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SWITZERLAND

A vault prised open

A sudden acceptance of international standards on tax transparency spares the Alpine state from being blacklisted
but brings a big upheaval for its discreet private banks

Commercial war

By Haig Simonian

he stiff breeze that gusts through the winding

streets of Genevas Old Town to the swanky
boulevards along the lake has taken on a
bitter new chill. Switzerland, the country
synonymous with discreet financial services for the
rich, this month agreed to ease its legendary bank
secrecy laws - and the countrys private bankers
fear their world will never be the same. Berns
acceptance of international standards on tax
transparency, potentially lifting the veil on billions
of francs in foreign assets never declared by their
owners, came in an international chain reaction by
countries whose bank secrecy rules long appeared
impregnable. The process started with a growing US
investigation into UBS, the worlds biggest wealth
manager, that endangered Switzerlands largest bank
and prompted Bern into a panic decision to force
the group to surrender up to 300 secret names to the
US tax authorities. Matters accelerated fast as the
US was joined by other big countries including
Germany that, facing yawning deficits, upped the
pressure on other states whose bank secrecy laws
potentially helped tax evasion. With the Group of 20
summit of leading industrialised and developing
countries looming next month, the threat of being
blacklisted prompted surprisingly quick capitulations.
In a matter of days, Austria, Luxembourg,
Liechtenstein and Andorra all agreed to lower their
defences. Earlier, Singapore and Hong Kong, two
other offshore centres, had offered concessions.
"These announcements mark a fundamental change
and an important moment in the history of
international tax co-operation . . . this is an extremely
important breakthrough," proclaimed Angel Gurra,
secretary-general of the Organisation for Economic
Cooperation and Development, the rich nations
club. Switzerland is the biggest prize. Although firm
data do not exist, the alpine state favoured for its
political and economic stability is estimated to
account for about one-third of the worlds $11,000bn
(7,550bn, 8,100bn euros) or so in clandestine
personal wealth. Looking after rich foreigners money
has been big business for the Swiss. Financial services
account for about 13 per cent of gross domestic
product - significantly more than even in other

developed countries. Private banking represents

only part of the total. But this high-margin business
is crucial to banks earnings and a vital source of
direct and ancillary jobs. Geneva, the Calvinist city
that centuries ago drew rich French families fleeing
the revolution, is feeling the change most deeply.
Many of the former refugees turned to banking,
setting up private partnerships such as Pictet or
Lombard Odier, some of which are still controlled by
their founding families today. While private banking
also thrives in Zurich, Switzerlands commercial
capital where the biggest banks are based, the
business is most identified with Geneva, where there
are no fewer than 140 private banks, together
accounting for almost one in five of jobs in a city of
180,000 people. "Of course there is concern. Youre
talking about competitive advantages that are being
put in jeopardy," says Michel Drobert, director of
the Geneva private bankers association. Ivan Pictet,
managing partner of the bank created by his family

204 years ago, warned last month that the Swiss

banking sector could shrink by half if secrecy were
abandoned. The avalanche has caught the Swiss at
a bad time. After four years of record profits and
breakneck growth in private banking, sentiment
had already started to cool. With the notable
exception of UBS and, to a lesser extent, the rival
Credit Suisse, the financial sector had avoided the
worst of the credit crisis thanks to its concentration
on relatively stable private banking. But the banks
had not entirely escaped the impact of tumbling
stock and bond prices. Plunging asset prices affect
the private banks two main sources of earnings.
Commissions generated when clients buy or sell
securities have plunged as customers have grown
more cautious. Annual management fees based on
the size of clients portfolios have meanwhile dropped
as the assets within them have lost value. Even before
this months developments on bank secrecy, most
private banks were curbing their expansion plans.

