Swiss banks at centre of investigative storm

IFR Editor-at-large Keith Mullin

It’s clearly not enough that UBS and Credit Suisse are wrestling with efforts to reduce, restructure, rebalance, retool and reset the ambitions of their investment banks in the midst of an industry downturn.
Both banks have also been pulled into the investigative maelstrom gripping Switzerland and Swiss banks which has the potential to cause irreparable damage to the reputation of the country that holds more than 30% of the world’s private and institutional assets.
The investigation by Swiss competition authorities into potential collusion by derivatives traders at Credit Suisse, UBS and 10 other banks (BTMU, Citi, DB, HSBC, JP Morgan, Mizuho, Rabobank, RBS, SocGen, SMBC) to rig Libor/Tibor rates is but the latest in a string of probes into alleged Libor fixing. But the US assault on 11 Swiss private banks for allegedly aiding and abetting large-scale tax evasion by wealthy Americans has more far-reaching consequences.
Taking its 2009 settlement with UBS as a blueprint (US$780m fine, deferred prosecution agreement, handover of over 4,500 client names), the US Justice Department is coming after Wegelin, Julius Baer (both of which have been formally indicted), Credit Suisse (which has set aside SFr295m in its 2011 accounts to settle any fines), Basler Kantonalbank and others. The full list hasn’t been released but rumours are rife. In particular, the involvement of at least one of Switzerland’s publicly-owned Cantonal banks ups the ante and puts the issue right at the heart of Swiss officialdom.

When Swiss private bankers steer clear of travelling to the US for fear of being arrested, you know things have reached that critical point

When Swiss private bankers steer clear of travelling to the US for fear of being arrested, you know things have reached that critical point. Baer is likely to pay a fine to escape more serious charges. Wegelin & Co, Switzerland’s oldest private bank, was, of course, forced to take radical action a couple of weeks ago following the indictments of three employees.
The managing partners (who carry unlimited liability) split out the US business, and transferred the rest, along with most of the 700 employees and SFr21bn in client assets, to the newly formed Notenstein Private Bank. They then sold the latter to Swiss Raiffeisen, ending 271 years of continuous independent service.

Striking fear

The episode has struck fear into the hearts of Swiss private bankers. If Swiss authorities end up handing over US client records in a negotiated settlement, it will be yet another nail in the coffin of Swiss banking secrecy, which has been under siege from all quarters. So far, Switzerland has handed US authorities tens of thousands of pages of encrypted data on bank employees who served American clients suspected of evading taxes. But they will only provide the key to decipher them once the situation has been settled.
At the heart of the strains between the US and Swiss governments lies a radically different understanding of and approach to the notion of tax evasion; Swiss objections to US jurisdictional and regulatory extra-territoriality also loom large.
US extra-territoriality claims have been a constant for decades. They were famously invoked during the Iranian and Libyan crises of 1979 and 1986 when US presidents Carter and Reagan froze the assets of the respective governments, including those held in the foreign branches of US banks. They have been brought up much more recently in the context of the uneven progress towards a unified global regulatory framework and unilateral moves by US regulators to impose US diktat on non-US entities.
Speaking at the Swiss Private Bankers’ Association’s (SPBA) New Year press conference in January, Nicolas Pictet, partner of private bank Pictet & Cie, noted that “Swiss banks have realised that it is not enough to comply with Swiss law; foreign legislation must also be respected in certain fields and certain circumstances …”
Fair enough, but at the same time, he warned: “If financial intermediaries have to respect the legislation in countries where they carry out their business, caution must be exercised in respect of the growing tendency of certain countries to apply their national laws extra-territorially. This … is an intolerable threat for a small export country like Switzerland.”

Wegelin is now finished, courtesy of Uncle Sam. How long before other Swiss private banks follow Wegelin’s shocking demise?

The Asymmetric Threats Contingency Alliance (a unit of UK security consultancy mi2g) took a particularly narrow view of the tax issue in its note following the break-up of Wegelin: “Wegelin bank … managed to survive every threat across three centuries: revolution, financial disaster, and war, including being invaded by Napoleon, the Sonderbund civil war and then Hitler. Every threat except for one: the relentless assault on Swiss banking secrecy by the United States government to reclaim the funds lost through tax evasion schemes sold to its citizens. Wegelin is now finished, courtesy of Uncle Sam. How long before other Swiss private banks follow Wegelin’s shocking demise?” Punchy stuff.
It went on: “The US government ultimately crushed Wegelin. How? By threatening Wegelin bank with lawsuits, investigations, IRS penalties and criminal charges levied personally against the bank directors, the US government succeeded in its mission. The scare tactics were enough to chase away the bank’s customers, and Wegelin has now sold what little was left of its non-US business.”
Of course, it’s not as simple as that. If Wegelin and other banks openly, aggressively and defiantly – as is alleged in the wake of the 2009 UBS settlement – courted UBS’s US private clients with a view to offering them similar services, they should face the consequences. Wegelin didn’t have any US branches, so thought it was immune from prosecution. It wasn’t alone. A swathe of Swiss private banks reportedly engaged in the same questionable practices – knowingly and actively encouraging behaviour they knew was criminal in the US. Patrician, discreet Swiss private bankers as chisellers and hustlers? This is not the image they like to portray.
If the US successfully exacts fines on Swiss banks and at the same time succeeds in getting the names of thousands of clients who hid money in undeclared Swiss bank accounts, what’s to stop other jurisdictions piggybacking on US action and demanding some answers of their own?
Members of the Swiss Private Bankers Association – an association of 13 independent private banking houses among hundreds of Swiss banks offering private banking services – have operations all over Europe, the Middle East, North & South America, the Caribbean and Asia. I can see this episode snowballing into something bigger and much more sinister.