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Switzerland’s banks try to put the past behind them

Switzerland’s banks try to put the past behind them

Five years ago, Switzerland’s banks finally realised the game was up. In late summer 2013, the affluent Alpine country submitted to a deal with Washington that drew a line under its role in helping US clients evade tax.

Some 80 banks were processed under the agreement, meant for those which had breached US laws but were not yet subject to investigation. A few months earlier, Swiss finance minister Eveline Widmer-Schlumpf had thrown in the towel and accepted the principle of Switzerland automatically exchanging tax-relevant information.

It was a low point for a banking sector that had long thrived as a secure location for the world’s rich to secretly stash their wealth. The fifth anniversary is doubly poignant because it coincides with the tenth anniversary of the collapse of Lehman Brothers.

The global financial turmoil that followed Lehman’s demise led to the clampdown on Swiss banks — as they bailed out banks, western governments were keen to boost tax revenues from the wealthy. It also complicated their recovery. In total, Swiss banks have paid $5.5bn in US penalties since the first moves against them a decade ago.

The Swiss would undoubtedly like to think the past is behind them. Times are certainly better. “After years of struggling with structural change stemming from the financial crisis, the tide has begun to turn,” consultancy KPMG reported recently in its annual survey of 90 Swiss private banks.

Excluding the two big banks UBS and Credit Suisse, KPMG calculates net profits rose almost 20 per cent in 2017 to SFr2.8bn ($2.87bn), with larger banks performing best.

Swiss banks have overhauled compliance systems — Americans living in Switzerland today have a particularly hard time opening a bank account — and thrown out clients who cannot prove they are honest with their taxes. Bern has struck automatic exchange of information deals with EU states and 60 other countries.

The Swiss remain the world’s biggest managers of cross-border wealth. Assets under management are back above 2007 levels, last year rising 10 per cent to SFr7.3tn, albeit flattered by the good performance of financial markets. As with the global financial crisis, however, Switzerland’s past is still being worked through — and the path to recovery has thrown up fresh challenges.

Last month, two outstanding US tax cases — against Zürcher Kantonalbank and Basler Kantonalbank — were settled with penalties of $98.5m and $60.4m. The agreements offered a flashback to an era when Switzerland really was a haven for chancers. According to the US justice department, Basler Kantonalbank had in 2008 seen as a “business opportunity” the criminal investigations faced by its larger rival UBS. The Basel bank’s services had included “promoting” Swiss bank secrecy as a means of concealing assets and income.

Suspicions remain. Tax Justice Network, a lobby group, has Switzerland at the top of its “financial secrecy” index, reflecting its importance in global wealth management. Despite concessions on secrecy, the country continues to offer opportunities to evade tax to citizens of poorer countries, Tax Justice claims. It also criticises the “ongoing aggressive pursuit of financial sector whistleblowers”.

Meanwhile, as Swiss banks scramble to win business around the world, they have become linked with, among others, the international scandals surrounding Malaysia’s 1MDB state investment fund, Brazil’s Petrobras, and Fifa, world football’s governing body.

Last month, US authorities reported a former employee of Zurich-based Julius Baer bank had admitted a role in a billion-dollar money laundering scheme involving funds embezzled from PDVSA, the Venezuelan oil company. He is due to be sentenced next month in Florida. Julius Baer points out that the indictment does not relate to the bank, but has nevertheless launched an internal review.

Tax exposures may be more or less “regularised”. But as banks seek to attract assets and boost profitability, a big challenge is “to ensure they do not suffer reputation or other damage as a result of being involved in financial crime”, says Philipp Rickert, head of financial services at KPMG in Switzerland. The rest of the world will continue to scrutinise Switzerland with a wary eye.