. FINMA should have sufficient capacities to supervise all banks and financial intermediaries adequately irrespectively of their size,” Bohoslavsky suggested.
He also pointed out that criminal sanctions in Switzerland for assisting foreigners to evade taxes are weak. “While assisting a foreigner to steal some few hundreds CHF is a crime in Switzerland, assisting a foreigner to ‘steal’ from a foreign treasury a quarter of a million within one year, is not punishable within Switzerland.”
The rights expert also noted that the government presented to the Swiss electorate a comprehensive corporate tax reform package in 2016 (USR III) which included measures to bring Swiss corporate tax regimes in line with OECD standards to combat base erosion and profit shifting (BEPS) of multinational companies. The new law would have outlawed certain tax reduction regimes that are no longer accepted internationally, replacing them with patent-box regimes and other avenues for tax reduction.
In February 2017, the government proposal failed to reach a majority during a public referendum. A few weeks ago, the Federal Council published a revised tax proposal 17 for public consultation with the aim of ensuring that Swiss corporate tax regimes will become compliant with OECD standards.
“I continue to be concerned about the potential human rights impact of the revised tax reform proposal 17 in other countries,” Bohoslavsky said.
Essentially the tax reform proposal 17 aims to keep taxation of multinational corporations in Switzerland at low levels to make placing headquarters in Switzerland attractive. While this undoubtedly brings benefits in the form of tax receipts for the country and employment opportunities, it should not be forgotten that harmful tax competition between countries has resulted over the last decades in a dramatic reduction of corporate tax burdens of large corporations worldwide and contributed to the increase of unsustainable public debt in the developing world.
“Therefore, I would like to call upon the Swiss authorities to carry out a social and human rights impact assessment of the tax reform package, which should include an assessment of how the reform will impact on tax revenues available for the realization of economic and social rights within Switzerland and for individuals living abroad, in particular in developing countries.”
UN Guiding Principles
Bohoslavsky noted that Switzerland has been a strong supporter of the process that resulted in the adoption of the United Nations Guiding Principles on Business and Human Rights. “In December last year, the Government adopted a National Action Plan for implementing the Guiding Principles in Switzerland after a consultative process with the private sector and non-governmental organizations; an important step that I salute.”
The National Action Plan endorses the concept of a smart mix of mandatory and voluntary commitments; however, only a few of its action points refer to any regulatory measures to improve business respect for human rights.
While the National Action Plan is rather comprehensive, it regrettably does not include particular action points in relation to the financial sector of Switzerland, except mentioning the important role played by the Thun Group of Banks, an informal network of 11 major banks aimed at exchanging good practices in implementing the Guiding Principles in the financial sector of large corporate banks.
The rights expert welcomed the leading role of UBS and Credit Suisse in setting up the Thun Group of Banks with the aim of engaging with peer international banks in a discussion and exchange of information on human rights due diligence. However, he shared the concerns voiced by the UN Working Group on Business and Human Rights and other stakeholders that one of its recent discussion papers would unduly limit the responsibilities of banks for preventing and mitigating human rights impacts to which they are directly linked in the context of their client relationship.
He therefore welcomed the fact that the Thun Group recently invited human rights experts and non-governmental organizations to its annual meeting, and hoped that concerns expressed by human rights experts will be taken into account.
“Furthermore, I would like to encourage the Government, Swiss Banking, the Association of Swiss Private Banks and other professional associations to consider developing in dialogue with non-governmental organizations and human rights experts a banking sector agreement on responsible business conduct in Switzerland.”
The Dutch Banking Sector Agreement may be a source of inspiration in this context, the rights expert said, adding that in his view there is a need to develop a common understanding and more consistency in what it means to include human rights due diligence in the financial sector.
“In my view, the secret loan scandal in Mozambique pushing the country close to bankruptcy underlines the real need to incorporate the Guiding Principles [on] foreign debt and human rights and UNCTAD’s principles for responsible borrowing and lending in such sector agreements.”
Bohoslavsky welcomed the fact that an increasing number of pension funds in Switzerland have adopted investment policies that include some human rights criteria, including the public pension funds of the cantons of Geneva and Vaud. In December 2015, seven public pension funds managing investment assets totalling over CHF150 billion founded the Swiss Association for Responsible Investments (SVVK-ASIR). The pension funds include the BVK (Zurich canton’s civil service pension fund), compenswiss (AHV/IV/EO compensation fund), comPlan, the Swiss Post Office pension fund, the Swiss Federal Railways pension fund, the federal pension fund PUBLICA and Suva.
In total, the volume of assets managed in Switzerland following sustainability criteria has significantly increased in recent years. A market study covering 41 Swiss institutional investors indicates that sustainable investments reached $266 million in 2016.
Violation of human rights was the most important exclusion criteria of asset managers, followed by violation of labour rights, corruption and bribery and disrespect for the environment.
“Private Banks that have specialized in wealth management can similarly integrate human rights approaches in their asset management strategies and in financial products offered to their clients,” said the rights expert.
For example, the private bank Lombard Odier excludes, as a general policy at group level, any investments involved in the production or distribution of controversial weapons, including biological weapons, chemical weapons, anti-personnel mines, cluster weapons, depleted uranium and white phosphorus. It is in particular noteworthy that it has also banned investments in financial instruments such as futures, options, swaps, indices and exchange-traded funds directly linked to “essential food commodities” such as wheat, rice, corn and soybean.
Switzerland has adopted a human rights policy aiming for coherence and for the protection of human rights at home and abroad. Its government expects that private financial institutions headquartered in Switzerland respect human rights wherever they operate and that they exercise human rights due diligence throughout their business and client relationships.
In recent years, the federal government has undertaken several efforts and achieved progress in curbing illicit financial flows which undermine the rule of law and the enjoyment of human rights in Switzerland and in foreign countries.
“I believe, however, that it is necessary to integrate more systematically human rights considerations into financial policies of public and private institutions based in Switzerland,” said Bohoslavsky.
First of all, there is a legal obligation to do so. Second, further embedding human rights in financial policy would enhance the reputation of the Swiss financial market. It would also give further credibility to its human rights policies and to the aim of making Switzerland’s financial market a leader in sustainable finance.
“Finally, and this is in my view the most important aspect, it would improve the protection and enjoyment of human rights in Switzerland and abroad,” said Bohoslavsky.
“As outlined above, I have identified several areas in which there is room for improvements in the fields of accountability, regulation and supervision of the Swiss financial market and hope that my recommendations will be duly considered.”
Making further efforts to implement human rights in the financial field should be considered an evolving duty as asymmetric power relations undermining human rights operating underneath financial markets need to be continuously re-composed, said the rights expert. (SUNS8548)
Third World Economics, Issue No. 647, 16-31 August 2017, pp12-15