Switzerland, at risk of losing its crown as the world's top wealth management hub to Singapore, is seeking a deal on billions of dollars of untaxed money hidden at its banks, under pressure from cash-strapped foreign nations.
Last year Europe and the US, hungry for tax revenues after numerous bank bailouts, forced Switzerland to weaken its prized bank secrecy and extracted promises from the placid Alpine nation to help fight tax evasion.
That, together with a bitter US tax fraud probe into wealth management giant UBS, opened cracks into the rock-solid reputation of the $2trn Swiss wealth management industry. UBS paid a hefty $780m fine to settle US tax fraud charges in February 2009 and agreed, in accordance with the Swiss government, later that year to disclose Swiss bank data belonging to around 4,500 of its US clients.
Pressured from all corners, Berne was forced to swiftly devise a strategy to keep Switzerland on the global financial map, whose cornerstone consists in negotiating deals with large European neighbours aimed at allowing those who hid money in Switzerland to pay their way out of it without risking jail.
Helvea analyst Peter Thorne estimated last year that Swiss banks hold 726 billion Swiss francs ($722.4bn) of undeclared European assets.
German Finance Minister Wolfgang Schauble, who is holding talks with his Swiss counterpart, has promised such a deal by the end of October.
“I am very convinced we will find a solution,” said Walter Berchtold, head for Private Banking at Switzerland's second-largest bank Credit Suisse.
“It is extremely important as customers need clarity, our staff needs clarity and the bank needs clarity in order to (re)develop our business model and attract new assets from that region,” said Berchtold, one of the world's most influential private bankers.
Although the Group of 20 nations said last year it sought to eradicate tax evasion in all major offshore centrws, it is Switzerland that has so far borne the brunt of the attacks since it alone manages nearly one third of global offshore wealth, data from the Boston Consulting Group showed.
Tax evaders
European assets make up about 50 percent of foreign assets held in Switzerland. A large portion of undeclared money, known as “Schwarzgeld” or black money, came from Germany and Italy and was smuggled into the country starting in the 1960s, when income taxes started to rise in Europe.
Italy, which has an endemic tax evasion problem, acted pragmatically last year by offering its citizens a generous tax amnesty that brought nearly €100bn back home.
But Germany would not feel comfortable with a deal that allows tax cheats to come off lightly while millions paid what they owed.
“The Swiss legacy money issue needs to be resolved,” said Hans-Uelrich Lauermann, a partner with PriceWaterhouseCoopers in Frankfurt. “The problem is that a solution needs to be politically acceptable in Germany.”
Tax experts say an aggressive campaign by German tax police, which included paying for stolen data of Swiss bank account records and a raid at Credit Suisse's bank branches in Germany, prompted more than 20,000 Germans to turn themselves into the taxman.
The pressure may become only greater later this year, as Germany will make it difficult for tax cheats to escape criminal charges from next January onwards.
Experts expect the Swiss-German talks to be a blueprint for a similar deal with other nations. Even Singapore, which is not under the same amount of pressure as Switzerland, is keeping a close eye on the situation.
“The Singaporeans are closely watching the German-Swiss tax talks as they know that the Chinese may use this as a blueprint,” said Eduardo Leemann, CEO of Swiss-based private bank Falcon.
China new has become an increasing source of offshore wealth in Singapore.
“It's not an issue for Singapore right now, but it will be 5-10 years from now. The Chinese want to do it at their own pace.”
Looking east
Even though Switzerland is putting a lot of effort into trying to clinch deals with European nations, private bankers know the bulk of new growth will come from clients in emerging markets, where the rate of wealth creation is outpacing the West.
Singapore, and to some extent Hong Kong, have become the new centres of gravity of wealth management. And their clients are not just from the Asia-Pacific region, but also Americans and Europeans uneasy about the intensifying tax scrutiny in their own regions.
Even clients from the Middle East, the other main source of revenues for Swiss private banks behind Europeans, are now opting to open accounts in Singapore rather than Switzerland.
Hans Nuetzi, Chief Executive Officer at Switzerland's number three purely private bank Clariden Leu, said his bank had opened a European desk in Singapore following interest from European clients.
“Clients from the Middle East are increasingly interested in Singapore. About 80 percent of the new accounts we opened with Middle Eastern clients were opened in Singapore,” Falcon's CEO Leemann said.
But any Swiss wealth erosion in favour of Singapore, whose foreign assets now are just a quarter of Switzerland's, will take time.
According to the 2010 Private Banking Survey by consultancy McKinsey, Switzerland last year experienced net outflows worth one percent of its private banking assets. Those were mainly attributable to transfers by scared European clients.
Switzerland continued to enjoy inflows from Asia, Latin America, Russia and Eestern Europe, confirming its global attraction as a wealth management centre, McKinsey said.
Some of Switzerland's oldest private banks date back to more than 200 years ago and its polyglot private bankers are used to trading in any currency and any product.
Political stability, the basis on which this neutral country has built its wealth, excellent infrastructure and bureaucratic efficiency, are still valued by rich customers, private bankers say.
The country, already home to super-wealthy individuals of the likes of former F1-star racer Michael Schumacher, pop-singer Tina Turner and IKEA-founder Ingvar Kamprad, is also valued for its quality of life, its excellent schools and the ability to negotiate a friendly tax rate with local tax authorities.
“In the short-term, even though we have some problems with bank secrecy, I still think Switzerland is still extremely well placed,” Credit Suisse's Berchtold, a former precious metals and options trader said.
“The race will go on, but Switzerland will be leading for quite some time to come.”
