By Stephanie Baker and Warren Giles
July 2 (Bloomberg) -- On a hot Saturday morning in May at the Rolle yacht club on Lake Geneva, Guy de Picciotto, chief executive officer of Switzerland’s Union Bancaire Privee, smears on sunblock as he rallies a professional, lycra-clad crew of six to race his 35-foot, $600,000 catamaran.
“It wouldn’t do to look too tanned on Monday morning,” de Picciotto, 49, says with a grin, before jumping on a high- powered launch that takes him out to his sailboat, Zen Too, one of 12 identical carbon-fiber yachts moored offshore.
De Picciotto’s superlight catamaran accelerates toward the starting line in the light wind, which fades and then dies, leaving the yachts adrift in the heat. Still, the sailors, including Swiss biotechnology billionaire Ernesto Bertarelli, 43, a two-time Americas Cup champion, revel in their sport.
“I don’t have the weight of the bank when I’m out sailing,” de Picciotto says. “These are toys. It’s my leisure.”
De Picciotto and his fellow Geneva bankers were never more in need of stress reduction. Their world -- which converges on the city’s yacht club, the pistes of Verbier and golf in the hills above Geneva -- was shattered by the 2008 market crash and worldwide recession.
The banks’ “relationship managers” are working overtime to assuage angry clients and win new ones, while the risk managers are backing away from their bets on volatile stocks and derivatives.
A refuge for the world’s nervous money, Swiss banks are stumbling. Total assets held on behalf of foreign clients dropped more than 1 trillion Swiss francs ($918 billion), to 2.1 trillion francs, from the end of 2007 to March 2009, according to the Swiss National Bank.
$8.8 Billion Madoff Hit
In addition to getting hit by plunging markets, de Picciotto’s UBP, which manages 100 billion Swiss francs, lost $700 million in Bernard Madoff’s Ponzi scheme. Geneva wealth managers and their funds of hedge funds account for about $8.8 billion of the losses in the $65 billion Madoff swindle, according to the Geneva Financial Center, a foundation that promotes the city’s banking industry.
Not all of the news was bad in Geneva’s banking quarter, where banks and money managers are clustered near the Rue du Rhone. While assets at all of the banks declined due to market losses, some private banks, including Lombard Odier, Mirabaud & Cie. and Pictet & Cie., are picking up new clients who have pulled money out of firms that have been propped up with government subsidies, such as Citigroup Inc., Royal Bank of Scotland Group Plc and UBS AG.
UBS vs. IRS
Zurich-based UBS was hit hard by losses on investments in U.S. subprime housing loans and last year was given a $45 billion government aid package.
Investors have yanked some 130 billion francs out of UBS’s main wealth management unit since the beginning of 2008. The bank is battling the U.S. Internal Revenue Service, which is seeking information on the Swiss accounts of 52,000 American clients.
The Geneva-based banks are selling themselves to flustered investors as safe havens. Some are unlimited liability partnerships, which means the partners bear personal responsibility for losses. Pictet alone banked 17 billion francs in net new deposits in 2008, of which 7 billion francs arrived in the fourth quarter, as wealthy clients panicked after the collapse of Lehman Brothers Holdings Inc.
While UBS bled assets, most of the Geneva-based private banks had net inflows of money, according to data compiled by Bloomberg.
Partners Assume Risk
“Clients face people who risk their entire fortune every day,” says Patrick Odier, who last year became senior partner of Lombard Odier, which was founded by his family six generations ago. “Other firms can go through Chapter 11 and their executives can still keep their chalets. If our people make mistakes, our partners assume it to our very last cent.”
Having survived the market crash, Geneva’s bankers have shifted their focus to their second-highest priority: keeping their account information secret, or, as the bankers prefer to phrase it, protecting the privacy of their clients’ financial information. A decade after other nations pressured Switzerland into tightening anti-money laundering rules, governments around the world are once again targeting offshore centers in a campaign to expose wealthy tax cheats.
Switzerland, a repository for 27 percent of the world’s offshore wealth, is their top target. (Offshore is the industry term for deposits from any foreign country.) And the Swiss government has buckled.
In March, a month after UBS paid $780 million to the U.S. government to defer criminal charges that it facilitated tax fraud, Swiss President and Finance Minister Hans-Rudolf Merz announced Swiss banks would, for the first time, cooperate with foreign governments looking for tax evaders, if specific information is presented showing they’re using a Swiss account for that purpose.
“The era of banking secrecy is over,” world leaders meeting in London at the Group of 20 summit in April declared in a press release.
Not so fast, the Geneva bankers say. They’ve been pushing back against the attack on their industry, charging that it’s all a grab for their assets by envious bankers in other countries and government bureaucrats eager to bolster enfeebled treasuries.
