2.51 Thomas Cottier/ René Matteotti, The Treaty Request Agreement between the Swiss Confederation and the United States of America of August 19, 2009 (UBS-Agreement): Principles and Domestic Applicability, Legal opinion for the Federal Office of Justice of the Swiss Government
In view of the function of the UBS case as a case study in this Anthology and in view of the complexities of the case with respect to factual and policy matters the background of the case and the opinion at hand have to be highlighted.
The text at hand, which is a legal opinion for the Division of Justice of the Swiss Justice Department, deals with the Principles and Domestic Applicability in the Treaty Request Agreement between the Swiss Confederation and the United States of America of the 19th August 2009 (UBS Agreement) in the Causa UBS. The opinion was written for the Federal Office of Justice in the aftermath of conclusion of the treaty on 19th August 2009. The treaty was the result of the negotiation and solution of a potential conflict of jurisdiction between the United States and Switzerland after the IRS initiated a civil law enforcement proceeding in the Federal District Court of Miami of the John Doe Summons requesting UBS to produce more than 50,000 identities of accounts in the US court. The treaty negotiation in turn has been the result of a criminal law investigation against UBS by the Justice Department in connection with UBS asset managers blatantly having violated American law on American territory. This criminal law investigation was temporarily halted by the so-called Deferred Prosecution Agreement, in which UBS acknowledged that its asset managers had seriously violated US law, that UBS would discontinue the transborder of a banking business with American clients, that UBS was subjected to far-reaching compliance programs and UBS had to pay a fine of more than 600 million US dollar. As a condition for the conclusion of the Deferred Prosection Agreement, the United States Government requested and forced Switzerland to request UBS to disclose 255 identities of accounts to the IRS. The Federal Council has not done this on the basis of emergency powers; the latter deferred to FINMA, the supervising authority of banking and insurance, to request UBS to disclose those identities to the IRS, which FINMA did.
These developments were brought about as part of a pervasive business model leading to American citizens evading American taxes with the help of and by the use of Swiss banks. Approximately 25 percent of private assets held by American individuals are being held in Swiss bank accounts so as to profit from Swiss bank secrecy provisions. The developments from a United States policy and legal enforcement perspective became necessary because the United States were highly irritated that the Swiss tax authorities in 2008 did not comply with a request for the legal assistance for 300 identities of accounts in due course. The criminal law investigations by the Department of Justice led to airing of extreme threats vis-à-vis UBS, to indict the bank and to recall the banking licence, which allegedly would potentially have led UBS to bankruptcy. UBS at that time was one of the international banks most adversely affected by the financial crisis of 2008.
The Summons enforcements proceeding were anticipated based upon a carve-out in the Deferred Prosecution Agreement. The action had been started in the Federal District Court of Miami one year earlier. Immediately after the conclusion of the Deferred Prosecution Agreement, the IRS initiated the enforcement proceedings against UBS. Within the Federal Council this development led to a change of competence from the financial department to the judicial department in view of the fact that the John Doe Summons proceeding was viewed by the Swiss government as potentially leading to a conflict of jurisdiction between the two countries.
The Opinion of professors Cottier and Matteotti had to prepare the legal grounds for potential legal actions of UBS bank clients in Switzerland. The UBS agreement provided for a 360-day period after the presentation of a request for legal assistance of the IRS to proceed with 4,550 requests for legal assistance, the recourse to the Federal Administrative Tribunal being reserved. Switzerland had negotiated an international treaty under international public law and was under the international public law obligation to perform. These extraordinary international-treaty-based mass-legal-assistance-proceedings requested immediate financing and an increase manpower of about 100 persons with about two weeks’ notice. The opinion of professors Cottier and Matteotti supported the Federal Government’s position in the expected cases before the Federal Administrative Tribunal.
The opinion deals with the extension of the UBS agreement of legal assistance under the heading of the wording of the Double Taxation Treaty “Tax fraud and a like” to tax evasions amounting to Steuerhinterziehung. The opinion argues that the allocation of powers in matters of foreign policy is such that the Federal Council has the constitutional and legal power to conclude this treaty and that it should be interpreted not based upon a domestic law and a traditional tax law based interpretation but rather upon international public law applying the unified concept of the general principle of legality emanating from the Swiss constitution. The Federal Administrative Court did not follow this opinion. The reader may revert to the text of Thomas Cottier, in which in the afterword he addresses the relevant fundamental issues of law and writes in retrospect based upon lessons learnt.
Professor Thomas Cottier is a full Professor of European and International Economic Public Law at the University of Bern, and is the director of the World Trade Institute. Cottier has an international academic education at the Universities of Cambridge (United Kingdom) and Michigan at Ann Arbor (United States). He has experience in legal practice in the function of Deputy Head of the Swiss Office of Intellectual Property and as a negotiator for Switzerland in the GATT- and WTO process. As an international scholar he is part of a small group of leading specialists in international economic law in the world. René Matteotti is a Professor of Swiss, European and International Tax Law at the University of Zurich. He is the editor in chief of the Journal Archiv für Schweizerische Abgaberecht. He closely collaborated with Cottier on scientific and teaching matters.
The legal opinion of professors Cottier and Matteotti contains the following executive summary:
“The Agreement between the Swiss Confederation and the United States on the Request for information from the Internal Revenue Service of the United States regarding UBS AG, a cooperation established under the law of the Swiss Confederation, signed and entered into force on August 19, 2009 (UBS Agreement), was properly concluded by the Swiss Government under its constitutional and legal authority. It is subject to the principle of pacta sunt servanda and to be implemented by federal authorities. Decisions taken under the Agreement are subject to full judicial review under Article 190 of the Swiss Constitution. The UBS Agreement is self-standing, partly completing, partly amending the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Income of October 2, 1996, the Protocol, and the Mutual Agreement of January 23, 2003 regarding the administration of Article 26 of the Treaty. The relationship of the UBS Agreement to preceding instruments is defined in accordance with Article 30 para. 3 of Vienna Convention on the Law of Treaties. The UBS Agreement, being part of a settlement of a particular dispute, precedes these instruments in terms of lex posterior and lex specialis. Determinations, in particular on tax fraud and the like, need to be made on the basis of the UBS Agreement, and other instruments are to be taken into account only to the extent that they are compatible with the UBS Agreement. Authorities are obliged to construe these provisions in accordance with methods and principles of interpretation of Article 31 Vienna Convention, based upon the text, context and legitimate expectations. The UBS Agreement is suitable for direct effect, in particular the criteria established by the Annex, and thus is in a position to form the basis of specific determinations. It does not amount to a prohibited retroactive effect. Domestic procedures are based upon the UBS Agreement, the 1996 Treaty and internal regulations that are found to be compatible with principles of delegation of powers under the Swiss Constitution. Finally the Agreement does not conflict with obligations of UBS to inform clients about their potential obligations under Sec. 18 USC § 3506.”