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Struggling small banks sweat over US tax bill

After its mauling by the Department of Justice, Wegelin’s name died and the remains of the carcass were transferred to a new bank: Notenstein Keystone

The imminent threat of huge tax evasion fines from the United States has raised fears that yet more Swiss banks could suffer the same fate as Wegelin, Switzerland’s once-oldest private bank, which was recently destroyed by US prosecutors.

Already burdened by higher regulatory and compliance costs and diminishing fees, some struggling small boutique banks may be tipped over the edge by the latest Swiss–US deal to settle the long-running tax row.

A quarter of the 103 Swiss private banking operations recently surveyed by KPMG and the University of St Gallen have been tipped to go bust in the next three years – even before the US fines were announced. Some 13 banks closed their doors in Switzerland in 2012.

Small boutiques, defined as those with less than CHF5 billion ($5.3 billion) in assets under management, were identified by the study as being particularly at risk.

The exact cost to all Swiss banks of staving off criminal prosecution by the US authorities has yet to be calculated, but most initial estimates settle on a sum between $5 billion and $10 billion.

While larger banks may have to pay bigger fines, they also have enough cash reserves to absorb them. Smaller players will probably suffer the most, according to Martin Janssen, a professor at Zurich University’s Institute for Banking and Finance.

“We might see some banks running into trouble,” he told “Even a relatively modest fine of $50 million could wipe some banks out. If they manage to pay such a fine, they could still find themselves in trouble with the regulators for being undercapitalized.”

Switzerland’s oldest surviving private bank, Rahn & Bodmer, said on Wednesday, September 11, that the US Department of Justice had placed it under formal criminal investigation.

The list of Swiss banks now under active DoJ investigation, and at threat of criminal sanctions, is believed to number 16.

Rahn & Bodmer said it was uncertain if it could now apply for the non-target letter programme, which targets banks suspected of tax evasion offences but not under active investigation.

The Zurich-based bank, which was founded in 1750, has around 200 staff managing some CHF12 billion ($13 billion) in client assets.

The bank said the proportion of US assets was small.

Extra costs

KPMG’s Christian Hintermann, co-author of the recent private banking study, agreed that even a fine of $10 million to $20 million would be a “significant amount” for some smaller boutiques.

It all boils down to the size of undeclared US assets that individual banks hold in their vaults and whether they have enough equity to absorb fines imposed by the US authorities, he added.

Additional costs would also be incurred by dedicating time to sifting through client information to identify undeclared US assets. This could prove particularly onerous for those banks that have recently changed their IT systems, making it harder to track this specific data.

A survey of half a dozen smaller Swiss private banks by mostly drew a “no comment” or the information that the bank was still assessing the ramifications of the Swiss-US tax deal, which was signed on September 3.

The Swiss-US agreement, signed on September 3, aims to end a long-standing dispute over tax dodging.

It allows banks to apply for a non-target letter that defers prosecution to allow for an out-of-court financial settlement for tax evasion offences.

Banks have until the end of this a year to apply to the program, then reveal the size of assets involved and the date that accounts were opened.

For accounts already in existence by August 1, 2008, banks would pay a fine equivalent to 20% of the assets held in that account.

Accounts opened between August 1, 2008, and February 28, 2009, would attract a 30% levy.

A fine of 50% would apply to accounts opened after February 28, 2009.

The Swiss Bankers Association called the deal “painful” but said it would restore “certainty to the financial sector”.

Affects “all” private banks

Christian Rahn of mid-sized private bank Rahn & Bodmer is confident that any potential fine would be “manageable” for his bank and covered by money already set aside for legal bills. Since the second half of 2008 the bank has turned its back on US undeclared assets and advised existing clients to own up to the US authorities, Rahn added.

“All merchant management banks [private banks] in Switzerland have probably had, and maybe still have, US clients who have not taxed their assets. I believe that many Swiss banks will have to adhere to this agreement,” he told

The program targets more than 100 banks that are suspected of sheltering undeclared assets but are not under formal investigation by the US Department of Justice (DoJ).

Guilty banks have been invited to apply for a “non-target letter” from the US authorities that enables them to settle financially rather than through the criminal courts.

Many of these banks are suspected of poaching US clients from UBS after the Swiss wealth management giant was indicted in 2008. Smaller banks gave shelter to these tax cheats in the erroneous belief that they could not be touched by the DoJ as they had no presence in the US.

The most infamous example was Wegelin, which was forced to break up in 2012 and dissolve a year later after being found guilty of helping US citizens evade taxes on $1.2 billion worth of assets.

Worse to follow

The demise of Switzerland’s once oldest private bank sent shock waves through the Swiss banking sector. And there was worse to come: in July the Swiss government authorized banks to hand over data to the US revealing to which other banks clients had transferred their funds in order to escape prosecution.

The paper trail of incriminating evidence left by the so-called “leaver lists” means that there is now no place left to hide, even for small discrete boutiques with no presence outside of Switzerland.

Some observers fear another Wegelin is just around the corner.

In 2009, Switzerland’s biggest wealth manager, UBS, was fined $780 million after admitting to aiding and abetting US tax dodgers.

The following year, the Swiss government handed over nearly 4,500 names of UBS clients to the US authorities, effectively ending Swiss banking secrecy.
The US continued to target other Swiss banks suspected of helping tax cheats and of poaching UBS’s US clients.
In January 2012, Switzerland’s oldest private bank, Wegelin, was forced to sell off its non-US wealth management business as it succumbed to a US criminal investigation.
A year later, the 272-year-old bank effectively ceased to function, with its partners facing massive fines.
In April 2012, the Swiss government authorised a handful of banks to hand over details of US business dealings to the US authorities.
In June of this year the Swiss parliament rejected a government plan to extend the data transfer to other banks, including new information such as the leaver lists.
On July 3, 2013, the Swiss government nevertheless approved the new data transfer deal.

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