Government moves to align tax regimes with EU neighbours and banks facing a tough US disclosure programme mean plenty of work for Swiss firms. The problem is scaling up for this one-off bonanza
The Swiss banking industry continues to reel after the August publication of the US/Swiss bank disclosure programme, with almost daily moves by the country’s government to join the international fold in the fight against tax evasion. Add to this the inexorable march towards harmonisation with the surrounding EU and it is clear that Swiss bankers will have to compete to survive. All of which is creating ample work for lawyers.
This marks “the end of banking secrecy” in Switzerland, the head of tax issues at the Organization for Economic Cooperation and Development (OECD) said after the Swiss government signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, an international agreement on fighting tax evasion among more than 60 countries, on 15 October.
This was a feather in the cap of the Paris-based OECD, which has spearheaded a clampdown on tax evasion and the concealment of illicit funds in the wake of the financial crisis of 2008 and subsequent eurozone debt crisis.
US tax authorities in particular have taken tough action against some Swiss banks, with the disclosure programme assigning banks to categories based on the amount of undeclared US funds they are estimated to have received.
Fourteen so-called Category One banks, a group that includes Credit Suisse and Julius Baer, are under criminal investigation by the US Department of Justice’s (DoJ) tax division and are not included in the new programme.
Category Two banks are those that have “reason to believe” they may have committed tax-related offences or monetary transactions offences under US law in connection with undeclared US taxpayer accounts.
They can seek non-prosecution agreements, along with a fine equal to: (i) 20 per cent of the maximum dollar value at any time of each US person’s account which existed on 1 August 2008; (ii) 30 per cent of the maximum dollar value at any time of each account opened between 1 August 2008 and 28 February 2009; and (iii) 50 per cent of the value of accounts opened after 28 February 2009.
These dates correspond to the disclosure of the DoJ’s prosecution of the first targeted Swiss banks – so, when other banks should have known better.
“A fine of 20, 30 or 50 per cent of assets under management could be a death warrant for quite a few Swiss banks,” says Alexander Troller, a partner at Lalive, “but I’m confident that this sets a frame for the programme and each bank will be examined in the light of facts specific to that bank. You may have a starting number depending on bad assets under management, but then you focus on the behaviour of the bank – whether a bank passively accepted customers or chased them in the US will make a difference.”
The banks in categories three and four, meanwhile, would essentially be those with no undeclared US assets and would not be fined.
“The impact is not as bad as you’d think,” says Franz Stirnimann, a partner at Winston & Strawn in Geneva. “The programme is limited to US citizens and virtually all the accounts covered have already been disclosed. Also, it hasn’t hit the global clientele, there are still a lot of people from Russia, the Middle East and Latin America who come and use the services of Swiss banks.
“Although Switzerland is facing huge competition from Singapore and other sophisticated offshore jurisdictions, it doesn’t mean Switzerland as a tax planning jurisdiction is off the map – on the contrary, I see a lot of healthy private banking activity here.”
Gain from pain
While Switzerland has had a history of competing in industry sectors such as precision mechanics and chemistry, “the financial sector has been a bit distorted”, opines Troller.
“Certainly it has flourished but the conditions were such that there was less need to compete because we had the structural indulgence of this lack of transparency in tax matters – this now has to change,” he adds.
There could be long-term gain from the short-term pain
“The Swiss financial services industry will come out stronger and be ahead of the pack if it manages to deal with the new environment,” says Niederer Kraft & Frey partner Philippe Weber. “In the short term many people are afraid that the banks will be losing assets under management while costs of compliance go up and revenues go down, but in the longer term it may prove beneficial.”
While lawyers’ regulatory work is a cost that clients may prefer not to spend a lot on, with the collapse of Switzerland’s oldest private bank Wegelin & Co last year on the back of US tax evasion charges and a fine of more than $50m (£32m), plus an estimated one-third of banks potentially ceasing to exist, it would be money well spent.
“Boards of directors are grappling with how to behave,” says Catrina Luchsinger Gähwiler, managing partner of Froriep. “Directors are looking at alternatives. The problem is that the financial consequences of this deal are drastic,
depending on the amount of assets of US persons you have you could pay a multiple of the equity in the bank, meaning the bank goes bankrupt.”
“Where will they end up when the fines are not related to the equity of the company but rather the assets held by American clients?
Even banks that believe they have done nothing wrong will have to consider whether to enter the programme.
“Even if you’re a bank which believes it is squeaky clean, are you sure you know how every employee has been acting with respect to US clients and activities, and that these endeavours have been run completely by the book since 2008. And are you comfortable not even entering the programme?” says Jay Rubinstein, a partner at Withers. “And even if you’re sure no activity has occurred that would lead to prosecution, is there still value to the bank in local regulators or potential customers knowing the bank has participated in the programme and received the non-prosecution gold seal from the US government?”
