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  1. Wealth
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June 4, 2009

Tax Special: Suisse and Sour

By Spear's

Josh Spero on the future — shamed, chastened, battered and bruised — of Swiss banking

O f all the obvious Alpine metaphors you can choose to describe the Swiss banking sector’s current crisis, ‘avalanche’ would probably come pretty high. From the broadside of the G20 on banking secrecy to the populist roars of Senator Carl Levin against UBS to the global recession and scandals dragging down banks national and cantonal, all conceivable problems seem to have fallen on Switzerland at once.

Switzerland’s formerly proud banks have been decapitated: within a few weeks, UBS lost both its CEO and its chairman and Credit Suisse its chairman. (Tellingly, UBS replaced CEO Marcel Rohner with Credit Suisse’s former CEO Oswald Grübel.)

Board members are playing musical chairs and the lower ranks are starting to look emaciated: UBS is laying off 8,700 workers after a £1.2 billion first-quarter loss, Union Bancaire Privée has made an unspecified number of redundancies, Banque Syz its first ever redundancies. Senior executives have been jumping before they are fired or their company disintegrates. 
The Swiss government is clear that the problems facing Switzerland have cross-pollinated, making a total crisis out of several separate situations. ‘They’re not directly connected but psychologically there are connections, that’s clear,’ says Roland Meier, a spokesman for the Swiss finance ministry.

Although you can dispute the idea that Switzerland’s problems are unrelated, Meier is not wrong that the popular consciousness is seeing an all-consuming blaze where in fact there are just several discrete raging fires. 

Early gambits in this long game show accounts being closed down in droves, with a consequent loss of clients, but the longer term promises structural change and a change of attitude on the part of banker and client.

There is — despite protestations of normality and a counter-offensive — no doubt that Switzerland will be affected by its travails: the questions are only how deeply they will cut and how different Switzerland’s banking landscape will be. 

One could say that it has recently all gone terribly wrong for Switzerland, but it never really seemed to go right, at least in public. The era of banking secrecy started under poor auspices.

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In 1934, after an earlier police raid on a Swiss bank in Paris which uncovered the undeclared accounts of the Peugeot brothers, government ministers and clergy, the Swiss were moved to create their system of numbered accounts for the next time the cops came calling. ‘Don’t know who owns account 89-0445324? Can’t help you.’ 

The best perspective on Swiss banking activity during the war came half a century later: in 1997, the American government estimated that Swiss banks held $305–$409 million in Nazi gold, and in 1998, Swiss commercial banks agreed a $1.25 billion settlement against claims of withholding looted money.

The remark of a former president of Switzerland that calls for compensation were ‘blackmail’ seemed to typify the attitude which had kept blood money sloshing around Switzerland for so long. 

Between the war’s end and that war-reckoning, Switzerland became a lurid playground for global scandals; at some point every dictator was said to have stashed his country’s GDP in Geneva. Evita Perón, Fulgencio Batista, the Shah of Iran, Haile Selassie, Baby Doc Duvalier, Manuel Noriega, Sukarno: it’s a nefarious edition of Who’s Who that encompasses all these. This is not to forget the Japanese fraudsters, Colombian drug lords and Algerian terrorists. 

Under the radar, Switzerland was the destination of choice over the past 60 years, especially for new money from the Middle East and Russia. Its political, economic and legal stability are attractive, while the wild fluctuations in inflation and taxes elsewhere, as well as terrorist threats in countries such as Italy and Germany, drove capital to Switzerland.

Switzerland has never found favour with America, with regard to Nazi gold, banking secrecy and tax evasion, although it is liked by Americans, as Carl Levin’s investigations have revealed. 

Even if Switzerland was once the land of a thousand secrets, each one concealed in its own vault, some never to be discovered (imagine the gallery Swiss bank vault paintings could create), it has never stood for anything decent in the public imagination. Now it is forced to bare its treasures, denuded of its confidential cloak. 

Throughout all the recent coverage, one issue has had an ironically high profile: banking secrecy, as it is known in the West, or banking confidentiality, in the less loaded Swiss term. Rather than the application of diplomacy or subtlety, the G20 nations took a hammer to banking secrecy, announcing in its communiqué that ‘the era of banking secrecy is over’.

