Noose may tighten for private banking

Liechtenstein is looking increasingly isolated as the forces of the EU and Organisation for Economic Co-Operation and Development (OECD) rally following Germany’s tax probe at the start of last month. Peer Steinbrueck, Germany’s finance minister and the man who authorised the Federal Intelligence Service (BND) to pay millions to a bank staff member for confidential client data, called on other EU members to “put the screws” on the tiny principality to force co-operation on tax matters. The secretary general of the OECD, Angel Gurría, backed Germany’s position stating tax evasion is a “fundamental issue in our increasingly interdependent world”. Liechtenstein is one of the last three offshore centres on the original FATF black-list, alongside Monaco and Andorra, and remains defiant in spite of increasing global pressure. And yet, many of the principality’s actions in recent weeks have only served to fan the flames of negative sentiment. The row blew up following revelations that the BND paid e4.2m for client data on 1,250 private banking clients with accounts at LGT in Vaduz. The source of the data breach was a former back-office employee at the bank. Since that time, LGT has launched criminal action against the former employee and a series of clumsy statements from a number of senior Liechtenstein officials, from the Prince down, have shown an administration out-of-touch with world opinion. On the other side of the divide, adroit media management by the German government, notably the naming and shaming tax-dodging senior executives for the multi-billion euro dent in Germany’s finances, has rallied popular sentiment. Their lead has, so far, been supported by the US, UK, Spain, Italy, France, Greece, Sweden, Canada, Australia and New Zealand. Whether or not it is the result of PR savvy, and regardless of the legality of the BND (and UK tax authorities) paying for stolen information, the world’s newspaper column inches have undoubtedly determined that tax avoidance is now truly socially unacceptable. This raises an important question for the global private banking industry: how long will it remain an acceptable business practice for private banks to offer alternative booking facilities under such growing moral scrutiny? If the growth of shareholder activism and client interest in socially responsible corporate governance are a sign of the times, one can only deduce that time frame will be short. Historically, the offer to provide clients with booking arrangements of their choice has been one of the few elements of the private banking service that CEOs agree is fundamental to the business model. Indeed, private banking senior management has tended to agree that while it may be morally uncomfortable, the booking for tax purposes in alternative centres is too valuable a part of the business to challenge. While in many other matters, private banking executives have been reliably unco-operative, on this matter, the industry is united. Indeed, it has long been the refrain of private banking management that with so many disparate business models it is not possible for the wealth management industry to speak with one voice. The moves in Liechtenstein last month may yet prove that view to be both academic and short-sighted. The alternative scenario will be for one or more brave players to take matters into their own hands, stepping away from the private banking herd to offer a truly different proposition in which alternative booking for tax purposes will no longer be offered. It seems increasingly likely that this player will win a major coup in global branding terms as popular sentiment increasingly shifts tax avoidance into the realm of moral opinion. Furthermore, institutions with the far-sightedness to undertake this exercise will safeguard their brand and clients from the fate of LGT. Sebastian Dovey is a managing �partner at wealth management �strategy thinktank Scorpio Partnership