Legal work for all
With more than 300 Swiss banks potentially involved and the clock ticking – banks having until 31 December to decide what category they fall into – there is a huge amount of work to be done in terms of Swiss and US law issues, with one Swiss lawyer describing the programme as “an Eldorado” for US firms.
However, co-operation is key, with some US firms teaming up on a best-friends basis with Swiss law firms to pitch for work.
“It’s a great opportunity,” enthuses Weber. “Clients are best served if they get the full package and can see you’re working with colleagues you know well and will work with seamlessly.”
While other top Swiss firms have gone down the team-up route, not all have.
“We’ve decided not to team-up,” says Luchsinger Gähwiler, “but to accommodate our clients with respect to the US lawyer of their choice – we want to give our clients the maximum freedom to try and find the best lawyer for the case.”
Even for those firms that are not teaming up there is an element of co-operation throughout the market.
“The key element here is not that various law firms are competing for work but rather that it’s extremely important in the financial markets for there to be an understanding of what the programme really means,” says Daniel Daeniker, managing partner of Homburger. “That way all banks use the same standard when assessing the US cross-border implications.”
While competition among law firms is important, with the amount of banks involved there is only so much one firm can do.
“We can’t represent 150 banks, we can’t represent 300 banks, it’s just physically impossible,” concedes Eric Stupp, financial services head of Bär & Karrer.
The size of the undertaking throws up problems for firms.
“The question is how much resource you allocate to this,” says Weber. “This is a one-time event so you have to be careful to allocate enough and not stretch too far. If you end up with 90 per cent of the firm working on these matters it becomes a large exposure and is not sustainable.”
The Wegelin collapse taught Froriep some valuable lessons.
“The biggest challenge is usually the timing. While you’re dealing in a multi-jurisdictional environment, you’re also dealing with people who are nervous and losing a lot of money if you’re dealing with the owners of banks, and all under time pressure,” remembers Luchsinger Gähwiler. “We had teams dealing with everyday work and teams dealing with this specialised matter. We basically rerouted mandates to free the shoulders of those who were on this deal.”
But that was just one bank – this is many.
“There’s no standard – you can’t group them and every case will be individual because the set-up of the banks is different, the remaining
assets are different, the level of involvement in criminal offence from the US point of view is different so there’s no such thing as one-hat-fits-all,” points out Luchsinger Gähwiler. “You can’t have too many of these cases at once.”
“You need to have enough staff available at the more or less same time,” he says. “Probably everyone will need our support in the same weeks, but you can’t do all the banks in the same week.”
While even the biggest firms may have to expand to meet the demand “one impact could be that some firms grow considerably to be able to absorb this work,” warns Andreas von Planta, a partner at Lenz & Staehelin, “and, as this is not a sustainable occupation, they may have a problem once it’s over.”
Under pressure from the OECD and EU, the move towards making Switzerland’s banking market tax-compliant means “many private banks are not profitable anymore, and this will lead to consolidation without any doubt”, predicts von Planta.
But it is not only banks that are affected.
“The programme only relates to banks and doesn’t apply to insurance companies, investment managers and trust companies,” says Rubinstein, “but trustees and
investment funds, as well as individual customers, are going to be asked whether they are in the good account category or whether they might not have been fully compliant and their bank may have to
pay a penalty in respect of that account. These entities and individuals will need help satisfying banks they have been or will become
While the pressures on the banking industry are already producing consolidation in the banking sector, such as the merger of Bank Sarasin & Co and Bank J Safra (Switzerland) earlier this year, there have also been a series of “transformations” in the sector.
Two of Geneva’s biggest private banks, Pictet and Lombard Odier, and private bank Mirabaud have recently reorganised their structures to become corporate partnerships overseeing limited companies. It is a move that may herald the end of Swiss bankers assuming unlimited personal liability for losses – and the end of truly private banking.
Asset managers in the spotlight
The effect of greater regulation is not just causing bank consolidation and restructuring, the Markets in Financial Instrument Directive (MiFID II) and the Alternative Investment Fund Managers Directive are also seeing radical developments among asset managers.
“Firms such as asset managers who have not so far been supervised and have led a largely unregulated life are having to consider how they do business,” says Catrina Luchsinger Gähwiler, managing partner of Froriep, “In respect of the requirement under MiFID II to have a branch in the EU, it will mean that a lot of asset managers will have to rethink their cross-border business and may find they are not big enough, and it isn’t viable for them to continue on their own. They will have to create bigger platforms in Switzerland, then look for a leg in the EU.”
Relocation of activities outside Switzerland is clearly on the cards.
“A lot of the brainwork will still be done in Switzerland if you look at it from a staffing point of view,” says Luchsinger Gähwiler, “but if you look at it from a legal and structural point of view the move has already started to take place.