By Elena Logutenkova and Joshua Gallu
March 6 (Bloomberg) -- Ever since UBS AG handed over the names of about 300 customers to the U.S. on Feb. 18, there’s been nothing but shuddering from Zurich’s Paradeplatz to Geneva’s quartier des banques.
The decision marked the first time Switzerland lifted its banking secrecy laws, allowing UBS to pass on client data to avoid U.S. criminal charges. In the past two weeks, Finance Minister Hans-Rudolf Merz said he’s willing to collect taxes on offshore accounts for the U.S., and Justice Minister Eveline Widmer-Schlumpf offered cooperation on some cases of tax evasion.
“That’s de facto abolishing banking secrecy,” said Regula Staempfli, a Swiss political scientist in Brussels who lectures at universities in Germany, France and Switzerland about European and Swiss political decision making. “Having broken the rule of law, we have no ground to refuse Brussels what we’ve given Washington.”
Switzerland can’t ignore U.S. demands because UBS and Credit Suisse Group AG earned more revenue in the Americas from 2004 to 2007 than they did in their home market, company reports show. The government’s concessions to protect UBS, the country’s biggest bank, threaten to undermine a cornerstone of the Swiss banking industry, which manages $2 trillion for foreign clients and accounted for 8.5 percent of the domestic economy in 2007, according to the Swiss Bankers Association in Basel.
At stake are the jobs of the 130,000 people who work at banks in the 26 cantons of Switzerland, representing about 4 percent of the country’s workforce.
‘Under Pressure’
Swiss law currently allows for bank secrecy to be lifted only when there’s a criminal offense, such as tax fraud or money laundering. Tax evasion, or forgetting to declare income, isn’t a crime in Switzerland, and banks aren’t required to inform authorities of funds that may be undeclared.
“We’re under pressure,” said Christophe Darbellay, head of the Christian People’s Party, the third-largest in parliament after the anti-immigrant People’s Party and the Social Democrats. “Today we’re talking about the difference between tax fraud and tax evasion. Tomorrow there will be another issue.”
Thomas Borer, a former Swiss ambassador to the U.S. and Germany who led a task-force in a dispute over Holocaust assets a decade ago, said the government should have acted to defend its bank secrecy before Zurich-based UBS ran into troubles.
Lost Taxes
“For 10 years we neglected to come up with a strategy for Switzerland as a financial center,” Borer said in a telephone interview from Zurich, where he is a board member of Renova Management AG, an investment company owned by Russian billionaire Viktor Vekselberg. “We didn’t find allies who believe in our concept of Swiss banking. We just sit in our Swiss bunker and complain.”
Offshore accounts in countries such as Switzerland cost the U.S. about $100 billion in taxes annually, according to estimates from Michigan Senator Carl Levin. The U.K. probably loses at least 4 billion pounds ($5.6 billion) a year in revenue, the London-based Trades Union Congress reported March 1.
With governments around the world facing budget deficits from the financial crisis, patience with Switzerland’s position is running out from Washington to Paris and Berlin. On Feb. 19, a day after UBS agreed to give out the 300 client names, the U.S. government sued it to force the disclosure of as many as 52,000 names of American customers who allegedly hid their Swiss accounts from tax authorities. The following weekend, European leaders said they will crack down on tax havens and threatened “sanctions” against “uncooperative jurisdictions.”
Call for Diplomacy
Mark Branson, the chief financial officer of UBS’s wealth management and Swiss bank division, told Levin and his colleagues at a hearing on March 4 that the company won’t turn over the names of any more clients.
UBS has already “complied with the summons to the fullest extent possible without subjecting its employees to criminal prosecution in Switzerland” under bank-secrecy laws, Branson said. UBS has said the dispute should be resolved through diplomacy and not the U.S. lawsuit filed in Miami federal court.
Threatened with the loss of their competitive advantage, even Geneva’s traditionally reserved bankers have joined the debate. Ivan Pictet, senior managing partner at Pictet & Cie., said the domestic banking industry may shrink by as much as 50 percent if the country lifts the distinction between tax fraud and tax evasion.
Swiss banks contributed about 20 percent to the country’s economic growth in the past four years, said Bruno Parnisari, a government economist.
UBS’s Ambition
UBS and Zurich-based Credit Suisse, the second-largest Swiss bank, generated 36 percent of their revenue in the Americas in the four years through 2007, compared with 34 percent in Switzerland and 22 percent in the rest of Europe, Middle East and Africa, according to data compiled by Bloomberg.
“The ambition of the two big Swiss banks is to be global players,” said Teodoro Cocca, professor of wealth management at Johannes Kepler University in Linz, Austria. “If you have that vision, you can’t afford not to be present in the biggest capital market of the world.”
The Swiss government has been weakened at home since it gave in to the Feb. 18 ultimatum by the U.S. The decision allowed UBS to enter into a deferred prosecution agreement, in which it admitted conspiring to help clients conceal assets from the Internal Revenue Service.
