Sunday, 2 September 2012

Switzerland pays the price for banking secrecy

Will the Swiss banking industry be able to survive the death of banking secrecy?
Will the Swiss banking industry be able to survive the death of banking secrecy? (Keystone)
Aug 30, 2012 - 11:00-by Armando Mombelli,

Attacks from European governments, investigations against Swiss banks in the United States and international arrest warrants against bankers - in the space of just a few years, banking secrecy has turned into a costly burden.

"Today I met several bankers in Zurich. They were all shaking their heads saying, ‘In 40 years of operations we’ve never had a crisis like this one – a war like the one being waged against the Swiss banking system. We’re in the artillery sights of every country and every day there are new attacks’,” recounted Paolo Bernasconi, a business law professor at St Gallen University and former Ticino public prosecutor.

"Many bank directors are unable to leave Switzerland because they risk being arrested.”

The storm sweeping through the Swiss banking sector can also have terrible consequences for those not directly involved. In August, the two teenage sons of a Geneva banker who flew to the US on holiday were detained by customs officials on arrival and grilled about their father’s activities.

Rapid change

This is not the first time that banking secrecy has been targeted by other countries, but until a few years ago they were isolated attacks rather than orchestrated campaigns launched by the world’s leading economic powers.

Swiss banks, as well as many tax havens, had always been able to place part of their activities in a grey zone, which is seen by most governments to be black. Eleven Swiss banks are under investigation by US authorities looking into allegations the banks helped Americans evade taxes.

“For 50 years, Swiss banks have lived by the following rule: we strictly uphold Swiss legislation while ignoring foreign legal norms. This has earned us a great deal of money – not just for the banks, but us as well,” Bernasconi said.

“Today we’re paying the price. But it’s not just those who were responsible in the past who are paying for it, but the new generation as well; they are losing their jobs and suffering from the impact of the crisis.”

Not so long ago, bank directors and politicians claimed that banking secrecy was “not negotiable”. But they underestimated the speed with which attitudes were changing in the international fight against tax evasion.

In 2009 when the G20 and the Organisation for Economic Co-operation and Development (OECD) officially took up the battle against banking secrecy, Switzerland was placed on a grey list of countries accused of not cooperating on tax matters.

In the crossfire

To avoid ending up on a blacklist, Switzerland was obliged to urgently adopt a range of OECD standards, including ending the historic distinction between tax fraud and tax evasion, which was unacceptable for other countries.

Under pressure from the US, the Swiss were also forced to hand over data on thousands of clients of Swiss banks to American authorities.

The Swiss government was caught in the middle. While the centre-left parties demanded absolute transparency immediately, for the rightwing Swiss People’s Party, supported by the nationalist Campaign for an Independent and Neutral Switzerland group (ASIN), it was clear that the cabinet had caved in under pressure.

“We have a weak government that capitulated in a humiliating way to the EU and the US, who keep trying to weaken our financial sector and banking secrecy,” said People’s Party parliamentarian and banking expert Hans Kaufmann.

Bernasconi said the rightwing parties’ viewpoint was “suicidal”.

"The People’s Party and ASIN have to realise that Switzerland is small fry compared to the US, the EU, and the OECD. Our country is completely tied to the global trading, banking and payment systems; it can’t afford to end up on a blacklist. Today, no one can avoid the OECD standards,” he warned.

Another way

To avoid the automatic exchange of tax information, which would effectively mean the end of banking secrecy, the government is currently pursuing a new path – negotiating bilateral tax treaties, known as Rubik accords, with interested countries.

Bilateral tax agreements have already been signed with Germany, Britain and Austria. Switzerland has agreed to levy a punitive retroactive tax on undeclared capital to regularise the past and apply a withholding tax to future interest income from those accounts.

But right-of-centre Swiss parties have launched a referendum against the three Rubik treaties already signed.

“These agreements are unacceptable. They do not contain any kind of reciprocity. They represent an administrative burden that is too high for the banks and the tax rates are almost confiscatory,” said Kaufmann.

“In two years, once they have pocketed the money, these countries will denounce the agreements and try to impose the automatic exchange of tax information.”

Bernasconi disagrees: "Rubik is not the answer to all our problems but it can solve some of them. The automatic exchange of tax information will definitely arrive one day as the OECD and the US are determined but at least we will have time to get ready and we will receive fewer blows from other countries.”

He said another thing should not be forgotten: “These tax agreements serve as a guaranteed amnesty for Swiss bankers who today can no longer risk leaving Switzerland.”

Secure island

In the face of such unprecedented attacks, will the Swiss banking industry be able to survive the death of banking secrecy or is there a risk it will lose huge amounts of managed funds?

“The greatest strength of the Swiss banking industry is not banking secrecy, but the country’s stability,” explained Jan-Egbert Sturm, head of KOF, the leading economic institute at Zurich’s Federal Institute of Technology.

