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Challenges and opportunities

  • Author : Daniel Martineau
  • Date : April 2011
ABOUT THE AUTHOR: Daniel Martineau TEP is Executive Chairman of Summit Trust International SA and a founder of the Swiss Association of Trust Companies (SATC)

In preparation for writing this article, I happened to fall into a series of conversations with various bankers, lawyers and trust professionals. It may just be that the effect of increased tax transparency in Swiss private banking circles has been weighing on the minds of many people recently.

As a prelude to some observations of how transparency might improve, let me first go on record as saying that, in my opinion, generally Switzerland’s compliance record of obtaining adequate ‘know your client’ documentation and assessing acceptable source of funds from clients has been as good as, and perhaps better than, most financial centres. In my experience (speaking as a foreigner in the country), I have found that the Swiss are very good at complying with rules once it has been defined what those rules are meant to be. The most significant disjoint perhaps has been that while some other jurisdictions have classified non-compliance to tax as being ‘money laundering’, Switzerland simply has not regarded the matter as something they needed to consider.

One of the effects of this definitional difference in relation to money laundering was that it created the risk of jurisdictional arbitrage. Some may suggest that such arbitrage can at least partially explain the dramatic growth in the number of trust companies in Switzerland in the last ten years.

There have, however, been some game-changing events recently that may cause the Swiss private banking community (and ancillary service providers such as trust companies) to re-assess their ambivalence towards tax compliance.

Theft of client information

To anybody that has not yet noticed, bank secrecy – as a practical concept, if not a legal one – has been sufficiently eroded to the point where it is not generally considered a sustainable strategy for clients to merely hide money as a means of tax saving. Even if banking secrecy might be protected by law or by treaty, the ‘Wikileaks effect’ of whistle-blowing by way of information theft has blown away the secrecy expectation of Swiss banks and their clients. There has been a series of thefts of client information from banks big and small, with some banks candidly admitting that the technical challenges of protecting that information may be beyond their capabilities. The Swiss legal system has tried to defend the notion of bank confidentiality by charging and even jailing information thieves, but when the perpetrator is a foreigner (as some of the thieves have been) then there is a limited amount that the Swiss authorities might be able to do. This is particularly true where the thief may be celebrated or even rewarded financially for their ‘patriotic act’ of denouncing tax cheaters.

Loss of business

With the increased likelihood of being found out and the push/pull effect of incentives to come clean/disincentives of increasingly severe punishment, many clients are coming to the conclusion that the risks are too high and the probability of sustaining secrecy is too low to be non-compliant in their tax reporting. This has shrunk, and will continue to shrink, the client base of some parts of the private wealth management industry in Switzerland and elsewhere in the short term.

Pronouncements by regulators

To the surprise of many in the banking community, FINMA, the Swiss financial services regulator, came out in October 2010 with a statement that they expected Swiss banks to take into account the tax compliance aspects of a client’s home country. This was, it seems, a public warning to the financial community – that they could no longer ignore the heretofore unasked question of whether or not the funds that they were holding for clients were transferred with tax compliance in mind. I think that it is fair to say that, until this point, many banks, trust companies or investment managers had not considered or asked, and perhaps had even avoided asking, questions relating to tax compliance in the client’s home jurisdiction. In fact, I would venture a guess that many thought that it was simply not their business to ask. Their ignorance of the client’s tax position, whether involuntary or wilful, was, in the minds of most bankers and asset managers, just not relevant to their role. This approach, if adopted by trustees or directors of offshore companies, was certainly much less justified given their active involvement in the ownership and the management of the assets in their care. In some cases, banks (in general the larger ones) saw tax transparency pressures mounting and have been preparing over the last few years a cleansing of their books towards more tax compliance, and have encouraged clients to look for new solutions. Some of these clients will have gone the clean-up route themselves as noted above; some will have changed jurisdictions where they may have assessed less tax-compliant pressures; some merely walked across the street to another Swiss institution (usually smaller) that would welcome them as a new client, thereby just referring the potential future problem from one Swiss institution to another. The growing problem for Swiss bankers is where they may have actively ‘aided and abetted’ their clients in the evasion of tax. Worse still is where the bank could be seen to have enticed the client with the offer of ‘no-tax solutions’.

Criminalisation

In fact, the ‘aiding and abetting’ argument has now been used increasingly in the US as a method of punishing and no doubt making an example of bankers and professional advisors who have misbehaved. It is hard to imagine that their clients will rush to their defence; in fact it might quite suit clients to contend that they had been ill-advised or tempted into the sin of hiding money by their bankers or advisors. Criminalisation of bankers and professional advisors is a whole new standard by which business ethics may now be measured. It is no longer about the size of bonus or the viability of the bottom line – it’s about incarceration.

The problem might be aggravated where a bank, using a related trust company, is seen to be giving advice or assistance to its client for a structure that was not intended to be tax compliant and was not independently advised by lawyers or accountants for tax aspects related to the client’s home country.

Tax transparency – the way forward

Until recently, insisting on tax-compliant business in Switzerland has been a business-limiting proposition. Why would you ask these uncomfortable questions and insist on advice if that was not a requirement? While dealing in tax-compliant, robust structuring has undoubtedly proven to be a better long-term, sustainable business model, until recently it would have meant that you turned down more business than you could accept.

In a recent presentation in Geneva, Patrick Odier, President of the Swiss Banking Association, contended that while there was more work to be done, Swiss banks have come a long way in a very short time towards harmonising the Swiss private banking proposition with tax transparency. He was upbeat that the Swiss banking community should and would adapt successfully. In his words, Swiss banks were ‘too Swiss to fail’ and would use their professionalism and resourcefulness towards a business model that will allow them to survive and thrive. Odier’s leadership should be applauded; this is not a message that is easily swallowed by some of his banking confrères. Odier understands that there is no coming back from here; that there is no future in hiding money; that the only way forward is to lead from the front of the tax compliance trend; to gear up the policies and the skill-sets that are required to deal with the clients with a tax transparency problem. Trust companies, if they have not yet figured this out for themselves, have got ‘to get with the programme’. Given the reputation of Swiss financial institutions for service, professionalism and highly educated staff – a distinct advantage compared with some offshore jurisdictions where the local working population is small and restricted immigration policies limit the use of expatriate staff – Switzerland has the opportunity to compete effectively in the new world order to maintain its premier position as the leading offshore financial centre for sophisticated high-net-worth clients.


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