The Swiss private banking story continues to have more twists and turns than a well-scripted thriller. The summer passed with many Geneva and Zurich bankers being told to stay at home, rather than risk arrest by a predatory foreign authority, thirsty for Swiss blood and lost tax revenues.
Talk is now turning once again to the self-styled ‘Tarantula’ of Swiss wealth management. Bradley Birkenfeld, a former UBS banker until recently under lock and key for helping a property developer in the US avoid taxes, will be the beneficiary of a special award from the US Internal Revenue Service.
The Americans will reward him with more than $100m (€77m) for his role as ‘whistleblower’ in alerting them to a tax evasion scheme that cost the US billions of dollars. Following criminal charges against Swiss banks and their executives, UBS settled for $780m with the Department of Justice. A further $5bn in back taxes was also collected from Switzerland.
How a bank deals with this type of crisis is central to its image, sense of identity and future success. Emerging markets champion Standard Chartered is currently in the process of such an enforced period of soul-searching after a settlement with the US following accusations of sanctions-busting.
When a whistleblower from the IT department in Bank Sarasin, one of Switzerland’s few remaining private banks surviving along the old-fashioned partnership model, drew attention to portfolio holdings which compromised Swiss National Bank Chairman Philipp Hildebrand, the latter was forced to resign. But was the reputation of Sarasin hit by this event?
If anything, the opposite was the case. The bank’s PR department wisely decided to share documentation and details with the press, rather than resorting to a cover up. As a result, we were witness not just to the meticulous record-keeping of the Hildebrands’ relationship manager, but also to the excellent advice he was offering to them in terms of currency allocation and stock selection.
Can UBS somehow also turn this news into something positive? This task will not be so easy, bearing in mind that many are blaming the Zurich giant for the very demise of Swiss private banking as we know it.
The enforceability of Swiss regulation, says Ray Soudah, head of Zurich’s strategic advisers MilleniumAssociates, has been shattered by numerous and ongoing concessions by the Swiss authorities, following the Tarantula’s initial tales of mischief. They have failed so far in any attempt to prevent their centre, banks and employees being harassed by foreign governments bidding to retrieve unpaid taxes.
At best, says the reflective Mr Soudah, Switzerland can be described as being in a “regulatory limbo”. The only way out is re-invention. This transition – possibly into a safe haven domicile promising luxury brand private banking coupled with high level asset management – may take several years, with many stragglers falling by the wayside.
The good news for UBS is that they are already a long way down this road. An increasing chunk of their business is emanating not from questionable offshore sources, but from fast growing Asian businesses, flowing into twin private banking hubs in Hong Kong and Singapore.
Also, guided by private banking boss Jürg Zeltner, the emphasis is no longer about tax planning and shaky legal structures, but – shock horror – about actually managing client assets to an institutional standard.
Eventually, this could even mean outsourcing more client assets on a sub-advisory basis to effective managers who pitch for mandates in core and specialist asset classes. UBS and other Swiss banks may eventually move to such a delegated model. When they do, they will be fast approaching maturity.