“Switzerland is seen as an island of security, both politically, economically and from a monetary perspective. Just think about the strong Swiss franc.”

Sturm said this stability is particularly important during times of crisis such as the current problems in the eurozone: “And despite all these attacks against banking secrecy, massive amounts of funds continue to flow from abroad into Swiss bank accounts.”

Armando Mombelli,
(Translated by Simon Bradley and Jeannie Wurz)

Swiss Bank Employee Arrested for Stealing Customer Data

In another blow to the Swiss banking industry, a $2 trillion business based on secrecy, private bank Julius Bear confirmed Sunday that one of its Zurich-based employees has been arrested on allegations of stealing private customer information, according to the Associated Press.

That information, the reports said, was then passed on to German tax investigators. The story first reported by the Swiss weekly SonntagsZeitung.

The arrest of a Swiss private bank employee underscores the importance of having the right security policies and controls in place. It also strengthens the case for data breach insurance.
Banks typically buy the insurance in order to hedge against such breaches.

The insurance covers mishaps caused by low-level employee misconduct and protects against the loss of vendor-controlled data.

Julius Baer recently agreed to pay 860 million francs ($879 million) to buy Merrill Lynch's wealth management operations outside the United States.

Prosecutors seek names of Swiss bank employees

The war against Americans who use Swiss banks to evade taxes has been successful, even as it has pierced the aura of the once-vaunted Swiss banking system, which touted its secrecy.

A numbered account at a Swiss bank is hardly a guarantee of confidentiality these days. The U.S. is hardly the only country that has gone after Swiss banks in this regard. The head of one of Germany's main political parties has accused Swiss banks of "organized criminality" for helping rich Germans evade taxes and would like to see some criminal charge brought. Credit Suisse is currently under investigation by German authorities, but prosecutors want more than the clients from these banks. Increasingly, they are seeking the names of employees of Swiss banks--such as the Swiss unit of HSBC, Credit Swiss and others--as well as a wide range of identifying information (including copies of passports), with the idea that some of them might someday be charged with facilitating mass tax evasion.

So far, at least five banks have supplied e-mails and telephone records containing as many as 10,000 names to the Department of Justice, according to one Geneva- based lawyer interviewed by Reuters. Swiss banks are eager to settle the many probes in this area, and are apparently willing to provide the names, to the chagrin of employees. The banks say that most employees have nothing to fear, as they worked by the book.
But that's not enough to inspire confidence in many. One HSBC executive said he was afraid he would be arrested if he set foot in the U.S.

Read more: Prosecutors seek names of Swiss bank employees - FierceFinance

HSBC hands US more staff names in tax evasion probe

Wed Aug 15, 2012 10:25pm IST

* Bank says more data passed as part of December request
* Lawyer says one employee lawsuit filed, more could follow
* Big law firms unlikely to take on banks-lawyer
By Martin de Sa'Pinto

ZURICH, Aug 15 (Reuters) - Global bank HSBC has handed over details of current and former employees to the U.S. authorities, it confirmed on Wednesday, as part of a tax probe that almost sank rival bank UBS in 2009.

As a result the bank could now face legal action from individuals whose details have been revealed, lawyers representing them said.

In a letter to them seen by Reuters, the bank said it had passed on documents, in which their names appear, on the request of U.S. authorities looking to hunt down U.S. citizens with untaxed money held in Swiss accounts.

After passing on a first set of documents earlier this year, HSBC has sent the new batch to the U.S. Department of Justice and the Securities and Exchange Commission in an effort to reach a settlement over the investigation.

HSBC lawyer Lenz & Staehelin has told lawyers acting for these employees that the documents included the minutes of executive, board and audit committee meetings, client visit reports, emails and other correspondence.

"We have submitted further information to the U.S. authorities but it concerns the initial enquiry from December 2011. Client information has clearly not been submitted," HSBC Private Bank spokesman Medard Schoenmaeckers said by telephone.

Banks including HSBC, Credit Suisse and Julius Baer have already passed on about 10,000 employee names in an attempt to avoid the fate of private bank Wegelin, which broke up in January under threat of indictment, bank employees and lawyers said.

Credit Suisse said its cooperation with the U.S. authorities was also in the interests of the bank and its employees. Baer declined to comment.

Lawyer Douglas Hornung, who has filed a complaint against HSBC on behalf of its former chief legal counsel, said banks who handed employee names to U.S. authorities infringed the criminal code and Swiss privacy laws.

HSBC has avoided breaching strict Swiss banking secrecy laws by redacting from the documents any information that could lead to the identification of clients, said Lenz & Staehelin in a letter to lawyers acting for current and former employees of the bank.

In 2009 the Swiss authorities reached a deal for UBS to pay a fine of $780 million to avert criminal charges, and ultimately agreed to allow the bank to reveal details of around 4,450 clients.