‘An Economic War’
“We are in an economic war,” says Yves Mirabaud, the 43- year-old managing partner of Mirabaud & Cie., a Geneva-based private bank founded by his ancestors in 1819, as he pauses over a plate of filet mignon in a Mirabaud dining room with a view of the snowcapped Alps and the 19th-century Grand Theatre de Geneve. “Switzerland is a small country not supported by others, so we are an easy target. The big countries want to take market share, wherever it is.”
“They don’t like to be bullied,” Garelli says.
Proudly neutral Switzerland (population 7.6 million) didn’t join the United Nations until 2002 and doesn’t belong to the European Union or the North Atlantic Treaty Organization. Military service is compulsory, giving the country a standing militia of 220,000. By law, every Swiss resident must have access to a nuclear bunker, at home or in the neighborhood.
Swiss private bankers like Mirabaud have come out of their professional bunkers to defend the secrecy laws, which make it a crime for a banker to divulge a client’s financial information to a foreign tax authority or even to the Swiss government.
Bank Secrecy Law
A banker can go to jail for up to three years for revealing bank secrets. In a case of negligence, such as an accidental leaking of information, the penalty is a fine of as much as 250,000 francs.
“As we say in French, ‘pour vivre heureux, vivons cache,’” says Jacques de Saussure, managing partner of Pictet: To live happily, live discreetly. “Most clients like to be very discreet because they were born rich or have grown rich, and they know it’s better not to talk about it too much. This principle of privacy or secrecy is very important to them.”
Even so, in March the Swiss government agreed to follow guidelines of the Organization for Economic Cooperation and Development (OECD) on the exchange of information in tax matters, meaning that in the future its banks will turn over names and financial records of clients if foreign governments provide evidence of tax evasion. That will involve renegotiating tax treaties with at least 12 other nations.
Evasion Not a Crime
Previously, Switzerland had cooperated in cases of tax fraud. Now, it will treat tax evasion, which is not a crime in Switzerland, in the same way. Bankers say there should be no “automatic” exchange of information, which they say is what the IRS is demanding.
At least one of the tax treaties is likely to be subject to an up or down vote in a Swiss referendum, for which only 50,000 signatures are required. And three-quarters of Swiss citizens believe the country should preserve its bank secrecy laws, according to a March poll of 1,000 people by the SBA.
The bankers coordinate their message through bimonthly executive board meetings of the SBA, which is headed by Yves Mirabaud’s uncle, Pierre Mirabaud, who is also a senior partner at Mirabaud & Cie. Pierre doesn’t mince words.
“The idea that Swiss banks live from the tax evaders of the world is a Hollywood invention,” he said at a May lunch of the American International Club of Geneva, which brings together ex- pat business executives and their Swiss counterparts. “There’s no ethical conflict between the right of the state to enforce taxation laws on the one hand and respect for financial privacy on the other.”
Club of Bankers
Geneva’s private bankers form a tightly knit club, with some friendships cemented in the Swiss Army officer corps. Geneva is a small city -- population 186,000 -- and smaller still in the affluent precincts surrounding the Rue du Rhone.
Every day, many of the district’s bankers, lawyers and traders gather for lunch at Roberto, an Italian restaurant popular with Geneva’s wealthy since the aftermath of World War II. On a rainy mid-May afternoon, the place is packed with patrons in hand-tailored suits dining on gnocchi and grilled sole.
That evening, some of Roberto’s patrons meet again at the Beau-Rivage hotel on Lake Geneva, where Sotheby’s auctions off a rare blue diamond for 10.5 million francs to an anonymous phone buyer after vigorous bidding.
A Banker’s Life
The bankers can also be found sipping coffee on the terrace overlooking the marina at the Societe Nautique de Geneve, the lakeside yacht club founded in 1872; hitting balls at the Golf Club de Geneve in the wealthy suburb of Cologny; or attending the ballet at the Grand Theatre.
The foundation that runs Geneva’s Museum of Modern and Contemporary Art reads like a who’s who of the private banking establishment. Bernard Sabrier of money manager Unigestion Holding SA is there. So are Pierre Mirabaud; Pierre Darier, managing partner of Lombard Odier; and Pictet partner Philippe Bertherat.
The bankers maintain that Switzerland is being unfairly singled out by the G-20 while offshore centers like Hong Kong and the U.K.’s Guernsey are given an easy ride.
“This whole debate is full of hypocrisy,” Pierre Mirabaud said in his May speech. “It’s a fight for market share, a fight for tax reserves, and the only rule today is that the strongest wins.” Mirabaud will be succeeded by Patrick Odier as SBA head in September.
Germans, Swiss Battle
Such arguments are sophistry, says German Finance Minister Peer Steinbrueck, whose government accuses the Swiss of facilitating criminal behavior.
“There are jurisdictions -- tax havens and nation states -- that not only approvingly accept but deliberately invite German money transfers with the clear intention of committing tax fraud,” Steinbrueck told parliament on May 7. “This is clearly true in the case of Switzerland, and Liechtenstein too.”
