A French version was published at feirwon.blogspot.com on August 12, 2009.
I propose that the first song of the summer is: "Everything is going very well, Madame la Marquise." The Luxembourg people, lying on the beaches of Mallorca, only have one fear: that swine flu will fall on their heads.
Their resting is well deserved after several months of worrying about their fountain of wealth, the Luxembourg financial center, which feeds their well-being. It is in some way the warrior's rest, a reference to my earlier article about Luxembourg’s two wars. The first war is over. We lost it, as did all our allies.
What about the second war? We know that in our good old Europe it usually takes some time to rebuild a new generation of infantrymen. But in this case, this no longer true. We don’t even need as much time as to let the barrels cool down. We don’t have to rebuild a generation, there were no deaths: there were only losses. This means that the victorious veterans, now uniquely experienced, may restart fighting right away, because all of their objectives were not achieved during the first war. Could the oracle that predicted two wars be fulfilled so quickly, as at the opening of the Luxembourg “Schouberfouer”?
For sure, the jammed highways for the return from vacation will give us a flavor of war and remind us of the exodus of people fleeing the German invasion May 1940. Our ally, Switzerland came already under attack these days from Washington. The very experienced U.S. veterans Lawrence Summers, Tim Geithner and Barney Frank (Chairman, House Financial Services Committee) have more than one trick up their sleeves when it comes to repatriate millions and billions, as the Obama Administration intends to do and has to do. Even if Switzerland would recall the papal guard to defend that other sanctuary, the Swiss bank secrecy, the move would be futile.
One could however feel a great determination among the losers of the first war, after all was over. In the future, they would not yield one single inch. They would fight by the combat method of the firm defense here and now, in the trenches! These prospects inspire the choice of a second summer hit, by Georges Brassens in this case:
"Colonel, the one I prefer
Is no doubt the first World War "
Using this martial language is not because of a personal preference. It is rather because of the recognition of a fact during the first assault on tax havens these past months: a quasi-war was fought with the de facto suspension of an entire section of international law. No need for a Geneva type Convention, because no prisoners were taken.
What Switzerland is currently experiencing is indicative of the things to come. Like every war, this war for the substance of tax havens, that is their wealth, began like all wars, with a single first shot.
This shot was fired already a year ago in the case of UBS employee Bradley Birkenfeld. He was arrested in Florida in 2008 for his systematic support of tax evasion schemes for his U.S. clients and for forgery of "Qualified Intermediary" (QI) documents. UBS is a signatory of the QI status. The QI agreement imposes an obligation on the bank to report all US revenues of U.S. customers to the IRS. From this point on, UBS got gradually entangled in the regulatory and legal net that it made great efforts to ignore.
It is surprising that a world-class bank of that size can get so deeply into hot water. UBS has indeed known other dangerous episodes with the US Justice Department and U.S. regulators. Let’s just recall the case of the shredding of Holocaust records, in which the bank came close to losing its U.S. banking license. It got off the hook after agreeing to pay compensations in excess of $1 billion to victims of the Holocaust together with Crédit Suisse. Is this the result of arrogance or of an internal culture of mutual reinforcement, that got the proverbial donkey dancing on ice? The gradual treatment of suspicious activities with benign neglect finally let the bank sink into criminal activity, at least in terms of U.S. law, resulting in sanctions and condemnations.
Meanwhile the bank has received a new penalty of $ 780 million related to the case of tax evasion and Bradley Birkenfeld. UBS was actually forced to violate Swiss bank secrecy laws by delivering 252 customer names in order to appease the American appetite. Churchill once said that it is futile to feed the crocodile, hoping to be eaten last. The crocodile indeed came back and requested 52,000 more names. The “Firm Defense” cracked at the first rumblings. The Sovereign Swiss Confederation had to weigh in, threatening to seize all information from the bank. It had to agree to the de facto suspension of international law caused by a conflict of law and its replacement by the test of political wills and strength. Switzerland has thus committed its only strategic reserve, its sovereignty, for a glorious result in its own description, in reality however a catastrophic result for its future as a tax haven, with consequences that are not yet to be fully overseen. As for example, 52,000 potential lawsuits against the bank for abuses of all kinds.
Instead of 52,000 names, Switzerland does deliver "only" about 5,000. Is this a victory? Yes, a total one for the United States. Knowing US practices, these 10% of names are likely to represent 90% of US deposits at the bank. But most importantly, the release of these 5000 names will appear as the equivalent of the Hiroshima bomb. Switzerland has been reduced to a prohibited area for any U.S. bank customer. U.S. customers rush for the exits and go beg for forgiveness to the IRS. Worse, US clients are now considered as toxic. No Swiss bank wants them anymore, as some American friends who work in Switzerland confirmed. They have all the pain in the world to maintain at least one bank account there for their daily needs.
So it is in fact a political solution that emerges after a negotiation between two states, and Switzerland had to yield to the stronger side. Yet it must be remembered that Switzerland in this negotiation had at least one good card to play: the fact that it represents the United States diplomatically to all the "bad guys" of the planet with whom the U.S. has no direct relations.
Alas, my dear Georges Brassens, we now have proof that World War One, the one known for its firm defenses in the trenches, the static one, is not the one we should prefer. We must revert to something else, for there will be battle. One cannot appease the crocodile.
“Give me a lever long enough and a place to stand and I'll lift the Earth” said Archimedes. “Give me a Bradley Birkenfeld and UBS, and I will lift bank secrecy,”could say Larry Summers. This lever is a combat method that will be repeated in the future with other tax haven jurisdictions, up to the point of exhaustion.
But by the way, while on vacation, if you were passing by the Brandenburg Gate, the Arc de Triomphe or the Lincoln Memorial, listen to what Steinbruck, Sarkozy and Barney Frank are weaving for the near future. One of them would increase the pressure on tax havens by creating a list of his own, the other will have his own artillery aiming at his own troops, the French banks, located in jurisdictions with bank secrecy, and finally the last one considers another list of judicial and regulatory havens, that the United States would establish and back it up with sanctions.
These are the threats, with the conclusion that it will take something else for Luxembourg to do than a shortsighted statement about the firm defense of banking secrecy, or the obsessive repetition that "everything is fine Madame la Marquise." An in depth review of past policies is really of the essence. But let’s listen to a Prophet from elsewhere:
"There can be no more taboos, given our experiences of the last two years.” Philipp Hildebrand, Vice Chairman, Central Bank of Switzerland.
Will Luxembourg finally find its Hadubrand, who in the medieval saga is the (spiritual) son of Hildebrand, and put an end to the taboos?
Egide Thein
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