A day after Switzerland did the unthinkable and handed over information on hundreds of banking clients to the U.S. authorities, the Swiss government struggled to defend an integral part of its financial system: the promise of customer confidentiality. "Banking secrecy, ladies and gentlemen, remains intact," the Swiss president, Hans-Rudolf Merz, said at a news conference Thursday. But even as Merz spoke, the U.S. government was laying the groundwork to ask for confidential information on hundreds of other banking clients. On Wednesday, Switzerland bowed to pressure from the U.S. government, and in an unprecedented step gave up the details of about 250 wealthy American clients of UBS who were suspected of using the bank's accounts to evade taxes. The U.S. Justice Department is in the final stages of preparing to indict several of the wealthy Americans for offshore tax evasion, according to people briefed on the matter. Merz pledged that Swiss banking secrecy laws would remain in place and that the laws do not "protect tax fraudsters." UBS said it "remains committed" to client confidentiality, which "was never designed to protect fraudulent acts or the identity of those clients, who, with the active assistance of the bank personnel, misused the confidentiality protections." – International Herald Tribune
Dominant Social Theme: All over for the Swiss.
Free-Market Analysis: The headlines blare that Swiss banking confidentiality has been breached by the UBS settlement, as mentioned in the excerpt above. But let us try to put this in context, since the mainstream media is obviously not doing so.
There are actually two kinds of banks in Switzerland these days. There are a few big banks like UBS and Credit Suisse that can rightly be called international – "public" – banks and then there are Swiss private banks. It is the public, international kind of Swiss bank that is having trouble. In fact, to call UBS a Swiss bank is at least partially missing the mark. It has branches all over the world and is subject to numerous jurisdictions and laws.
Swiss private banking is a different matter. Swiss private banking is fairly ancient, going back hundreds of years. A Swiss private bank minds its own business, keeps it branches within Swiss borders and is careful about who it does business with. It has no foreign branch exposure and thus is not subject to other jurisdictions. Contrast this to UBS which has sprawled around the globe and used the Swiss reputation to basically lure foreign clients.
Nonetheless, UBS lacks many essential elements of private Swiss banking, as many in the Swiss banking community will be glad to tell you. As big as it is, UBS is certainly not run conservatively or even at this point with a great deal of discretion. In fact, it has managed to declare losses of about US$50 billion in about six months. What UBS, and a couple of other big Swiss banks have been able to do, however, is to gain a good deal of leverage and allies within the Swiss federal government (as opposed to the Cantons). It is Switzerland's biggest bank and has maintained substantial backing at a federal level, which make outsiders think that the UBS model is the face of Swiss banking. As pointed out above, it is not.
UBS, at this point, resembles the Western, Anglo Saxon banking model. With its supermarket approach to financial services, its emphasis on global expansion and its aggressive business practices, UBS is more like a Citicorp than a private Swiss bank. And those who used UBS services but did not do their due diligence about what really constituted a private Swiss bank are reaping the unfortunate consequences of those choices.
We have sympathy and respect for the Swiss, and for Swiss banking. We have also declared in these pages that we don't wish to provide a posture that encourages tax evasion; nor, in fact, do Swiss private bankers who are finicky about who they do business with. Those who wish to launder drug money and perform other questionable acts will find their way to other jurisdictions — Panama comes to mind. Certainly, such jurisdictions seem to offer more confidentially than Switzerland. Actually, they will offer less in the long run as they will end up being in the cross-hairs of European and America regulators. Real Swiss private banks will not.
As long as we are on the subject, we want to point out that the best way of reducing tax evasion is to reduce taxes. Unfortunately, almost every industrial nation now is moving the other way, raising taxes especially on the rich. America certainly is, and Britain and Germany as well. In fact, the EU still hopes to "harmonize" taxation. Brussels all but declared not so long ago that nations seeking to attract business and industry by lowering taxes were not playing fair. Using this logic, Brussels came up with the idea that nations with lower tax structures ought to be penalized. The act of lowering taxes, in other words, would become subject to penalties. And gradually, lower taxes would be associated with some sort of unfair economic advantage – a practice to be eradicated.
Using this logic, there will be no end to tax hikes, and presumably the eradication of tax havens is part of at least a pincer strategy designed to gain full control of the fiscal lever. That looks to be a tall order. For the foreseeable future, it seems to us that nations will continue to compete on a tax-advantaged basis. Those who want real confidentiality and sophisticated financial services will continue to turn to the gold standard of private banking – the Swiss private bank.