Has UBS Ruined Switzerland’s Standing as a Financial Haven? « naked capitalism

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Friday, November 7, 2008

Has UBS Ruined Switzerland’s Standing as a Financial Haven?

Personally, I would lay more blame for any damage to the Swiss banking brand to the fear of the possible compromise of Switzerland’s standing as a tax haven. However, as we will discuss, the giant Swiss bank UBS has lost a lot of prvate banking clients over worries about the bank’s soundness, something completely contrary to the Swiss image of rock solid financial institutions (and equally reliable wristwatches and cuckoo clocks).

Oh, and UBS also was at the center of an ongoing row with the US over bank secrecy. Per Der Spiegel:

After fighting Switzerland’s banking secrecy laws for decades, European finance ministers are about to receive support from the United States. Investigations into major Swiss bank UBS and a proposed law against tax havens are ratcheting up pressure against the system….

Liechti’s former colleague Bradley Birkenfeld, as well as Mario Staggl, an executive with a trust company in Liechtenstein, are under indictment for allegedly helping American billionaire Igor Olenicoff evade taxes. According to the indictment, a fortune of about $200 million (€129 million) was sheltered from tax authorities “in secret bank accounts in Switzerland and Liechtenstein.” Prosecutors allege that Staggl’s attorney in Gibraltar even helped Olenicoff hide the details of his ownership of a “147-foot yacht.”

The accused are alleged to have forged special forms that Swiss banks use to report their US customers’ capital gains to the US tax authority, the Internal Revenue Service (IRS). Both Birkenfeld and Staggl have declined to comment on the charges.
“UBS is walking a thin line. On the one hand, it has to show a willingness to cooperate. On the other, it is trying to protect its customers’ banking secrets,” says Robert Heim, an attorney in New York and a former investigator with the US Securities and Exchange Commission…

According to Heim, the United States is by no means the only place where Swiss high finance and the country’s banking secrecy laws are coming under growing pressure. Foreign authorities around the globe are increasingly taking sharper action against tax evaders. Swiss financial institutions, often in tandem with partners in Liechtenstein, play a central role in helping the ultra-rich avoid paying billions in taxes.

An almost unimaginable fortune of more than €3 trillion ($4.7 trillion) is currently sitting in Swiss bank accounts. The discreet Swiss allow vast amounts of money to disappear into trusts, offshore companies and bank accounts, money that is often protected by Switzerland’s banking secrecy laws.

Because of these laws, foreign officials on the hunt for untaxed riches are often forced to end their quests at the Swiss border…

More than anything, Switzerland’s system of banking secrecy amounts to a very good business. It is considered the most controversial model of success in the history of global high finance. In past decades, the banking secrecy that is protected by law in Switzerland has acted like a magnet, drawing in trillions of euros and contributing to the meteoric rise of the small Alpine country’s financial sector.

Once insignificant boutique banks transformed themselves into banking industry giants. Despite suffering record losses as a result of the US subprime mortgage crisis, banks like UBS and Credit Suisse are still seen as top choices for portfolio managers. The entire industry makes up 15 percent of Switzerland’s gross domestic product…. everyone values the Swiss authorities’ policy of refusing to respond to inquiries from foreign tax investigators. Those seeking a place to park untaxed income have nothing to fear in Switzerland. Their account information is kept under lock and key because tax evasion is not considered a criminal offence in the country.

This story erupted in May, and has retreated to the background. An update from the Financial Times in October:

UBS on Thursday gave its clearest indication yet of how seriously it is treating US probes into its former Swiss-based private banking activities for wealthy American clients by announcing it had set up a special boardroom committee to follow the issue….

UBS is also under investigation by the US Department of Justice and the Securities and Exchange Commission in separate, but linked, inquiries into whether bankers assisted clients in evading tax, or breached US rules on providing investment advice. The bank has said it is co-operating with the inquiries….

Mr [Peter] Kurer’s (UBS chairman] comments come against the background of increasing pressure from the US authorities on the bank to disclose the names of some of the roughly 19,000 US clients holding accounts in Switzerland. UBS has responded by unilaterally closing accounts with no securities holdings and balances of less than $50,000, believed to comprise a substantial proportion of the total.

The bank is also believed to have passed names of some customers suspected by the US authorities of tax fraud to the Swiss government, after formal requests for legal assistance from the US.

However, it is unlikely any such details have yet been transferred across the Atlantic. Bankers stressed that, under Swiss law, a client had to be informed before any such step. Moreover, such an account holder would have the right to appeal to the highest Swiss court before data was provided to the US.