Hornung said banks that hand over employee data to U.S. officials are hoping to reduce the potentially huge fines they might face if they are found to have helped U.S. clients avoid tax.

"HSBC could face a much higher fine than UBS, $1.3 to 1.4 billion would be logical. In cooperating HSBC can expect the fine to be lowered significantly," said Hornung.

The benefit of such a reduction for cooperating would far outweigh anything the banks would have to pay for breaching obligations to employees in Switzerland, where the maximum fine is 5 million Swiss francs ($5.15 mln) and there are no punitive damages, Hornung said.

A spokeswoman for the Swiss Attorney General confirmed that a legal complaint against HSBC had been received and said it was considering whether to open an investigation.


A former HSBC employee, who asked not to be named, told Reuters he had never dealt with U.S. clients and only realised U.S. officials had his name during a background check when he was shortlisted for a new banking job.

He was not offered the job.

"It can be difficult to inform former employees because as a company we don't keep records of their whereabouts. If they contact us, then we do inform them," Schoenmaeckers said.

But Hornung, a partner at Geneva-based Hornung Avocats, said allegations of professional damage might be hard to prove.

"I have spoken to five or six people in the same situation, which means there is some chance of demonstrating a direct link between being on the list and difficulties in finding further employment," said Hornung.

Bruno Seeman, a lawyer from small but locally renowned Zurich law firm Anwaltsbuero Landmann who is representing another former HSBC employee, said those wishing to sue the bank were unlikely to get any help from the largest law firms.

"The big five in Switzerland are all employed by the large banks, all the big commercial law firms with the capacity and know-how to act against big Swiss organisations cannot do so because it would be a conflict of interest," Seemann said.

"The effect is to prevent employees from approaching them because these law firms can't act against existing clients."

Swiss say won't renegotiate terms of German tax deal

ZURICH | Wed Aug 15, 2012 8:44pm IST
Aug 15 (Reuters) - A bilateral deal to tackle German tax dodgers hiding money in secret Swiss accounts cannot be renegotiated, a spokesman for the Swiss government said on Wednesday.

The agreement to tax Germans' accounts in Switzerland is due to come into effect early next year, but recent purchases by German officials of leaked bank data have raised questions as to whether the deal will survive.

It still needs to be ratified by the German parliament.

The two countries have renegotiated the deal once, setting higher tax rates in a bid to please Germany's opposition SPD, which says the pact lets tax evaders off too lightly and refuses to ratify it.

"There will be no subsequent negotiations," Swiss government spokesman Andre Simonazzi told a news conference.

The SPD could return to power in Germany as part of a governing coalition in parliamentary elections next year.

Banking secrecy is key to Switzerland's $2 trillion offshore wealth management industry. The Swiss government has refused an automatic exchange of information on account holders and is pursuing instead the strategy of a withholding tax to preserve secrecy.

Germans hold an estimated 150 billion euros ($185 billion) in Swiss accounts.

Chancellor Angela Merkel still backs the pact, a German government spokesman said on Monday.

(Reporting by Catherine Bosley; Editing by John Stonestreet)

US demands drawing out tax dispute

Switzerland hopes to reach a global settlement with the US, but "not at any price"  

 The United States authorities are holding up resolution of a tax dispute with Switzerland by making new demands, according to Swiss Finance Minister Eveline Widmer-Schlumpf.

The minister told Saturday’s Zürcher Regionalzeitungen newspaper, that since the two countries had agreed on an overall approach to a global settlement “new demands are constantly being made that we cannot accept”.

She could not say how long she expected the negotiations to continue. “If Switzerland did as the United States’ wanted, a global solution would be decided tomorrow.” But Bern is holding firm on certain points, and any compromises had to be compatible with Swiss law, she stressed.

The minister said Switzerland was looking for a solution that addressed the situation of the 11 Swiss banks under investigation by the US authorities for allegedly aiding tax evasion, as well as other Swiss banks. As such, “a line needed to be drawn under the past”.

The Swiss government wants to get US tax investigations against the 11 banks - including Credit Suisse and Julius Bär - dropped in exchange for the payment of fines and the transfer of client names. It is also seeking to shield the remainder of its 300 or so banks from US prosecution.

Widmer-Schlumpf did not go into more specifics on which points in particular were holding up the process.

The US wants Swiss banks to provide information on undeclared funds belonging to American citizens in Swiss banks. A global settlement between the two countries would end ad hoc requests by the US.

"Not at any price"

It comprises a double-taxation accord signed by the Swiss and US governments in September 2009. It was revised and ratified by the Swiss parliament in March 2012. It was cleared by the US Senate’s Foreign Relations Committee in July 2011 but still requires ratification by the US Senate.