In case an inattentive world had missed the point, it was the first thing Gordon Brown and Barack Obama said at their press conferences. To reinforce this with that familiar tool of global politics, shame, the Organisation for Economic Co-operation and Development simultaneously issued its grey list of non-compliant nations; Switzerland was holding up the bottom. 

Switzerland had pre-empted this, of course: the government had said on Friday 13 March (if not previously an ominous date in the Alps, surely one henceforth) that banking secrecy was to be relaxed. The Swiss have given up their reservation about Article 26 of the OECD Model Tax Convention, which permits the exchange of information after a specific and justified request. 

In certain ways, this is a natural development from the introduction of the EU Savings Tax Directive, which created a withholding tax on interest earned by foreign nationals, although that was pooled and thus anonymous.

Jay Krause, co-head of Withers funds, investments, tax and trust group, agrees: ‘Clearly [the financial crisis] has added a snowballing effect to international pressure. The EU Savings Directive was one aspect of dealing with banking secrecy issues, but there have been various OECD initiatives going on for any number of years.’ 

There are no two ways about this change: it destroys the very principle of Swiss banking secrecy which has endured since 1934. A press release from the Swiss government the next day said that ‘banking secrecy remains intact’, splitting hairs about resident and non-resident foreigners.

Raymond Baer, the eminent Swiss banker and chairman of Julius Baer Holding, said it was intact, although he conceded that Switzerland had sustained ‘enormous damage to its image as a state ruled by law’. The bankers doth protest too much. 

The lawyers have got it right: Jay Krause calls it a ‘significant modification’, and Charles Gothard, head of International Tax and Trusts at Speechly Bircham, says that Switzerland has undergone a ‘seismic shift’, which seems to be closer to the mark, as headlines about Swiss banks closing their international arms or facing a tidal wave of outflows concur. 

The Swiss idea of just what they’re doing is curious, given its uncomfortable spin of independence: ‘The attacks [of the G20], we’ve taken notice of them. That’s history. We’re going our own way by adopting the OECD standards,’ says Meier.

Talks have started with the USA, Japan and Poland on double tax treaties. Meier deflects attention from Switzerland: ‘Yes, of course Switzerland has changed, but changes have taken place in every country over the past six months.’ 

Opponents of banking secrecy see a blow against tax havens as a success for the world. Amid an answer to a question about tax havens and smokescreens which Spear’s WMS asked Stephen Timms MP, financial secretary to the Treasury, at the G20 Summit, the minister added that the global crisis had been made worse by places such as Switzerland.

‘The reason why the value of some assets hasn’t been understood is because they’ve been hidden away in tax havens,’ he said. ‘This opacity has contributed to the severity of the recession.’ Nor did Timms miss the opportunity to declare that ‘the era of banking secrecy is over’, putting Switzerland squarely in the frame. 

One reason cited in favour of Swiss banking secrecy is the liability of the rich from certain areas — Central and South America, Russia and the CIS. Jay Krause says: ‘It’s a matter of life and death if your account information falls into the wrong hand. We do have clients in Latin America whose family members have been kidnapped because people got  hold of their bank information.’ 

Not everybody buys this. Richard Murphy, director of Tax Research and an anti-tax-haven campaigner, says this argument is ‘the biggest load of rubbish. The person who has enough money to put it in Switzerland or Liechtenstein advertises it in a lot of other ways: they live in a big house, they drive a Mercedes.

This is the red rag for kidnappers. Swiss banking secrecy was created in 1934 for the reason of tax evasion.’ It seems as if this side of this side of the argument has won the day. 

Nor do the Swiss seem thoroughly prepared for this brave new world. Gothard was in Geneva giving a speech at a seminar when he was asked about the Friday the 13th announcement: ‘People are now assuming that it will take months, probably years, for Switzerland’s 70 double tax treaties to be renegotiated in order to incorporate the OECD exchange of information article. However, in relation to the UK people are being somewhat misguided as that has already happened.’

This was a 2007 treaty-amending protocol entered into between the UK and Swiss governments — which came into effect on 6 April 2009, less than a month after the announcement.

The Swiss will now use the UK’s definition of tax fraud (which includes non-disclosure in a tax return, which is not a criminal offence in Switzerland) to determine whether information must be exchanged.

‘An awful lot of lawyers and bankers came up to me afterwards and said: “This is absolutely momentous. Why did nobody tell us?”’ 

