From Switzerland with Love: International Tax Espionage

Tax administrators operating in different countries are rivals, in a sense: the interests of one country may run counter to the interests of another, and each wants the maximum share of a taxpayer's revenue. But Switzerland may have taken this rivalry to a whole new level—to the point that Germany has laid criminal charges against alleged Swiss agents.

In 2006, German tax administrators began paying employees of Swiss banks for records relating to accounts held by German customers who may have been evading tax. The ECJ has reportedly approved of Germany's practice as a legitimate method of combatting tax evasion. However, the Swiss government views the attempts to acquire the records as a violation of Swiss banking secrecy laws. It has issued arrest warrants (still outstanding) for three employees of a North Rhine-Westphalia (NRW) tax services office who authorized or arranged for the purchase of the records. By itself, the action would be evidence of a "frenemy" relationship between the two countries; however, it appears that the evidence to support these warrants may have been obtained by means that violate German law.

In April 2017, a Swiss man identified by German prosecutors as Daniel M. was arrested for espionage, having been accused of operating in Germany since 2011 with instructions to identify German individuals responsible for the purchase of bank records and the means by which they were able to make the purchases. Daniel M. apparently posed as an employee of a Swiss bank who had information to sell; the Swiss government commenced a sham investigation of Daniel M. for breaches of bank secrecy laws in order to make his claim appear credible.

In May 2017, Germany alleged that either Daniel M. or the NDB (the Swiss intelligence service) had planted an unidentified agent in the collections group of an NRW tax services office and had given that person instructions similar to those issued to Daniel M. The controversy is growing: in August 2017, German newspapers reported that German prosecutors had opened an investigation into three more individuals, all allegedly employed by the NDB, who were also suspected of spying on German tax administrators.

The arrests and investigations came after Germany and Switzerland had agreed to stop spying on one another. According to Swiss and German media reports from June 2017, the two countries signed a secret memorandum of understanding to this effect in January 2017, although neither government was willing to confirm the existence of the accord. While it was reported that all Swiss tax-related espionage activities had ceased by January 2017, the need for such an agreement to be negotiated raises questions about how extensive the Swiss spying operation might have been.

The maximum sentence for Daniel M. would likely be five years in prison. Interestingly, the corresponding offences under sections 16 and 17 of the Canadian Security of Information Act carry a potential life sentence.

In years past, the CRA has attempted to obtain access to Swiss bank records from non-Swiss foreign tax authorities. Fortunately for the CRA employees who are tasked with acquiring information relating to Canadian account holders, it does not appear that the CRA has been in direct contact with Swiss bank employees or has obtained information otherwise than through government-to-government transfers. Nevertheless, these CRA employees might want to rethink any plans to take a vacation in Switzerland.

H. Michael Dolson
Felesky Flynn LLP, Edmonton

Canadian Tax Focus
Volume 7, Number 4, November 2017
©2017, Canadian Tax Foundation