Switzerland signed an agreement late last week that will see about 100 small Swiss banks disclose hidden details about their U.S. operations and pay hefty fines for helping U.S. citizens evade taxes.  The agreement also gets an additional 200 Swiss local banks off the hook by giving them a clean record with U.S. authorities.  The accord, hence, covers all but the 14 Swiss banks which are currently being investigated by the U.S. Department of Justice (DoJ) – Credit Suisse (CS), Julius Baer and HSBC’s Swiss arm among others. The largest Swiss bank, UBS (UBS), already settled tax evasion charges with the U.S. in 2009 for $780 million.
As far as the banks which are still under investigation are concerned, the agreement carries both good and bad news for them. Why do we say so? It’s good news because the agreement largely lays down the amount of fines these banks can expect for their involvement in the alleged tax evasion. The banks will be able to finally settle with the U.S. authorities in the near future. But the agreement also effectively puts an end to Switzerland’s perception as a tax haven among investors around the globe which will negatively impact the growth in assets for the country’s banking industry as a whole and for the largest banks in particular.
The Swiss Government Really Did Not Have Much Choice
Tax authorities around the globe have taken a renewed interest in money tucked away by their country’s citizens in offshore accounts in the wake of the economic downturn of 2008 – quite clearly to make up for reduced tax revenues from the slowing economic conditions by focusing on this potential revenue stream. And Switzerland’s banking sector with its reputation for privacy has been an ideal target for the leading economic giants to begin with. Over the years, the U.K. and Germany have inked their own tax accords with Switzerland and France is looking to reach an agreement of its own soon.
The U.S. DoJ has also been quite active in pursuing the Swiss banks over assisting U.S. citizens, starting with the crackdown of UBS in 2009. The DoJ then shifted its focus on fourteen other Swiss banks and demanded that they furnish information about all U.S. clients holding accounts worth at least $50,000 over the last 10 years (see Swiss Bankers and US Gov’t Square off Over Credit Suisse). But the stand-off dragged on for well over two years before the DoJ turned the heat up by threatening to initiate full criminal proceedings against all the banks.
This represented a big problem for the Swiss government on several fronts. Firstly, the increased scrutiny of its biggest banks has had a negative impact on the perception on Swiss banks in general in the eyes of global investors – especially after the oldest Swiss bank Wegelin was forced to cease all operations after pleading guilty to U.S. tax evasion charges.  Secondly, some of the banks (notably Credit Suisse) have a strong presence in the U.S., and the criminal proceedings could end up with the banks forfeiting all their U.S. assets and in a worst case scenario even losing their operating licenses in the country. Finally, the fact that two of the fourteen banks named by the DoJ are government-run cantonal (or regional) banks only complicated matters further.
Starting from a weak position due to all these factors, the Swiss government acceded to fines of as much as 50% of the dollar value of assets in hidden offshore accounts for all its tier-two banks to save them from any scrutiny. The fines range from 20% to 50% of the assets held based on when the nearly 100 banks impacted accepted the money from U.S. citizens. Another 200 Swiss banks also come under the ambit of the agreement with those who have any operations in the U.S. required to prove that they did not breach any U.S. law.
So What Does It Mean For Credit Suisse And The Other Unlucky Thirteen Under Investigation?
With the agreement, U.S. tax authorities have only 14 top-tier Swiss banks on their scanner – those which are already under investigation. The Swiss government’s decision to settle this issue for the larger part of the Swiss banking sector should pave the way for a similar settlement for each of the remaining banks too in the near future, albeit at an admittedly steep one-time cost. And this can be seen as a positive thing for the banks as they can expect to put the nagging tax evasion issue behind them by next year.
But the agreement comes with a significant long-term downside. Swiss banking clients who operated their offshore accounts as a means to save on taxes will find this option closed. This will not only limit the growth in the size of assets under management for these banks in the future but could also trigger a withdrawal of existing assets, the impact of which on Credit Suisse can be estimated by making changes to the chart below.
- U.S., Switzerland strike bank deal over tax evasion, Reuters, Aug 30 2013
- US and Switzerland reach tax evasion accord, Financial Times, Aug 29 2013
- Wegelin’s Fall to Tax-Haven Poster Child, The Wall Street Journal, Mar 3 2013
Disclosure: No positions