As an experiment in how to provoke a notoriously peaceable nation, the stripping and humiliation of Switzerland through the G20 has been a success. Francis Rojas, a tax partner at Withers in Geneva, says the mood in Switzerland is one of ‘concern’, which seems the least the Swiss would be entitled to: ‘Switzerland is an OECD member — it wasn’t even consulted and it appeared on that preliminary list of tax havens.’ 

The IRS’s case against UBS caused equal concern, says Rojas: ‘For a US judge to try to get client names through the court system, knowing that you have a conflict of laws in place, caused a lot of concern, and also the decisions by Finma [the Swiss bank regulator] to investigate and release a certain number of client names caused concerns here among the banking community.’

It was also ‘the not knowing what was going to happen that got everybody concerned’. Gothard points to ‘significant irritation’ on the part of Swiss banks that the UBS affair has tarred the reputation of Swiss private banking. 

The Swiss riposte to the OECD has betrayed more than concern. Interior minister Pascal Couchepin told Sonntag: ‘In this crisis the OECD shouldn’t be dishing out stars to good and bad states like a restaurant guide. It should instead serve them as a research centre, studying the causes and consequences of the crisis.’

This anger was also noted in a Financial Times opinion piece by Faith Whittlesey, a former American ambassador to Switzerland, who said that UBS and Finma ‘have been pilloried’ by all stripes of politician and journalist and that ‘the most intense anger has been directed at the US government’. The hills are alive, but with sounds ranging from muffled gnashings of concern to curdling cries of anger.  

So what kind of future is Switzerland looking at? Over the snowy precipice and down into the abyss or up to the summit? 

There are plenty of people who feel positive about the future, noting that even if the OECD manages to create a level playing field, where no country can offer more secrecy than any other, Switzerland will still outclass everywhere else with its established quality of service.

‘Switzerland’s place as the premier private banking jurisdiction of the world will be preserved because, frankly, the quality of services available in Switzerland surpass what can generally be obtained elsewhere,’ says Gothard. Krause stresses the level-playing-field aspect, saying that around Friday the 13th several other countries, including Singapore and Hong Kong, declared that they, too, would commit to OECD standards. 

The level playing field will indeed encourage people to go further abroad, feels David Lesperance, a Canadian lawyer and expert in cross-jurisdictional tax issues, who says: ‘Canada, Singapore, Australia and New Zealand are high-tax countries, but because of tax planning, you can shield yourself from the impact of local taxation.’

This seems possible, but given, say, Canada’s automatic information exchange treaty with America, not as desirable. Switzerland’s location is another mark in its favour. 

Nevertheless, skeletons may start falling out of some designer-stocked closets. To avoid this, UBS has moved its American clients to UBS Wealth Management Americas and Credit Suisse, according to Sonntagszeitung, is on the verge of closing down Americans’ undeclared accounts.

UBS still has a deferred prosecution hanging over it, even if it has now paid its punitive $780 million, and the Department of Justice is hot for 52,000 names. People with undeclared Swiss accounts may well find their best option is to take this opportunity to come clean and restructure their tax affairs. 

Non-compliant money will not languish, and will not be allowed to languish, in the vaults (whether cavernous or electronic) of Switzerland: it is already billowing away.

Lesperance believes that even if the clients move to a cantonal bank, it will only be a matter of time before the bank realises it is risking American or OECD attention by having undeclared funds. After that, it’s a desperate hunt around the globe for a Micronesian island no one has heard of with a grasping bank. 

This change will not just be in the quantity of money leaving. UBS, Credit Suisse and their cantonal comrades may have lost billions in outflows, but even if they reclaim them, neither they nor their customers will be the same.

Gothard thinks that the next decade will see ‘a move away from the single banking model towards clients dividing up their assets between different institutions’. (Eggs and baskets come to mind.) This trend would certainly mean money leaving the large banks, but logically they might also pick up money coming from elsewhere. 

A s a consequence, the clients will become more educated, and indeed ought to start paying attention to the documents their bankers have them sign. ‘It is in everybody’s interest,’ says Gothard, ‘to have customers that understand what they have invested in.’

This is, of course, not just the prudential diffusion of money but also a justified suspicion: after the Madoff scandal, which cost Bank Medici its banking licence and countless other banks their reputations, the erosion of trust in Switzerland is no surprise. 

Just before writing, an article appears on the BBC News website: ‘Swiss hold “$150m Nigeria bribes”.’ The Swiss future can’t come quickly enough.

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