If the general threat of possible compromise of Swiss banking secrecy wasn’t bad enough (but will the Swiss really blink on this one? Doubtful), we have the specter of UBS as being the poster child of unsound banking, running the nasty combination of high leverage and high risks (although where were the Swiss regulators when UBS was running with so little equity?). This article ran in the Swiss press, and reader Marshall provided the link and a synopsis:

After long silence, UBS today had to admit that this year clients of the bank have withdrawn 140 billion swiss francs, or the equivalent of 130 billlion dollars. Those profitting from these transfers of money out of UBS were state and private banks. The escape from UBS did not even stop after the Swiss Confederation granted UBS a package/bailout of 68 billion swiss francs, an unique transaction in history. People simply don’t trust the situation anymore and are afraid they will soon be standing in front of a closed bank.

Private banking is the one sector of the industry is recession-immune, and UBS appears to have messed up its best franchise chasing higher income and (supposed) growth opportunities.

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Read more on Banking, UBS AG, Investing in Switzerland at Wikinvest

15 Comments:

Anonymous says:

November 7, 2008 at 3:06 am

I don’t think Private Banking is immune in a downturn and global deleveraging. As all asset prices go down, the asset under management will decline, and that will impact fee income for the private banks.

aw70 says:

November 7, 2008 at 3:09 am

Minor nitpick w/r to Switzerland:

Reliable wristwatches, yes.

Cuckoo clocks, not so much. That would be the Germans, in particular the Bavarians, and even more specifically the Black Forest region.

Otherwise, as usual, a highly interesting post. Many thanks for your great work!

Yves Smith says:

November 7, 2008 at 3:18 am

I am speaking to American prejudices here…we are notoriously bad at geography here and anything in the Alpine area gets lumped together! That comment was meant to make fun of American ignorance and may have landed a bit flat.

aw70 says:

November 7, 2008 at 4:03 am

Thanks for your reply, but my post was not meant as a real criticism, anyway.

After all, even if you really did not know the difference (which I somehow doubted, but I still couldn’t resist the nitpick), you would be in good company.

Quoth Orson Welles as Harry Lime in the Third Man:

In Italy, for thirty years under the Borgias, they had warfare, terror, murder and bloodshed – they produced Michelangelo, Leonardo Da Vinci and the Renaissance. In Switzerland, they had brotherly love and five hundred years of democracy and peace, and what did they produce? The cuckoo clock!

That line was actually an impromptu idea by Orson Welles, and not in the original script by Graham Greene. As one might expect, Swiss public opinion was allegedly Not Very Amused by this…

Marin belge says:

November 7, 2008 at 4:56 am

Any risk of Reykjavik syndrom here?

I definitely believe that the balance sheets of bankers now represents a significant downside risk for the swiss currency.

who can believe that the investments of swiss bankers are at home…

In the absence of figures – this crisis is a mad one. NOBODY HAS FIGURES ! – I bet, no better word, that those smart investors at CS and UBS have played smart money in the East European monetary conendrum on top of their disastrous games in Wall Street.

I’d be glad to hear anyone having anything more than BETS on this?

Anonymous says:

November 7, 2008 at 6:17 am

Taxation is another matter that requires some logical thinking.

The accounts of any company will show that all taxation, whether corporate, or on the payroll, or contributions to government insurance and pension schemes, is financed from a proportion of sales revenue. At the end of the supply chain, real paying customers, i.e. individual people with money, will be found that support the production costs of each associated supplying enterprise. If the customer does not contribute to these tax bills, who does?

The concept of tax evasion is interesting in that, these people are big spenders and will be big tax payers already by the implicit taxation of their consumption. Assuming they derive their money from enterprise, then their customers have not been burdened with an extra tax bill. Government demands that these rich entrepreneurs tow the line and force their customers to pay up in future. Meanwhile, the government looks good by targeting fat cats. However you look at it, the consumer always pays.

One must conclude that our complex tax system is a charade to hide the true cost of government from consumers and voters.

ECForster

cansarnoso says:

November 7, 2008 at 6:18 am

aw70
third man
drug traficking in another indiscriminate alpine country

belge
buying same ticket on reykjavik replay -at least in top three-

Anonymous says:

November 7, 2008 at 8:22 am

not in the same league as Reykjavík, at least the swiss produce something usefull and are good at value adding! with no natural resources they run a trade surplus (not to mention the service balance) and the looming close-out of the CHF carry supports their ccy – have a good one!