Merz, 66, who currently holds Switzerland’s rotating presidency, was criticized by Swiss media over the decision. An editorial in the Zurich-based Tages-Anzeiger newspaper said Switzerland was without leadership, and the tabloid Blick portrayed the country as a “banana republic” for breaking its own laws.
‘Caught Pants Down’
“They were caught with their pants down,” Staempfli said. “Merz had said that banking secrecy isn’t negotiable. You don’t say that because everything is negotiable in politics.”
Within two weeks of the deal, UBS replaced Chief Executive Officer Marcel Rohner, who headed the unit accused of helping Americans evade taxes before becoming CEO 18 months ago, and 59- year-old Peter Kurer, the bank’s legal counsel before he was named Chairman less than a year ago. The bank has denied allegations in Swiss newspapers that the two knew of structures aimed at defrauding the U.S.
UBS called 65-year-old veteran banker Oswald Gruebel, who turned around Credit Suisse in 2003 after two years of losses, out of retirement to succeed Rohner, 44. It proposed former Finance Minister Kaspar Villiger, 68, as chairman. During Villiger’s time at the finance ministry, Switzerland enacted legislation against money laundering and agreed to a European Union plan on the taxation of savings income.
‘Declaration of War’
The government has scheduled a press conference for today to provide results of its discussions on UBS and the country’s banking secrecy law. It has proposed setting up a task force to deal with the U.S. legal proceedings and scheduled talks with government officials in Austria and Luxembourg to discuss blacklists for so-called tax havens.
Levin, who oversees the U.S. Senate subcommittee investigating UBS, proposed new laws this week to stop Americans from using offshore financial centers to evade taxes, supporting legislation previously sponsored by President Barack Obama. The Michigan Democrat wants to impose tougher requirements on taxpayers with offshore accounts and give the Treasury Department the authority to take action against foreign jurisdictions that impede tax enforcement.
‘Cash Cow’
“Bank secrecy is a cash cow in Switzerland,” Levin said at the March 4 hearing held by the Senate’s Permanent Subcommittee on Investigations. “Conduct that actively facilitates tax evasion amounts to a declaration of war by offshore secrecy jurisdictions against honest, hardworking taxpayers. We’re determined to fight back and end the abuses inflicted on us by those tax havens.”
U.S. Treasury Secretary Timothy Geithner told the Senate Finance Committee on the same day that the government will mount an “ambitious” program to crack down on companies that use offshore locales to avoid paying taxes.
Merz said last week he’s willing to make an agreement with the U.S. that’s similar to an accord with the European Union, under which Switzerland collects taxes on offshore accounts anonymously on behalf of the EU. Widmer-Schlumpf said after a meeting this week with Acting U.S. Deputy Attorney General David Margolis that the government will review whether to treat “gross” tax evasion the same as tax fraud.
“Switzerland has to move from being an obstacle to an engine of international regulations,” said Christian Levrat, head of the Social Democratic Party, in an interview. “That means giving up the distinction between tax evasion and tax fraud.”
‘Fishing Expeditions’
While cooperation on gross tax evasion may not be enough to satisfy the U.S. and EU, the Swiss are concerned that assistance in tax evasion cases may open the door for foreign countries to request data they don’t need, said Peter V. Kunz, head of the business law department at the University of Bern.
“Switzerland is afraid of fishing expeditions from abroad,” Kunz said. “It cannot be that just out of curiosity, without any hint of illegality, foreign authorities come to Switzerland and ask for information.”
Swiss banks manage 27 percent of the $7.3 trillion in offshore global assets, the biggest market share ahead of the U.K.’s Channel Islands with 24 percent and Luxembourg with 14 percent, according to the bankers association. Offshore banking accounts for 3 percent of the Swiss economy and tax revenue, and 1 percent of all jobs in the country.
Baer to Vontobel
If banking secrecy “disappears, clients will no longer have any reason to travel 500 kilometers to see their banker,” Pictet told Le Temps in an interview published Feb. 24. “The traditional Swiss banking know-how in wealth management wouldn’t, in itself, be enough to compensate for the lack of protection in the private sphere.”
Gruebel, UBS’s new CEO, said in an interview with the Finanz & Wirtschaft newspaper in Zurich that client confidentiality laws have “strongly helped” Switzerland in the past.
“We’re talking about enormous sums,” he said. “This is not just about taxes, but rather about a branch of the economy that creates jobs and income.”
Zurich-based Julius Baer Holding AG and Vontobel Holding AG, which cater to millionaires, owe 8 percent to 13 percent of their market value to the banking secrecy law, according to a 2005 study sponsored by the University of Zurich and the Swiss National Science Foundation. The study examined share price performance from 2002 to 2003, when Switzerland and the EU held talks on banking secrecy.
UBS, Switzerland’s largest wealth manager, has lost 22 percent of its market value since the U.S. obtained the client data last month, compared with a 17 percent drop in the 65-member Bloomberg Europe Banks and Financial Services Index. It beat the index in all but three years since the start of the decade.
“The government put its head down and ignored the situation and then panicked when they realized they were up against a wall,” said Cocca. “They’ll have to give in to reduce the pressure on Switzerland.”
Source:
Bloomberg
