By Warren Giles and Dylan Griffiths
Aug. 20 (Bloomberg) -- Swiss private bankers are turning to emerging markets and shunning American clients as the government’s agreement to hand over the details of 4,450 UBS AG accounts to U.S. authorities erodes bank secrecy.
Yesterday’s settlement in a lawsuit against UBS comes five months after Switzerland said it would renegotiate tax treaties to avoid being blacklisted as anuncooperative tax haven. Swiss banks hold $2 trillion for individuals overseas, or 27 percent of the globe’s offshore wealth, according to Boston Consulting Group and the Swiss Bankers Association.
“It shows Swiss banks can be put under pressure by foreign tax authorities,” said Teodoro Cocca, professor of wealth management at Johannes Kepler University in Linz, Austria. “Bringing new money to Switzerland will be considered risky.”
Some of Switzerland’s 300 banks are already shifting their focus to Asia, Russia and the Middle East, stressing their financial expertise and Switzerland’s reputation for stability and security. Julius Baer Holding AG, Lombard Odier & Cie. and Bank Sarasin & Cie. have opened offices from Moscow to Singapore and Mumbai in the past two years.
The decline of bank secrecy has been an issue for Swiss bankers since 2002, when the European Union asked for the automatic exchange of tax information, said Alfred Mettler, an adviser to the Swiss government on banking secrecy and a professor at the Robinson College of Business at Georgia State University in Atlanta.
“Bank secrecy will change and over time there will be less and less untaxed money in Switzerland, especially from the U.S.,” Mettler said. “But privacy will remain important, even with double-taxation agreements.”
‘Scheme to Defraud’
The U.S. Internal Revenue Service plans to target other financial institutions, law firms and entities that help Americans hide assets offshore, IRS Commissioner Douglas Shulman said yesterday in an interview with Bloomberg Television.
UBS admitted in February to participating “in a scheme to defraud the U.S.” The Zurich-based bank agreed to pay $780 million and disclose the names of more than 250 clients who allegedly hid assets from the IRS. A day later, the IRS sued UBS for information on as many as 52,000 clients, triggering the negotiations that led to yesterday’s settlement.
“Swiss bank secrecy that includes tax evasion is on its last legs,” said tax attorney Josh Ungerman of Meadows, Collier, Reed, Cousins & Blau LLP in Dallas. “The IRS made clear that U.S. clients at other Swiss banks are subject to U.S. requests for information if they engaged in the same type of tax evasion as UBS clients.”
The litigation has already damaged UBS, adding to an exodus of clients hurt by the global financial crisis. UBS customers withdrew 156.3 billion francs ($146.8 billion) of assets over the past five quarters, dropping the bank into second place globally as a money manager for the rich.
“This agreement helps resolve one of UBS’s most pressing issues,” ChairmanKaspar Villiger said yesterday in a statement. “I am confident that the agreement will allow the bank to continue moving forward to rebuild its reputation through solid performance and client service.”
The Swiss tradition of bank secrecy dates to the 19th century. The first laws forbidding bankers from disclosing information were enacted in 1934, a year after Adolf Hitler passed legislation threatening to imprison Germans who didn’t declare money held abroad.
“This agreement doesn’t undermine Swiss bank secrecy,” said Michael Ambuehl, Switzerland’s chief negotiator on the UBS settlement. “I don’t think that there will be pressure on other Swiss banks on the basis of the UBS agreement. The agreement has been made specifically for the UBS case.”
The settlement complies with existing Swiss laws under which tax fraud, or actively misleading authorities, is a crime and tax evasion, or failing to declare assets, is not. It also gives clients the right to appeal to a Swiss court if UBS decides to turn over their names.
The government has said the new tax treaties it is negotiating will allow it to cooperate on both fraud and evasion cases if foreign authorities provide specific evidence of a violation.
The UBS agreement shows the limits of banking secrecy, said Martin Maurer, secretary general of the Zurich-based Association of Foreign Banks in Switzerland, which represents more than 140 institutions.
“If a bank undermines a foreign law, then you can’t expect the Swiss government to cover its wrongdoings in another country,” Maurer said.
American Accounts Closed
Increased scrutiny from U.S. regulators has led some Swiss banks to close investment accounts held by Americans.
UBS told U.S. clients in a March 27 letter that it planned to terminate their existing accounts within 45 days. Customers who wanted to continue banking with UBS were asked to transfer their assets into an entity registered with the U.S. Securities and Exchange Commission, according to a copy of the seven-page letter seen by Bloomberg News.
Geneva-based Mirabaud & Cie. is closing the “few remaining” accounts held by U.S. taxpayers, a company spokesman said in June.
HSBC Holdings Plc’s Swiss private bank and Credit Suisse Group AG have also asked clients for permission to release their details to financial regulators in other countries that demand investor disclosure.
The Swiss unit of HSBC, Europe’s biggest bank, in September asked clients to surrender their right to secrecy if they wanted to hold securities in 28 markets. The bank said it “strongly recommends” that independent money managers renounce banking secrecy for clients who want to invest in the U.S., Germany, the U.K., Russia, Singapore and seven other markets.
“The big banks will probably ringfence American clients and concentrate on developing emerging markets, such as India and China,” said Matthew Ledvina, an international tax lawyer in Zurich. “It’s hard to beat countries like Switzerland for political risk.”
Some Swiss banks are also opening branches in new European markets to serve clients in their home countries, instead of in Switzerland.
Julius Baer opened offices in Istanbul, Moscow and Milan in the past two years. Lombard Odier, Geneva’s oldest private bank, has expanded in Prague and Singapore, and Bank Sarasin opened branches in Mumbai, Warsaw and Frankfurt.
Pictet & Cie., Switzerland’s biggest closely held private bank, is expanding its Frankfurt-based staff to attract more onshore money from German clients.
“Switzerland has to promote its political stability, the skills of its employees and its low-tax environment,” said Cedric Tille, a professor at the Graduate Institute in Geneva and a former economist at the Federal Reserve Bank of New York. “If all we have to offer is the ability to hide from the tax man, then we are in trouble because that would be building a financial model on sand.”