Austrians Keep Their Secrets

Changing banking laws is tricky, wherever it’s done. It affects nations, businesses and citizens – in fact, everything.

In Austria, the last big change was made in 1996, when it was decided that Austrian savings accounts (Sparbücher) could no longer be anonymous. By 2000, it was literally impossible to open a savings account without showing identification. And in 2002, to make it official, no withdrawals were allowed from residual anonymous accounts.

When it comes to keeping secrets, Austrians see little urgency to change. After European Union finance ministers met in Dublin, however, it became clear that time was of the essence.

 

Austria’s private parts

In the past, clarity in matters financial has not been Austria’s strong suit. Bank secrecy became useful with all the illegal money after the war. According to tax expert Werner Doralt, the banking sector profited more from it being in anonymous accounts than tucked into mattresses.

In 2003, EU member states agreed on measures to tax capital gains and "Austria agreed to the directive," SPÖ Finance speaker Kai Jan Krainer told the Austrian daily Kurier. Because of existing bank secrecy laws, Austria, Belgium and Luxemburg insisted on an exception. Now that Luxemburg bowed to pressure, Austria’s bank secrecy, alone, remains in force. But the government "can’t set conditions for something they already said yes to," Krainer stressed.

Currently, Austria does not deliver account data to foreign authorities. Instead, banks deduct taxes at the source (Quellensteuer) and deliver them to the Finanzamt (Revenue Office), without indicating the identity of the account holder to the party’s country of residence. This deduction is included in their income tax declaration.

A precedent was set in July 2006, that not every foreign financial criminal procedure merits a breach of Austrian Bank secrecy. Only an Austrian court can require account information, regardless of whether the account holder is Austrian or not, or whether or not they are residents.

Bank secrecy is anchored in the Austrian Constitution. Therefore, disclosure of information to any authority whatsoever (as is customary in Germany) constitutes a criminal offense. If authorities like the Austrian National Bank come across information to which bank secrecy laws apply, bank secrecy is understood as mandatory, an exercise of professional confidentiality.

 

Drama in Dublin

French finance minister Pierre Moscovici led the call for reforms in Dublin on 12 April, supported by Germany’s Wolfgang Schäuble, Great Britain’s George Osbourne and their counterparts from Poland, Spain and Italy.

Austria "will fight for bank secrecy," insisted finance minister Maria Fekter the next day, stressing that the country "is not a tax haven."

After significant pressure from Brussels and EU Commissioner for Taxation Algirdas Šemeta, Austria agreed in April to loosen the reigns on bank secrecy. But the country wishes to remain an exception on two fronts: the right to maintain special banking relations with Switzerland and to not report Austrian citizens’ accounts.

Commission pressure stems in part from hopes that Austria’s come-around would initiate discussions with Switzerland over the exchange of information. EU commissioner Šemeta stressed that the draining of other tax oases "should be another argument for Austria to make a move."

 

Fekter, Faymann, Fischer

In Dublin, Fekter complained of unfair treatment, citing tax havens like those in the British Isles and Gibraltar. "What applies to a small island (Cyprus) should also apply to the big island (Great Britain), for all areas where European laws, for instance British law, is exercised," she said, following a council session on 13 April.

A compromise for Austria – keeping bank secrecy for Austrian citizens but adhering to new regulations – would only be plausible if bilateral agreements made with Switzerland and Liechtenstein remain intact, she went on, stressing that data swaps alone were not an efficient way of fighting tax evasion. "A withholding tax (Quellensteuer) is a much more efficient instrument," she said.

After many delays, on 27 April, Chancellor Werner Faymann announced that Austria would loosen its bank secrecy regulations. "We want to promote an outcome in the interest of fighting corruption in Europe," he told the Austrian national broadcaster ORF, adding that it would be more harmful for Austria to have a reputation for protecting swindlers.

After much debate among coalition members, the government presented a preliminary proposal on 26 April, which provides for information exchange on the accounts of foreigners but ensures that bank secrecy for Austrian citizens stays intact. This solution gained the support of President Heinz Fischer, who called it "a contribution to greater justice."

 

Is Austria holding back the EU?

The EU is also in the process of forming a banking union. While Germany stressed the need for a single overseer, namely the European Central Bank (ECB), it conceded that supervision could go forward without a unified change in monetary policy. Minister Schäuble also noted that setting up EU institutions to share the burden of restructuring and closing banks will require changes to the EU treaty. This could however affect the legal basis of the banking supervision system once it goes into effect in 2014, regardless of any unified monetary policy.

The proposal calls for the ECB to begin supervising eurozone banks.  Austria has supported Germany’s call for a change in the EU treaty to allow for the banking union, which raised questions about how fast it can be implemented.

Austrian Financial Market Authority (FMA) co-head Helmut Ettl told Reuters in mid-arpil that the "project gets its legal basis in July of this year and the whole thing goes operative at the middle of next year at the latest." Currently the FMA and The Austrian National Bank supervise the seven Austrian banks that will be directly affected by the ECB supervision: Erste Group, the Raiffeisen Zentralbank group including listed unit RBI, BAWAG PSK, Raiffeisen banks in Upper Austria and Lower Austria/Vienna, Hypo Alpe Adria, the Volksbanken group, and Bank Austria via the Italian parent UniCredit .

Austria has therefore shown a great interest in promoting EU-wide banking oversight, but not of depositors.

Šemeta sees Austria’s position as vital to progress on an EU level. "We have two important dates coming up: The council of finance ministers on 14 May and the EU summit on 22 May," he said, stressing the need for "strong political pressure on Austria to make a decision to move forward. Especially in light of how Luxemburg has moved."

Regardless of the outcome of the talks in May, Austrian politicians appear to understand the need for unified transparency policies to prevent corruption.

If the Alpine Republic wants to be an exception, it may need to abandon its own tradition of leisure when it comes to fiscal decision-making. After all, it’s not just private Sparbücher on the line this time, but the future of the eurozone.