Fwd: Macroperu Swiss glacier of bank secrecy is starting to crack

Swiss glacier of bank secrecy is starting to crack

By Haig Simonian

Published: February 23 2009 20:33 | Last updated: February 23 2009 20:33

Like a glacier, Swiss bank secrecy has loomed as a mighty, immovable presence for decades. But now, suddenly, the icy mass seems to be cracking under the pressure of regulatory climate change.

An avalanche of articles predicting the demise of bank secrecy has appeared since last week's $780m settlement between UBS and the US Department of Justice over allegations the world's biggest wealth manager helped rich US clients evade taxes.

Strict rules on client confidentiality have been a bedrock for Switzerland's success as a world financial centre. Discretion, good service, political and economic stability and a congenial location made it the repository of choice for despots and tycoons. Estimates suggest the country hosts about one third of the world's offshore wealth.

Now, however, the US authorities have declared war on tax evasion; Gordon Brown, the UK prime minister, has singled out Switzerland in calling for greater transparency, and Peer Steinbrück, the German finance minister, has attacked little Liechtenstein in a foretaste of a widely expected barrage on the Swiss.

New sanctions against "unco-operative" jurisdictions and tax havens – for which partly read Switzerland – will feature at the April meeting of the G20 economies. With the temperature rising, the ice must melt.

Does that mean well-heeled foreigners should start pulling their undeclared money out of Swiss banks? On the face of it, the sustained net outflows at UBS, which has hardly been out of the headlines over its difficulties with the US authorities, suggest some have already taken the hint.

But UBS is a special case. Its withdrawals have had more to do with clients' concerns about the group's long-term stability after $48bn of writedowns on toxic assets than sleepless nights about the tax inspector. Other Swiss banks, from Credit Suisse to smaller competitors, such as Julius Baer, have seen significant net new money. And the bigger cantonal banks, many enjoying state guarantees, that offer private banking services, have had a heyday.

Such data bear out suggestions that clients have few options. They could transfer funds elsewhere, with Singapore, Dubai and even Panama mentioned as new refuges. But none offers quite the merits of Switzerland, where annual visits to the bank can be combined with summer or winter vacations, medical treatment, or just checking out that finishing school. Moreover, even the more exotic financial centres will eventually come under pressure in an ever more transparent world.

But while the reports of the demise of Swiss private banking may be premature, it is clear that bank secrecy is undergoing a transformation. For a start, it should be understood that client confidentiality was never completely watertight. Over the years, the clam has been prised open – often with the approval of the Swiss – to achieve broader aims, such as securing double taxation agreements essential to the country's big industrial exporters.

Take the crucial distinction under Swiss law between tax evasion and tax fraud. The definitions may seem nuanced, but are crucial. In Switzerland, tax fraud is a crime, and, in such cases, the Swiss will provide judicial assistance to foreign tax authorities. By contrast, tax evasion is a civil offence, and, in this case, assistance would not be given. But the difference, which was always hard for foreigners to understand, has grown fuzzier. The double taxation agreement with the US, for instance, muddied the waters deliberately by referring to "tax fraud and the like".

Many Swiss bankers doubt the distinction can survive and believe that Bern will eventually have to provide full co-operation in suspected tax evasion. Liechtenstein seems already to have seen the light.

But the same bankers stress that such a change does not mean the end of bank secrecy. First, the concept, which is ingrained in Switzerland, will gradually be seen more like patient confidentiality for a doctor: inherent, but also potentially subservient to higher priorities. Second, a greater willingness by the Swiss to co-operate would not mean succumbing to "fishing expeditions" by foreign tax authorities trawling indiscriminately for data. Any request would have to be more specific. And finally, greater pressures on confidentiality for traditional "offshore" accounts will oblige Swiss banks to intensify the development of "onshore" activities in suitable locations.

So, it is true there is little future for the traditional private banking model of undeclared accounts, with no questions asked, for clients from relatively high tax countries such as Germany, France and the UK, where the authorities are stepping up their vigilance. Instead, the Swiss will rely increasingly on the local "onshore" networks being developed to take up some slack. Meanwhile, in jurisdictions such as Russia, much of the Middle East and parts of Asia, where domestic taxation is less relevant, traditional "offshore" Swiss accounts will remain valid.

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