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Swiss banking under assault again
UBS case opens door to renewed scrutiny of nation's vaunted secrecy model
By William L. Watts, MarketWatch
Last Update: 2:11 PM ET Feb 27, 2009
LONDON (MarketWatch) -- The pursuit of tax cheats by U.S. and European authorities may not spell the end of legendary secret bank accounts in Switzerland, but the nation's iconic private banking model faces renewed threats that are casting a fresh shadow over its outsized financial sector.
The decision last week by UBS AG UBS to pay fines of $780 million and to hand U.S. authorities account details of around 300 clients to settle tax-fraud charges sent shockwaves through the banking world. Back in Miami, the Internal Revenue Service has filed a lawsuit demanding that UBS also give up the names of 52,000 account holders as part of a probe into individual tax evasion -- a call that the bank and Swiss authorities have vowed to resist.
It's not the first time Switzerland has been on the defensive. In response to past international pressure, the country has moved to crack down on money laundering by crime lords and dictators. In recent years, it has returned or frozen millions of dollars squirreled away by powerful foreign leaders and despots ranging from the Philippines' Ferdinand Marcos to former Nigerian dictator Sani Abacha.
The heightened focus on Switzerland's role in international financial shenanigans has been years in the making and has picked up momentum in recent months. The landlocked nation's renowned rules on bank secrecy have come in for criticism from the likes of Alistair Darling, Britain's top Treasury official, and Peer Steinbrueck, Germany's finance minister. Sensing an opening, European leaders last weekend said they would make cracking down on tax havens a focus of a summit of the leaders of the Group of 20 nations scheduled for April.
Switzerland has drawn the resentment of tax authorities for years, said Michel Habib, a banking professor at the University of Zurich.
And charges that UBS employees aided and abetted U.S. taxpayers in setting up sham entities in order to evade taxes has only "weakened" Switzerland's ability to resist increased scrutiny, he said. Read about the UBS settlement.
On top of that, with governments around the world set to implement massive fiscal stimulus programs in the face of a global recession, "every penny of taxes counts and it makes any tax evasion all the more frustrating," Habib said.
Meanwhile, fears that Switzerland's famous and long-mythologized private banking model could soon be under threat have put added pressure on underperforming Swiss bank shares, analysts say.
'Golden age'
For generations, client confidentiality has been a hallmark of the Swiss banking business, a virtual national brand identity. But what cemented Switzerland's status as a premier safe haven was a 1934 law that made it a criminal offense -- rather than a civil matter -- to divulge bank-account details, according to historian Youssef Cassis, a professor at the University of Geneva.
Passage of tough secrecy laws ensured neutral Switzerland was a popular refuge for capital during World War II, Cassis said. And that was followed by what Cassis terms the "golden age" of Swiss banking, which lasted from the late 1940s to the 1980s.
While strict bank-secrecy rules ensured account holders would be protected, Switzerland's reputation for peace, stability and a solid Swiss franc enhanced its appeal as a bastion of financial security.
By contrast, economic and political uncertainty made France and Italy, two of Switzerland's neighbors, the main source of capital flight into Swiss accounts, said Cassis, author of "Capitals of Capital: A History of International Financial Centres, 1780-2005."
The Italian lira and French franc were volatile currencies often subject to depreciation. And there was "always fear of the Communists or the left in general taking power in France and Italy," Cassis said.
Today, Switzerland still plays a big role, even if its eminence as a financial center has diminished somewhat with the advent of the euro and a more stable, post-Cold War Europe.
Switzerland remains the home of around one-third of the world's estimated $7 trillion in "offshore" wealth, a term that refers to bank accounts held outside the client's country of residence.
Standing firm
And Swiss authorities insist that the nation's bank secrecy laws won't be eroded. The Swiss government has set up a task force that will focus on battling the civil lawsuit the American IRS filed against UBS.
"The mandate of the committee is to protect the interests of our country in the case of UBS and in the context of bank secrecy and Switzerland as a financial center," Finance Minister Hans-Rudolf Merz, who holds the rotational Swiss presidency, told reporters at a news conference.
Experts note that the UBS settlement focused on alleged fraud committed by UBS clients with the aid of bank employees. Under Swiss law, falsifying documents and engaging in other types of "tax fraud" is illegal, and bank-secrecy rules don't apply in those cases.
But tax evasion -- such as failing to report interest income on a secret bank account -- isn't considered a crime in Switzerland, and banks and authorities won't cooperate with foreign tax collectors looking for wealth hidden away in Swiss bank accounts.
Stock prices of Swiss banks did get a lift on Thursday, after UBS tapped Oswald Gruebel, the retired head of rival Credit Suisse, as chief executive, but shares were on the defensive again Friday. See full story.
Analysts regard bank secrecy an intangible asset of no small significance for the Swiss banking sector.
During a set of tax-treaty negotiations between Switzerland and the E.U. in the late 1990s and early 2000s, Habib calculated that the nation's secrecy rules contributed around 10% of the market capitalization of Bank Julius Baer JBHG.Y and 15% for Vontobel AG .
Banking giants Credit Suisse CS and UBS were less affected, likely due to perceptions that aggressive growth of onshore banking operations in the United States and elsewhere had made private banking less important.
Those perceptions are now in doubt. With investment banking drying up, "onshore operations are not as problem-free as they were once thought," Habib said.
The financial sector makes up around 15% of Swiss economy. With bank balance sheets set to contract as a result of the global financial crisis, worries about Switzerland's banking model could exacerbate the economy's downside potential, said Kenneth Broux, economist at Lloyds TSB.
But separating the impact of bank-secrecy concerns from a generally weak economic outlook is difficult.
The Swiss franc, which had rallied to par and beyond versus the dollar last year, remains in retreat amid unrelated concerns over Swiss banks and the global financial sector, as well as collapsing demand for Swiss exports in the euro zone and elsewhere.
"You don't need [worries about bank secrecy] for Swiss franc weakness," said Daragh Maher, a currency strategist at Calyon Bank. "On any number of fronts, you've got plenty of reasons to sell the Swiss franc."
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