The lead Swiss negotiator Michael Ambühl, secretary of state for international financial matters, said in an interview published Friday that Switzerland wanted a US settlement to be concluded by the end of the year, “but not at any price”.

Switzerland and the US have been hashing out a new deal on double taxation ever since 2009 when Swiss bank UBS paid $780 million (SFr757 million) to settle criminal charges. Switzerland also agreed to deliver UBS client data to the US without demanding documentation of suspected tax fraud, thus undermining banking secrecy.

Other Swiss banks have since been in the US tax authorities’ sights.

The current US-Swiss tax deal dates back to 1996 and in line with Swiss banking secrecy laws differentiates between tax fraud and tax evasion. Swiss can provide administrative assistance to the US in cases of tax fraud only, but under the new double taxation accord that could also be given in cases of tax evasion (forgetting to declare assets).

As a result of international pressure, Switzerland has signed around 30 double taxation agreements in recent years, in which administrative assistance can also be given in tax evasion cases, according to Organisation for Economic Co-operation and Development standards. 
Top and agencies

Julius Baer bulks up in Asia with Merrill deal

By Martin de Sa'Pinto and Katharina Bart
ZURICH | Mon Aug 13, 2012 12:06pm EDT
Boris Collardi, CEO of Swiss private bank Julius Baer, addresses a news conference in Zurich August 13, 2012. REUTERS-Arnd Wiegmann
(Reuters) - Swiss private bank Julius Baer (BAER.VX) is to buy Bank of America Merrill Lynch's (BAC.N) overseas wealth-management business for up to 860 million Swiss francs ($882 million), getting a huge boost in Asian growth markets.
Julius Baer's acquisition of the loss-making unit means that about half of all the Swiss bank's clients will be in faster-growing emerging markets - chiefly Asia but also Latin America and the Middle East - up from around one third now.

Baer, under pressure from an international attack on Swiss banking secrecy that is weighing on profit, is keen to expand abroad.

The Merrill acquisition is the bank's biggest since it bought Ehinger Armand von Ernst, Ferrier Lullin & Cie, BDL Banco di Lugano and asset manager GAM for 5.6 billion francs from Swiss bank UBS (UBSN.VX) in 2005.

But investors balked at the total cost, estimated at 1.47 billion francs, sending its shares sharply lower on Monday.


The bank is proposing to partially fund the deal by raising 1.19 billion Swiss francs ($1.22 billion) in new capital, including issuing 240 million francs worth of shares to Bank of America, which will end up with about 3 percent of Baer.

Costs of around 400 million francs include restructuring the acquired business and retaining its most productive client advisers, Baer said.

At 1552 GMT the stock was down 7.2 percent at 32.8 francs, compared with a flat Stoxx European banks index .SX7P.

"To us, this looks like a defensive and value-destructive transaction," said Dirk Becker of Kepler Capital Markets who rates the stock as a 'hold'. Becker criticized dilution of existing shareholders and questioned how an unprofitable business could add to Baer's earnings.

Others said the success of the steeply priced deal is linked to meeting targets including the transfer of assets to Baer.

The Swiss bank said Merrill clients will transfer between 57 billion and 72 billion to it by the end of 2015, a wide margin because some clients may choose to leave while Bear could turn others away. The deal could lift assets managed by around two-fifths to 251 billion Swiss francs .

"Overall, if they do achieve the stated targets, it will turn out to be a good, transformational acquisition for Baer," Nomura analyst Jon Peace said.

The Merrill deal dwarfs Baer's 520 million franc buy of ING's (ING.AS) Swiss private banking arm in 2009, when Baer paid 2.3 percent of assets acquired, whereas it said it is paying only 1.2 percent for the Merrill
Lynch funds.

Baer said it has 530 million francs in cash to help fund the deal but will also seek to raise 750 million francs in a rights issue, including 250 million to fund more acquisitions It also plans to raise another 200 million francs in hybrid bonds.

The bank is cancelling its share buyback program, set at up to 500 million francs in February.
Baer said it could add to earnings from the third full year after the deal closes.


The deal is Bank of America's latest effort to sell non-core businesses to streamline a company built through decades of acquisitions. It has lagged peers in recovering from the global financial crisis largely because of losses and lawsuits tied to its 2008 purchase of subprime lender Countrywide Financial.

Bank of America said the transaction will have an immaterial impact on its balance sheet, financial results and capital ratios. It also agreed to provide research and other products to the Swiss bank and to refer clients between the two organizations.

Greg Gatesman, currently Chief Operating Officer of the Merrill business, will take the same role at Bank Julius Baer and the Julius Baer Group, while Michael Benz, Head of Global Wealth & Investment
Management for Asia Pacific, will be chairman of the Asia business, which he will head up with Tom Meier, Baer's Asia CEO.

(Additional reporting by Oliver Hirt in Zurich and Rick Rothacker in Charlotte; Editing by Erica Billingham)