Is Swiss Banking Dead?

Posted by: Theo Francis on July 01

By Elise Craig

Things are looking a little grim for Swiss bankers these days.

Switzerland—famous for its strict bank secrecy laws—has cut a deal with U.S. authorities to help prevent tax evasion through the Alpine country’s famous numbered accounts. Revisions to a two-way tax treaty will increase the amount of information shared between the two countries—a big deal for clients who count on the privacy of Swiss banks. According to the Swiss ministry, banks would be able to give out information in “individual cases where a specific and justified request has been made.”

The pact was negotiated in the shadow of an IRS crackdown on offshore tax evasion. The U.S. Justice Department charged June 30 that beleaguered Swiss bank UBS has “systematically and deliberately” recruited wealthy clients to hide their wealth from the IRS, extending a long-running inquiry into the bank’s practices. The IRS is requesting the identities of 52,000 accounts—a prospect that is pushing many high-net-worth customers to other banks. A 3.8 billion franc capital increase is also sparking fears that the bank plans to use most or all it to settle its U.S. tax problem.

Meanwhile, the IRS crackdown is spurring both UBS and Credit Suisse to have their American clients move their funds into specifically registered accounts, or lose their bank accounts. According to the New York Times, some smaller banks are turning away their American customers altogether. And the U.S. isn’t the only one applying pressure.

So will the crackdown diminish the stature of the Swiss banking industry, with its long and storied history of secrecy and intrigue?

Swiss bankers, unsurprisingly, say no. They rattle off a catalogue of Switzerland’s advantages – a longstanding and solid legal system, plenty of English-speakers, the infrastructure to handle complex financial transactions, its proximity to other financial centers and access to far-flung regions of the world. But the country’s biggest draw may well remain its emphasis on privacy, argues Jaques de Saussure, managing partner of closely held Swiss bank Pictet, which is owned by just seven partners and bills itself as the biggest unlimited-partnership in the banking world. By Swiss law, divulging customer information is still a criminal offense, and under the new pact, bankers only have to disclose account-holder information when a foreign government provides sufficient evidence of tax evasion or other crimes.

So, while Switzerland may lose its notoriety as a tax haven, it stands to maintain its reputation for privacy. And, Saussure says, Swiss banks have a lot of clients who want to keep their wealth hidden for purposes other than tax evasion—Central and South Americans who fear kidnapping if their wealth became common knowledge, for example, or clients in the Middle East who worry about geopolitical turmoil.

Saussure also emphasizes the Swiss industry’s stability, noting that UBS remains the only bank Switzerland has had to directly aid. Meantime, the U.S. has shelled out billions to some 632 banks, so far.

Indeed, Saussure believes the American banking system can learn from banks like his—banks that are privately held with unlimited liability among the partners. With their own assets on the line, the partners at Pictet have everything to lose if their bank fails.

It might not be so bad if U.S. financial corporations saw to it that their executives had similar exposure -- not just to gains if their companies flourish, but to losses if they stumble, Saussure notes. Perhaps all but $500,000 of salary could be paid in restricted stock that could only be sold after at least five years. “For key executives and board members to have significant stakes is very important,” he says.