Recent revelations are only a taste of what is to come as the world’s largest economies start to act on tax evasion, although the likely long term effect on banks and the private banking industry is far from clear.
Scrutiny of the part played by (mainly Swiss) banks in helping taxpayers evade taxes in their home jurisdictions is becoming increasingly global. In recent weeks, Bank Leumi has more than doubled the money it has set aside for a possible settlement with the US, India’s new prime minister Narendra Modi has created a team of former judges and current regulators to investigate assets concealed abroad and prosecutors in Greece have been investigating a list of more than 2500 Greek nationals estimated to hold almost $2bn in overseas accounts.
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These revelations follow the fine levied on Credit Suisse by US tax authorities and reports that the Geneva branch of HSBC Private Bank is to be investigated in relation to accounts held by thousands of French citizens.
Swiss business lawyer Douglas Hornung , of Hornung Avocats, expects future revelations to refer more to European than US clients. "The route opened by the US will likely be followed by others, in particular European countries where France has followed the US model by indicting UBS and going after HSBC and has joined efforts with Belgium, while Germany buys data stolen from Swiss banks."
He observes that the largest banks will be largely unaffected by financial penalties ("officers will keep receiving huge bonuses, shareholders will continue to receiving their dividends"). In fact, he expects the crackdown on tax evasion to enable them to scoop up smaller rivals.
"Wegelin and Bank Frey disappeared and other small Swiss banks will follow. The smaller banks were prosperous through assisting tax evasion and cannot simply change their business model that quickly. As a result, they will be acquired by the large banks that will keep the ‘cream’ in the form of declared accounts and consequently increase their revenues, leaving them in a position to absorb more rapidly the huge fines they would have to pay."
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By GlobalDataBanks under pressure
According to Hornung, banks are under intense pressure from their associations and supervising authorities to no longer accept undeclared funds and cease relationships with existing clients if the bank does not have confirmation that the client is compliant (at least as far as European clients are concerned) and adds that banks are extremely cautious with clients from other countries. "This process has effectively eliminated undeclared US accounts in Swiss banks."
A spokesperson for the Swiss Bankers Association expressed the desire that those banks subject to investigation reach settlements soon.
"These settlements should also be consistent with the principles of fairness and proportionality. Banks in Switzerland have been committed to a tax compliant financial centre for several years now and want to acquire and manage only taxed assets. They have already put in place a number of measures that will help ensure that the strategic aim of a tax compliant financial centre is achieved. Another element is a clear commitment to helping to shape international standards in the future and complying with them."
While most of the recent US investigations have focused on Swiss banks, there are still many other jurisdictions where the ‘ask-no-questions’ school of banking secrecy is the norm, says Josh Simmons, policy counsel at Global Financial Integrity, anon-profit, research and advocacy organisation located in Washington.
"Once the US and other governments begin to collect huge amounts of financial data through FATCA and other automatic-exchange arrangements, investigations and prosecutions will likely shift to individual tax evaders rather than facilitating banks."
Simmons accepts that the impact on banks convicted of tax evasion has been entirely pecuniary and that after the US announced the Credit Suisse settlement, its stock price went up. But he also accepts that with the new multilateral approach, the potential for real damage is increasing.
"Ultimately, it is in the interest of banks to comply with such programmes since the US is no longer the only government clamping down. Resisting multiple regulators (and paying fines to multiple governments) will become economically insupportable."
More banks – particularly in bank secrecy jurisdictions other than Switzerland – should come forward and admit it if they have been complicit in their clients’ evasion of taxes, he adds.
"The US government is not likely to let up on its investigations, particularly once FATCA takes effect and begins producing a wealth of new data. Banks that haven’t already will need to examine their practices and see whether they could be held liable. They seem to have done very little to reduce their passive role in tax evasion, even if they have overhauled internal practices that previously made them active participants."
Further revelations likely
Private bank advisor David Maude also fully expects further revelations of tax evasion practices to emerge. "Six or so years after the ball started rolling with the Liechtenstein and UBS episodes, there are more than one hundred banks still awaiting settlements in the US-Swiss tax dispute."
However, he disagrees with Simmons on the extent to which this issue has damaged the industry in general and the individual banks found to have facilitated tax evasion. "Huge fines catch broad media attention, but the ongoing impact is probably even more serious, including substantial asset attrition, tighter regulatory oversight, management distraction and of course the reputational hit."
Despite uncertainties around treatment by the relevant authorities, issues around the degree of institutional culpability and circumstances regarding individual undeclared clients, Maude believes most banks would probably agree that there is no better alternative to participating in existing programmes.
"No sensible bank will want to be seen in any way to be facilitating tax evasion by current or prospective clients. That said, some are only just starting to implement tax-transparency processes (including collecting all relevant client information and documentation), especially for existing clients. Banks vary in terms of the quality, depth and consistency of their due diligence and in terms of the consequences (for example, account restrictions/blocks) in cases of deficiencies," he concludes.
| Bank | Fine (US$m) |
| Credit Suisse | 2,815 |
| HSBC | 1,920 |
| Standard Chartered | 327 |
| Bank Leumi | 289 |
| Bank of Tokyo | 250 |