Then came the body blow from Bern. Warning

bells that the "offshore" way of managing foreigners money was under threat had been ringing for
some time. International demands to curb money
laundering and fight organised crime had prompted increasingly stringent regulations and "know
your customer" rules. The attacks of September 11
2001 reinforced such calls, amid US fears that offshore centres were being used unwittingly to finance terror. Not all Switzerlands private banks responded in time. The biggest, such as UBS and Credit Suisse but also Julius Baer, Vontobel and Sarasin,
reacted by growing "onshore" - opening locally
compliant branches in important foreign markets
to complement their traditional model of managing foreigners money out of Switzerland. Such
banks have established activities in Germany,
France, Italy, Austria and the UK as well as Asia
and the Middle East. About 40 per cent of Pictets
3,000 staff are outside Switzerland. But many
smaller counterparts lacked the resources or foresight to follow suit. It is they that most fear an outflow of undeclared funds. Many Swiss bankers see
the international pressure in a much wider context. "This is not about bank secrecy or hiding taxes. Were fighting a commercial war. The next step
will be to go after Swiss industry," says Eric Syz,
founder and owner of Syz &Co, a medium-sized
Geneva private bank. The Swiss also accuse many
proponents of transparency of double standards:
Gordon Brown is deplored for advocating automatic exchanges of tax information while the UK
prime minister is in their eyes soft on his countrys own offshore tax havens, such as Jersey or
the British Virgin Islands. US politicians expatiating on the evils of bank secrecy are regarded in
the same light. "They rant about how bad we are
but forget about the lack of transparency in their
own back yard. What about the billions of undeclared dollars stashed away by rich South Americans in Miami or by wealthy Taiwanese on the
west coast?" asks a Zurich lawyer. Others point to
US and UK laws that allow the creation of tax-efficient trusts - which are highly restricted in Switzerland - and suggest that Bern should retaliate with
similar rules.

If all offshore financial centres give ground, we have a level playing field
The Swiss argue that the debate on client confidentiality touches on broader moral issues concerning the relationship between
citizens and the state. Under their direct democracy, where almost every government action can be challenged by referendum, confidentiality is seen as a right. "People trust each other
here. No one wants a Big Brother state," adds the lawyer. Evading tax is, of course, just one reason why people deposit money offshore. The Swiss note that their secrecy laws date back to
1934, when they were enacted partly to protect German Jews and
trade unionists from the Nazis. More recently, rampant inflation, political corruption and runaway crime have been among
other reasons for wealthy people to deposit assets outside their
own country - as many South Americans will know. Such arguments explain Swiss outrage at the perceived bullying by bigger
countries. Peer Steinbrck, Germanys finance minister, has become a bte noire because of his forthright criticism. Thomas
Mller, a centre-right Swiss MP, told parliament Mr Steinbrck
reminded him of "that generation of Germans who walked around
the streets in leather coats, jackboots and armbands". Mr Mller
was reprimanded by the speaker. But such views are widely
shared. Bankers have taken comfort from comments by Hans-Rudolf Merz, finance minister, that it could take years to renego-

tiate 70-odd double taxation treaties, gain parliamentary approval and face off possible referendums. Mr Merz has also
stressed that Switzerland would seek reciprocal concessions,
such as improved access for its banks. The government has also said its actions depend on other offshore financial centres
doing the same. Such fighting talk has bolstered bankers confidence, even amid greater transparency. "If all offshore financial centres give ground, we have a level playing field," notes
Mr Drobert. The private banks also take comfort from the fact
that Bern has ruled out automatic exchanges of tax information
and stressed it will co-operate with foreign investigations only
in cases of justifiable doubt. "We will not accept fishing expeditions," says Mr Merz.

Private banking will change

irreversibly
Recent inflows have stemmed largely from areas such as Russia
or parts of Asia and the Middle East where domestic taxation
is minimal, meaning evasion is not those depositors motive.
Some bankers believe they may even retain assets should other
clients feel obliged to come clean. Good service, reasonable returns and force of habit could persuade many to retain a nest-

egg in Switzerland. Alternatively, customers holdings could be

recaptured by the newer "onshore" branches if repatriated. Partly in that hope, bankers are keen for Bern to seek "fair treatment"
- meaning limited penalties - for clients who willingly come forward to their domestic tax authorities. Above all, the Swiss think
they offer a credible location for foreign savers in uncertain
times. Most Swiss banks have capital ratios that are the envy of
rivals abroad: even UBS, the biggest continental European casualty of the credit crisis, had a capital ratio of 11.5 per cent at
the end of last year. Many smaller counterparts boast rates of
around 15 per cent. The bankers acknowledge clients holdings
have fallen sharply in value but claim their conservative investment strategies and focus on long-term wealth preservation have
cushioned the blow. They add that, unlike in the UK, US or Germany, no Swiss bank has been nationalised or gone bust. So
most Swiss bankers reckon they will come out chilled, but not
frozen, by the crisis - although institutions that failed to recognise the warning signals and remained dependent on undeclared
money will suffer, they acknowledge. But irrespective of the
shape in which their industry emerges, one thing is clear: after
UBSs travails and Berns historic shift of policy, private banking
will have changed irreversibly.