The Swiss banking industry is set to incur fines running into billions of dollars for unpaid US tax, as the Department of Justice (DoJ) shows it is serious about cracking down on offshore accounts.
Coutts and Schroders have already set aside millions to pay for potential liabilities relating to historic tax avoidance by their US clients, some of whom might have been using Swiss bank accounts without having paid the correct amount of tax to the US government.
Banks are being placed in four categories based on the severity of the avoidance. Banks in category one are already being investigated. Those in category two, which most banks have opted for, have indicated there may have been some non-compliance.
Banks in category three say all their clients have been fully within the law, while those in category four claim to have virtually no US clients.
‘In theory, this affects all the Swiss private banks other than UBS, who have already done their deal with the DoJ, and the other banks in discussion with the DoJ,’ said Mark Summers, head of Swiss international private client strategies at law firm Speechly Bircham.
‘It’s going to cost billions. How many billions, who knows?’
Summers considers the $780 million (£469 million) tax avoidance penalties incurred by UBS in 2009 as something of a watershed, noting the fine levied on accounts increases if they were opened after that ruling. UBS received the fine because of the offshore banking services it offered wealthy Americans, and was forced to hand over the name of 19,000 clients to the US authorities.
Schroders revealed a few weeks ago that it had set aside £15 million for potential liabilities.
‘This doesn’t only relate to US clients. It also relates to clients with any kind of a US connection where there may have been, inadvertently or otherwise, some non-compliance with US tax,’ said Schroders chief executive Michael Dobson.
‘Most of these clients are no longer clients of the firm, but we’ve taken this provision, as I imagine most Swiss banks have, against our 2013 results,’ he added.
Meanwhile, Coutts’ parent group RBS disclosed in its results at the end of February that it had ‘notified the DoJ it intends to participate in the programme based on the possibility that some of its clients may not have declared their assets in compliance with US tax laws’.
Costs ‘in the billions’
Al Alevizakos, a banking analyst at Mediobanca, agreed with Summers that the cost to the industry as a whole is going to be ‘certainly in the billions’.
‘While this is for undeclared assets, if something else was found, like money laundering, the fines could go up,’ he said.
He welcomed the idea of banks placing themselves in category two, because selecting a less serious category could leave the business open to litigation at a later date, if any wrongdoing was found.
While category two banks are admitting some liability, John Cassidy, a tax investigations partner at accountancy firm Crowe Clark Whitehill, has some sympathy for them.
He said that firms can find it hard to stop investors from exploiting offshore tax havens because of confidentiality laws.
‘I have had many clients with Swiss bank accounts that have had them for all the right reasons and are looking for private bank expertise, but among these people there will always be those who take advantage of confidentiality,’ he said.
‘It is widespread in that there will be cases in just about every bank. That does not mean they were part of it, it means there is a person who was. There are a few bad apples in the barrel.’
Sebastian Dovey, managing partner at wealth management consultancy Scorpio partnership, said the probe could even be cathartic for the industry.
‘We see this as a turning point in the industry, which is that global wealth management should be based around fully tax compliant assets. They are definitely making sure the Swiss banks stay in line,’ he said.