The tax dispute with the U.S. promised to become a catastrophe of biblical dimensions for the Swiss banking industry. And the banks bled – for sure. Today however, Switzerland's financial market is in better shape than before, maybe thanks to the U.S. Seven reasons why this is so.
1. Banking Secrecy Would Have Fallen Anyway
Neither government, industry regulator nor the banks themselves were able to withstand the pressure: U.S. tax inspectors were allowed to vet the customer lists of more than 100 Swiss financial institutes. Banking secrecy came to an end. It is however too easy to blame the imperialist power across the ocean for ruthlessly exercising its might or the Swiss government for caving in. Banking secrecy belongs to the analog world – which isn't anymore.
The digital world is transparent, personal data have become public, to a surprising and indeed frightening degree. Almost unlimited amounts of data can be stored, transferred – or sold. The examples of Hervé Falciani and Edward Snowden showed just how transparent our systems have become. Banking secrecy was a thing of the past and would have come to an end in any case.
2. Leniency – Not Bankruptcy
Banks, consultants and experts expected much higher fines for the Swiss banks. As much as half the assets identified as tarnished might be docked by the U.S. tax authorities, was an expectations aired as late as at the start of 2015. In reality, a rate of 10 percent stands out as hard punishment. Neue Helvetische Bank recently published a list of fines already issued, reaching a total of 4 billion francs so far, which compares with 40 billion francs in money declared untaxed.
Julius Baer, Switzerland's third-largest wealth manager, put aside 350 million dollars as cover for the impending fine. This compares with the sum of 1 billion that analysts expected at the early stages of the tax dispute. And even Credit Suisse, whose fine of about 2.8 billion was the biggest to date, got off lightly.
3. Credit Suisse – an Institution Unscathed by Fine or Condemnation
Credit Suisse was forced to pay the enormous sum of 2.8 billion dollars and tagged as a criminal organisation – enough to cripple a bank. CS took it in its stride, unscathed by label and punishment. Brady Dougan, when still in charge of the bank in 2014, exclaimed: «We did a good job.»
Indeed: The U.S. Justice Department and authorities involved in the tax dispute had painted a bleak scenario awaiting the Swiss financial world: conviction, fine, withdrawal of banking licence, charges against bank managers, etc. What's left is the fine. The transfer of information about financial transaction followed the due legal process. And the bank is allowed to maintain its business with U.S. pension funds, presumably on order by President Barack Obama. In the U.S., Credit Suisse is plying its trade as if nothing had happened.
4. Bankers Punished Mildly
The U.S. accused more than 20 Swiss bankers of helping clients to avoid taxes. Some of them turned themselves in, some were arrested (Martin Liechti and Raoul Weil), others are on the run. The latter won't be able to leave Switzerland or only travel to countries with no extradiction treaty with the U.S. The lives of these bankers have been changed beyond recognition, or even destroyed. But observers conclude that the judiciary showed remarkable restraint and pragmatism – apart from the usual exhibition of the accused and the customary prejudgments.
The procedure against Raoul Weil, the former head of UBS Wealth Management, was exemplary. The U.S. authorities impressed just how much they intended to make this an example. Weil faced five years in prison. But, he was freed. Another example is Hansruedi Schumacher, who denounced his boss Weil. He pleaded guilty, received a suspended sentence and a fine. The only one to be imprisonned was Bradley Birkenfeld, the whistle-blower.
5. U.S. Market Remains Attractive
The clean-up of the tax dispute is still dominating the headlines. The priorities of Swiss private banks however have changed. These players won't give up on the world's largest wealth management market. Banking giant UBS, which was at the origin of the dispute with the U.S., is ramping up assets under management like never before, driven on by Bob McCann. Zurich-based Vontobel is about to expand its presence in the U.S., adding further branches to the one in Dallas.
Even smaller players, such as Geneva's Syz and Reyl are on the offensive, while no less than 40 Swiss institutes deal in the officially sanctioned offshore business with taxed U.S. assets.
6. Clean Offshore Banking
The U.S. used all its might as global hegemon to put an end to the Swiss business with untaxed U.S. assets. The experience was both unusual and uncomfortable for the Swiss banks and the settlement is incomplete. But the resulting restructuring was necessary and long overdue.
The easy business with untaxed money was damaging the reputation of the Swiss financial market. It made Swiss banking less competitive. The end of the black money era is an impulse modernise the financial market, making it more efficiency and to sharpen its professional qualities. A clean Swiss offshore banking is far better advertisement than the reputation as a vault for untaxed money.
7. The Swiss Financial Market Is Best in Class - Again
It is only seven years since then Finance Minister Hans-Rudolf Merz declared banking secrecy not up for negotiation. Battered by the onslaught from the U.S. and other countries and faced with black-listing of its financial market, Switzerland has taken the lead to make banking transparent.
At conferences of the industry, the pursuit of a white-money strategy, of the exclusion of business with untaxed funds, is repeated like a mantra. The information about banking clients will be exchanged with the authorities of other countries starting in 2017 and money-laundering standards will comply with GAFI already a year earlier.
Fidleg and Finig will bring Switzerland in line with its neighbors in the European Union in respect to the financial market regulation. And the fall of the domestic banking secrecy is already a topic within the industry.
