Swiss banks told to join US compliance plan

Swiss authorities are urging banks to quash their doubts and enter a U.S. voluntary disclosure program aimed at uncovering American tax evaders.

The Swiss financial watchdog Finma requested banks to decide by today whether they will join the first stage of the U.S. Department of Justice program by applying for non-prosecution agreements by the end of 2013. Swiss Finance Minister Eveline Widmer-Schlumpf is scheduled today to respond to lawmaker complaints that the government failed to resolve the tax dispute in 2 1/2 years of talks with U.S. authorities.

The program, open to about 300 firms that aren’t already part of a U.S. tax probe, has already forced banks to spend millions of dollars on legal and administrative fees to analyze accounts. While the Swiss government has called the measure the best way to avoid indictments, the DoJ said last month that other U.S. authorities may still be able to impose penalties, prompting some banks to reconsider their participation.

“Everybody’s thinking about it,” Alexander Notter, a partner at merger advisory firm CFM Partners in Zurich, said in a telephone interview. “They know if they try to hide they will go out of business, but the program itself hasn’t really been thought through. It’s a wishy-washy diktat.”

Widmer-Schlumpf will address lawmakers’ concerns over the U.S. disclosure program starting at 2:30 p.m. in Bern. The measure should be suspended while the Swiss government requests clarification from the DoJ, said Christian Luescher, a lower house member for the Liberal Party.

Banks have been hurt as the DoJ and Internal Revenue Service are seeking to crack down on undeclared assets abroad, prompting at least 38,000 Americans to make declarations and repatriate assets. UBS, Switzerland’s largest bank, settled in February 2009 to avoid prosecution, while private bank Wegelin & Co. shut down this year after being indicted.

U.S. client assets overseen by Swiss wealth managers have slumped more than 70 percent to about $40 billion since 2009, according to estimates by Boston Consulting Group. Some of those assets are in units registered with the Securities and Exchange Commission, which banks including Vontobel Holding  and Syz & Co. Group created to attract tax-declared Americans.

The U.S. said in August it would negotiate non-prosecution agreements with banks that admit to breaking U.S. tax laws in exchange for information on their clients and fines escalating to as much as 50 percent of undeclared American assets.

UBS, the world’s largest wealth manager, avoided prosecution by paying $780 million, admitting it fostered tax evasion and giving the IRS data on more than 4,500 accounts. Wegelin, Switzerland’s oldest bank, was forced to sell its non-U.S. client business in 2012, less than a week before being indicted. The St. Gallen, Switzerland-based bank paid and forfeited $74 million before closing its doors.

“This program is only just tolerable,” Patrick Odier, chairman of the Swiss Bankers Association, or SBA, told reporters on Nov. 13 in Geneva. “The level of uncertainty linked to the program remains very high,” because of its “complexity” and the fact that the IRS hasn’t confirmed the program constitutes a “definitive solution,” he said.

The U.S. has said it will continue criminal probes of 14 banks, including Credit Suisse Group AG and Julius Baer Group Ltd., the nation’s second- and third-largest wealth managers, while the rest of the industry is able to enter the voluntary program announced on Aug. 29, approved by the Swiss government.

The cost of hiring lawyers, consultants and temporary staff to analyze client account information is already weighing on companies. KPMG said last month that banks need to manage at least 10 billion francs ($11 billion) in assets to cope with more complex requirements from regulators and clients following “several years” of pressure on margins.

The cost of participating could reach “significant millions of dollars,” said Tim Dawson, an analyst at Helvea SA in Geneva. “I can’t see many banks going for the wing it, let’s-take-a-chance approach. If you’ve got cross-border American clients you didn’t know about and you haven’t gone into the program, my God your life is going to be bad.”

The program divides banks into four categories, with Credit Suisse, Julius Baer, Pictet & Cie. and HSBC Holdings  Swiss unit already under investigation not able to participate.

Other banks that opened accounts for Americans since 2008 can opt for category two and apply for a non-prosecution agreement. Those that don’t come forward by the U.S.’s year-end deadline could face criminal charges, said Kathryn Keneally, assistant attorney general in the DoJ’s tax division.

Between 80 percent and 90 percent of 150 Swiss banks providing cross-border banking services to individuals and families are considering joining the program, said Martin Schilling, director at PricewaterhouseCoopers AG in Zurich. A bank could spend “a low one-digit million franc number” or more in “difficult cases” ahead of the program, he said.

“The bulk of banks with offshore private banking activities will go for category two,” he said. “Even if they don’t know of any issues with untaxed U.S. clients, they want to avoid any kind of risk that could pop up in the future.”

For its part, Corner Bank Ltd., which is based in Switzerland’s Ticino region and employs some 1,000 staff, is considering joining category two, Paolo Cornaro, the bank’s chief executive officer, was cited as saying in HandelsZeitung on Dec. 4. The company confirmed the comments by phone.

Category three firms are those with international clients not deemed to have violated U.S. tax laws, while category four is aimed at local and regional banks with domestic clients.

Finma has urged banks to take part in the program to avoid a repetition of the Wegelin indictment and to ensure the financial industry retains access to U.S. markets. Banks are able to opt for category two this year and drop down to category three at the next stage of the disclosure program in July, if they are found not to have broken U.S. tax laws, according to Finma CEO Patrick Raaflaub.

Julius Baer, which has been under investigation for at least 2 1/2 years and is in category one, has said it’s able to afford to pay a fine on top of the 54 million francs in legal and administrative fees reported as of end of June.

Still, some banks may fail to meet the Finma deadline. Switzerland’s Raiffeisen, a group of cooperative banks with the third-largest branch network, won’t convene its board of directors to decide how to participate in the U.S. program until Dec. 13, Finanz und Wirtschaft reported. The bank didn’t immediately respond to an e-mail requesting a comment.

Syz Group, which has a business registered with the SEC, had not decided as of Dec. 6, according to an e-mail from a company official, while at least two private banks, Bank Frey & Co. and Gutenberg Group, have announced plans to drop their banking business because of additional regulatory burdens.

“Banks have spent a lot of effort and money in the last couple of weeks,” said Peppi Schnieper, a consultant with Roland Berger in Zurich. “If the balance sheet isn’t big enough, they may need to shut down. The penalties may be too severe.”-Bloomberg