Legal expert mulls possible Swiss bank fallout

In 2009 UBS paid a $780 million fine after admitting it provided tax-evasion services to rich Americans. Other Swiss banks now in the firing line could face similar fines. Wikimedia Commons

Should parliament change the law to allow Swiss banks to hand over confidential data showing their business relations with American clients? A Swiss banking expert believes this would make life much easier for banks embroiled in a tax spat with the US.

This content was published on June 5, 2013 minutes

Manuel Ammann, professor of banking law at the University of St Gallen, believes parliament’s approval of a cabinet-backed bill would make cooperation with the Americans easier.

Parliament is voting in its current session on whether to accept or block a cabinet proposal to allow banks to hand over confidential data chronicling their business dealings with US clients. In doing so, the financial institutions would dodge both Swiss banking secrecy laws and criminal prosecution in the US.

More than a dozen Swiss banks have been caught up in the US probe. If the Swiss parliament eventually votes down the bill, the US will increase pressure on Swiss banks. What exactly is the threat to these institutions?

Manuel Ammann: The worst that could happen to a bank would be an indictment from the American justice system, which could even put its survival into question. Such an indictment would probably only happen if the bank can’t or won’t cooperate with the US authorities. For example, if they don’t send data or pay fines that the Americans demand.

That's the point of the planned law: to create the legal conditions so that banks in Switzerland can cooperate with the US without violating Swiss law.

zVg But if parliament doesn't choose this route, will the banks be threatened with legal action?

M.A.: In the worst case scenario. But it doesn’t have to go that far. It would also be conceivable that they reach an agreement with the Americans anyway. Let’s take a bank that wants to cooperate and would also be prepared to send data on employees. Then, that bank – without the proposed new law in place – would violate Swiss law?

M.A.: That’s right. Depending on what the Americans demand, this bank could be forced to violate Swiss law to cooperate with American law. Would that be the lesser of two evils for a bank, practically speaking?

M.A.: It is difficult to generalise. But such a situation where (breaking Swiss law to cooperate with the Americans) would be the least worst choice can’t be ruled out.

But from the viewpoint of a Swiss bank, it would of course still be a bad thing.

Parliamentary politics and the banking bill

Parliament is to discuss the banking bill during the three-week summer session, which ends on June 21.

On Wednesday, the House of Representatives called on the cabinet to provide further information on the deal the US plans to offer Swiss banks alleged to have helped American tax cheats.

However, it threw out proposal by the rightwing Swiss People's Party to strike the bill from the agenda.

The debate pitted the political left against the right, while the centre largely abstained in the procedural votes.

The matter will next be discussed at committee level before coming to the Senate and the House as of next week.

Finance Minister Eveline Widmer-Schlumpf had last week presented the bill as a way to allow Swiss banks to cooperate with US authorities without breaking Switzerland's strict client secrecy laws.

She warned the bill needed to be passed quickly as US patience with Swiss banks was running out.

End of insertion What penalties might banks face if they violate Swiss banking secrecy to comply with US law?

M.A.: You would have to ask a lawyer what the penalties are for that. In the worst case, the Swiss regulatory authorities could deny responsibility for the proper conduct of business, meaning the license for a bank could be revoked even in Switzerland.

But that would have to be a quite extreme case. I can’t imagine that we’ll encounter a situation where numerous Swiss banks lose their licenses because they are cooperating with Washington.

But a situation could, of course, also arise where individual bank employees could be penalised for cooperating with the Americans. Why does a Swiss bank have to fear an indictment by US authorities so greatly? Is it because it could lose its license in the US?

M.A.: No, that’s the strange thing about all of this. Most of the banks likely to be affected don’t even have a license in the US. They never set foot on US soil.

They thought they could continue to operate their business according to domestic law because they didn’t have any business ties to the US and therefore didn’t fall under US law.

But that was a momentous mistake, as we now see. The US wanted to apply its rules outside its territorial boundaries and is having success with that notion in Switzerland. Then what would a Swiss bank without a license in the US have to fear?

M.A.: A bank is not an autonomous institution but is dependent on many others – on corresponding banks, custodians, stocks, etc. If those partners stop that collaboration, the affected bank cannot continue to do business because it will be cut off from the financial system. And the partners would have to do that in case of an indictment?

M.A.: Not absolutely, but it could start a chain reaction. If important American institutions no longer wanted to take up business relationships with accused banks, other banks might not want to collaborate with them either for reputational reasons. Do you assume that fines would be less serious for most banks, even though they are likely to be steep?

M.A.: Correct. Even if the bank survives the indictment, a long series of legal proceedings would follow with uncertain consequences for the bank and its business relationships. It is legally extremely irritating, but in the banking industry which is very sensitive to trust issues, such an indictment is almost like a conviction. Could those costs become so high that the banks’ existence could be threatened?

M.A.: I think that’s not very likely, despite everything. If you look at leading cases, for example Wegelin, which took on significant money from American clients, the percentage of the fine wasn’t easy to swallow but also it wasn’t so high that it would make a normal Swiss bank insolvent.

Most Swiss banks have few American clients in comparison [to Wegelin, for example]. It could be a different story for Swiss banks with a high number of American clients, but there are only a handful of those in Switzerland. So, if parliament rejects the bill it wouldn’t spell an end to the Swiss financial market, in your opinion?

M.A.: I don’t think so. But it definitely wouldn’t get easier for Swiss banks because the adoption of bill would make cooperation with the Americans easier. But it would be a further step toward the end of Swiss banking secrecy?

M.A.: The days of Swiss banking secrecy for foreign clients are over when it comes to tax matters, regardless of whether or not the bill goes through.

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