River says:

November 7, 2008 at 8:47 am

There is certainly nothing new about tax havens, so why the sudden interest in them. Could it be that TPTB are going to significantly increase taxes on those most familiar with the use of tax havens? Is it possible that TPTB want to insure that laws are changed everywhere to make tax avoidance illegal? Surely this is not to be! Where would those in charge of changing the laws stash their loot?

One argument in favor of tax havens is that they help pressure developed countries to reduce their tax rates.

‘To a certain extent, the founding concept of a tax haven appeared as an economic response to the principle of taxes. For instance, in Ancient Greece, some of the Greek Islands were used as depositories by the sea traders of the era to place their foreign goods to thus avoid the two-percent tax imposed by the city-state of Athens on imported goods. In the Middle Ages, Hanseatic traders who set up business in London were exempt from tax. The U.S. is not new to tax haven users. In 1721, American colonies traded from Latin America to avoid English taxes.’

http://en.wikipedia.org/wiki/Tax_haven

Anonymous says:

November 7, 2008 at 2:45 pm

>If the customer does not contribute to these tax bills, who does?

Arrgghhh!! Another one that simply cannot grasp the concept that the price of something is what the purchaser values it at, and if none or 99.9% of that money goes to the taxman the consumer is indifferent.

But even having it your way – as I'm sure you will no matter how many times I try to explain it to you:

A given government needs some level of revenue, nobody is going to do anything for free – a concept you should be comfortable with.

So if nobody pays taxes on the transactions you described, then the revenue will have to come from some other set of transactions.

And now we have economic distortion – which again, I suspect you would agree is a bad thing.

ECForster says:

November 7, 2008 at 4:06 pm

>…the price of something is what the purchaser values it at..

I do not disagree. Only the market will determine consumer prices for goods and services that have to support an additional tax on a business. But simple accounting of sales revenue reveals that the consumer will bear the entire burden of that tax in those prices. The consumer is the ultimate taxpayer.

CrocodileChuck says:

November 7, 2008 at 4:48 pm

I’ve long had an interest in the history of banking. For a eye opening survey of off shore banking since the first Oil Crisis of ‘73, try “The Sink” by Jeffrey Robinson. Amusing and shocking at once-a riveting read. One will never regard Private Banking in the same way….

Thank you for this post, Yves

CrocodileChuck

michael says:

November 7, 2008 at 11:30 pm

Sorry, but the Swiss Banking Secrecy Law effectively ceased to exist when Switzerland agreed that banks hand out all information on criminal offense charges of EU countries (and most likely to all other big western countries as well). Even though “tax evasion is not considered a criminal offence in the country” some official just has to make something up that IS a criminal offense also in Switzerland and there you go.
So all these articles just seem to be scapegoating.
a
It has become the other way round, the IRA has now setup such a mass of forms and regulations that ALL financial institutions over the world have to honor, that e.g. it has become close to impossible to find a Swiss online broker that will let you open an account if you have a US passport…

living in Switzerland for 10+ years (without being a high net worth individual),

Anonymous says:

November 8, 2008 at 1:48 pm

>The consumer is the ultimate taxpayer.

Why not just say the taxpayer is the ultimate taxpayer? Because then the idiocy of your line of reasoning becomes patent.

Somebody has to pay taxes. Economists tend to agree that non-distortionary taxes are best, and this usually means moderate taxes on everything (income, capital gains, profits, property, sales, etc) rather than high taxes in one area but low taxes elsewhere. Double taxation of economic activity tends to produce high taxes, and thus is bad. But in the end, no matter how you slice it, the taxpayer in aggregate end up paying all the taxes.

Anonymous says:

December 2, 2008 at 1:36 am

I said it earlier and I say it again: Some Americans have exploited the Swiss bank secrecy laws to evade taxes. Now, who is guilty? According to your logic, if you shoot someone, the gunmaker is the culprit. I know an American who showed up in a Swiss bank and presented a Canadian passport to open an account. The clerk was not suspicious and accepted the application. Another example: You go to a jeweller or bank and buy gold bullions. Now, the gold price goes up. Are you reporting to the IRS that you made a capital gain? I bet no! Swiss banks currently pay 1% interest on savings accounts. Off this 1% capital gain, they deduct 35% withholding tax, which they transfer back to the source – in this case the IRS. Now, who evades taxes here? I think it is just mistrust of the IRS. And, to end the discussion about the arrogant US pressure to eliminate the Swiss bank secrecy laws, the laws are written into constitution and a removal would require a referendum. Even if UBS or the Swiss government is standing with their back against the wall, the US, EU and other OECD bandits won’t be able to take on the swiss voters.

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