Monday, December 11, 2006

Swiss banks hold on to their offshore clients

James Nason remembers years of debate and negotiation over tax evasion in Europe, but one moment that stands out for him was when Swiss officials drew a line on how far they could be pushed around.

"Swiss bank-client confidentiality is not up for discussion," Nason, a spokesman for the Swiss Bankers Association in Basel, said he remembered Finance Minister Kaspar Villiger of Switzerland telling a conference of financial professionals in Frankfurt in September 1999.

Villiger's defiance was a warning to European Union finance officials, then squaring off for yet another round of talks in Brussels about whether, and how, to try to claw back lost revenue from EU citizens investing their savings in foreign tax havens.

For decades, EU officials have been trying to plug holes that let tax dollars leak out of Europe through investments channeled into so-called offshore banking centers. Switzerland, as the biggest offshore center in the world, often has been a focus of their efforts.

During the latest EU tax haven negotiations, which began in the late 1980s, Swiss officials, reluctant to weaken their strict privacy laws, did give in to EU pressure and agree to implement a groundbreaking savings tax regime.

The tax, which took effect in July 2005, was hailed as a breakthrough in the hunt for lost revenue, but there were fears that it could trigger massive client defections from Switzerland and other European financial centers to rival centers farther afield, like Singapore or Hong Kong.

An analysis by the Boston Consulting Group last year predicted that the tax could cause at least €1 trillion, or $1.3 trillion, to leave Switzerland and Luxembourg, another country popular with offshore investors.

In the hush-hush world of offshore banking, hard numbers can be hard to uncover, but so far, analysts said, most investors in Switzerland have decided to stay put.

"A year ago, people were quite worried about it," said Florian Frey, who specializes in financial services at Boston Consulting in Zurich. "But actually, when I look now, no one is talking about it. It is business as usual. It doesn't seem to be a problem."

Nason agreed that concerns have subsided.

"Let's put it this way: If there had been a panic and clients shifted assets, Swiss banks would have contacted us, and that hasn't happened," Nason said. "Everything has gone very quiet."

Assets under management in Switzerland have been rising significantly over the last few years, even after the tax took effect, reaching a high of 4.4 trillion Swiss francs, or $3.5 trillion, in 2005, compared with 3.5 trillion francs in 2004, according to the Swiss National Bank and the Swiss Bankers Association.

That includes assets managed for foreign clients in Switzerland, which rose to 2.6 trillion Swiss francs in 2005, from 2 trillion francs in 2004.

The tax also has not knocked the Swiss bank UBS from its perch as the biggest wealth manager in the world. And a Swiss rival to UBS, Credit Suisse, is in fourth place in wealthy investing, behind Citigroup and Merrill Lynch, according to a survey by the Scorpio Partnership consultancy in London.

UBS's assets under management rose in 2005 to $1.31 trillion, compared with $1.21 trillion in 2004, Scorpio reported.

A UBS spokeswoman in Zurich, Sabine Wössner, said bank officials would not comment on the effects of the savings tax.

The aim of the European Union's directive was to ensure that EU residents did not avoid taxes by depositing money in havens with strong secrecy laws like Switzerland, Monaco, or the British islands of Jersey or Guernsey. Under the agreement, Switzerland and other non-EU financial centers involved in the discussions implemented a flat-rate withholding tax on interest earned by EU-resident depositors.

This tax, which now stands at 15 percent of interest earned, is passed on in a lump sum, without identifying individual investors, to the EU member states in which the depositors are residents. The tax rate will rise to 20 percent in 2008 and to 35 percent in 2011.

The European Union designed the tax to target a narrow range of savings interest, leading some critics to argue that the directive was too selective. The tax is levied only on individuals and applies only to certain savings like bank account interest and bond interest. Dividend income from investment in stock market assets is exempt, which means that EU citizens who design their portfolios to be tax-efficient can stay invested offshore without exposure to the tax.

Some Swiss banks have complained about the administrative burden imposed on them by the new requirement.

"It is correct that the banks were complaining about the huge amount of regulation," said Tanja Kocher, head of communications for the Swiss Federal Banking Commission in Bern.

The Swiss banks responded positively to regulations, like those against money laundering, that were useful and necessary, analysts said, but some banks were not convinced that the crackdown on tax evasion, which in Swiss law is not considered to be a serious offense, fitted into that category.

Still, despite the concerns, investors have not packed up and fled Switzerland, and analysts cite many reasons for their decision to stay put. One is the experience of Swiss bankers. Another could be that clients have simply adapted their portfolios to avoid tax liability. But most investors also remain confident that, despite pressure from the European Union, Swiss bank secrecy will stay intact.

"Switzerland's attractions for international banking clients include its stability, security, professional banking know-how acquired over generations, respect for privacy," said Nason of the Swiss Bankers Association.

Frey of Boston Consulting said: "We have here a long tradition of banking and a large number of banks and a high level of competence. Also, we have a lot of skilled, well-educated people and products that investors need. Products make the difference more and more."

Frey said that even as the savings tax rises over the next few years, Swiss banks should not suffer much from client departures.

"Clients still are happy with the confidentially and that is very important," he said. "And that confidentiality continues to be like that, for me, this shows that as the tax increases, I would say the picture will not change dramatically."

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