Swiss banks reeling as US tax deal begins to bite

In August 2013, Switzerland and the United States signed an agreement which permitted US authorities to question 300-plus banks in Switzerland whether they had any tax-evading US citizens as clients.

 The Department of Justice (DoJ) asked Swiss banks to organise themselves into four categories. Half way through the process, a picture is emerging of an embattled industry as Swiss firms and their reputations are dragged through the mud.

The four categories each imply varying degrees of entanglement with US clients, and subsequently determine the level of interest the DoJ has in those firms.

In category 1, banks are already under investigation for suspected tax evasion offences. The consequences of their actions are made all the more difficult to predict given the deal UBS struck with US authorities back in 2009 which saw the bank pay $780m (€562m) in fines for tax evaded by clients.

Venerable institutions like Credit Suisse, Julius Baer, Pictet and the Zurich and Basel cantonal banks as well as some Swiss subsidiaries of foreign banks (like Barclays), are part of this first group.

Details of Credit Suisse’s activities were released by the Senate Permanent Subcommittee on Investigations and the claims make for grim reading. Alleged practices included “opening undeclared Swiss accounts”, or accounts to “mask their US ownership”, sending bankers to the US to recruit new customers and “service existing Swiss accounts without creating paper trails”.

Secret accounts

The report explains how the bank apparently worked to keep accounts concealed from US authorities. Some bankers applied for US visa waivers, claiming they were visiting for “tourism” instead of “business” purposes and the report details one incident where a client was handed bank statements inside a Sports Illustrated magazine. Tales such as these mean it is unlikely the DoJ will be willing to let category 1 firms off with a slap on the wrist.

Category 2 is for firms who believe they may have committed tax offences, and are eligible for a non-prosecution agreement if they come clean and pay fines. This group includes EFG International, Lombard Odier, Rothschilds and Banque Privée Edmond de Rothschild (BPER).

Banks wishing to register under categories 3 and 4 will have to wait until July 1 2014 to confirm their status (although this has not stopped Vontobel stating its intention to register as a category 3 firm). Category 3 firms have not engaged in criminal conduct or are deemed compliant under US tax rules while category 4 firms are those who have no accounts of American-held assets.

Ominously for all the banks in question, the Internal Revenue Service claims to have a list of 38,000 clients who have indicated they have offshore accounts. Woe betide the bank caught fibbing. The case of Wegelin shows the US is not afraid to litigate institutions into extinction if they fail to comply.   

James Horrax is a senior associate at wealth management think-tank Scorpio Partnership