Steinbrueck’s comment was part of an ongoing attack by Germany on neighboring offshore centers. Last year, German officials disclosed that their secret service had paid an employee of LGT Group, the bank owned by Liechtenstein’s princely family, 5 million euros ($7 million) for information on German clients.
Germany is investigating about 900 suspects in the tax- evasion probe, and authorities have raided businesses and the homes of wealthy citizens looking for incriminating documents.
Germany and Switzerland have been trading barbs about Swiss bank secrecy for decades. Swiss Foreign Minister Micheline Calmy-Rey twice this year summoned Germany’s ambassador to Bern to complain about Steinbrueck’s comments.
Fueling the Fire
Swiss lawmaker Thomas Mueller fueled the fire in March when he said in a parliamentary debate that Steinbrueck’s attitude reminded him of Germans “who walked the streets in leather coats, boots and armbands 60 years ago.”
Swiss bankers say Germans cross the border to avoid their own country’s draconian tax regime. “Germany has mistreated its entrepreneurs and citizens for decades by constantly shifting the tax goalposts,” says Raymond Baer, chairman of publicly listed Julius Baer Holding AG, leaning over a conference table in his Zurich offices, hung with contemporary Swiss paintings and art installations. “I have many entrepreneurs moving their holding companies to Switzerland because they cannot reliably plan with Germany’s ever-changing tax code.”
If the attack on bank secrecy results in foreigners doing their banking in some other country, that could be dire news for Switzerland, which derives almost 10 percent of its gross domestic product from the industry.
3.7 Trillion Francs Held
There are 330 banks registered in the country, almost 40 percent of them foreign controlled. Swiss banks held 3.7 trillion francs of securities for domestic and foreign clients at the end of March, more than seven times Switzerland’s GDP.
“Swiss banks are not an endangered species, but the world of absolute bank secrecy is behind us,” says Jeremy Jensen, a London-based partner leading the European private banking practice at PriceWaterhouseCoopers. “Private banks need to plan for a tax-transparent world and work to their strengths.”
Swiss banks could lose as much as 20 percent of their assets if the government agrees to surrender details on possible tax dodgers, says Peter Thorne, a London-based banking analyst at equity research firm Helvea SA.
“Banks are not the tax auxiliaries of foreign governments,” says Steve Bernard, managing director of the Geneva Finance Center. “We have a working relationship in Switzerland between the authorities and the citizens, meaning you don’t fear tax authorities knocking at your doors at 4 a.m.”
No Tax Police
One reason the tax police don’t come knocking is that tax evasion is a civil, not a criminal, offense in Switzerland. Even tax authorities must abide by the country’s strict bank secrecy laws when investigating suspected dodgers.
“Criminalizing a large part of the wealth-producing population is not the answer, especially in a world that needs wealth creators more than ever,” Baer says.
Switzerland has been a center of resistance to taxation for centuries. The legend of William Tell is the tale of how a rebellion against a Hapsburg empire tax collector sparked the creation of the Swiss Confederation in 1291. When Protestant theologian John Calvin arrived in Geneva in 1537, he sanctioned the charging of interest as long as it served the public good, helping to turn the city into a banking center.
Starting in the late 17th century, Protestants from France began fleeing to Geneva to escape religious persecution. Successive wars and revolutions in Europe made neutral Switzerland a refuge for moneyed exiles from the 18th century onward. Geneva’s major banking dynasties -- the Mirabauds, the Pictets and the Odiers -- all began as trade finance houses in the late 18th and early 19th centuries after the default of loans to French nobility, deposed in the Revolution, ruined their predecessors.
Switzerland enacted its first bank secrecy law in 1934, a year after Adolf Hitler’s government passed legislation making it a crime for Germans to fail to declare money held abroad. It followed years of allegations that French and German authorities had bribed Swiss bank officials to hand over information on account holders.
A major challenge to bank secrecy came in 1996, when Switzerland waived its laws to facilitate the work of the Volcker Commission, a group headed by former U.S. Federal Reserve Chairman Paul Volcker, whose task was to investigate dormant Swiss accounts opened by Jews fleeing Nazi persecution.
In 1998, Swiss banks, including Credit Suisse and UBS, agreed to a $1.25 billion settlement with Holocaust survivors. In 2001, the SBA published a list of 21,000 holders of Swiss bank accounts with possible links to Holocaust victims.
In 1998, the Swiss government tightened its anti-money laundering rules to prevent figures such as corrupt dictators from depositing ill-gotten gains in Swiss accounts. The new, “know-your-customer” rules were aimed at preventing a repeat of the embarrassing disclosure that Sani Abacha, the late president of Nigeria, had deposited about $640 million in Swiss bank accounts in the 1990s.
Nearly one-third of the Abacha funds were sent to Switzerland from banks in the U.S. and U.K., according to the SBA. Most of the money has been returned to Nigeria.
“Today, Switzerland has some of the strongest rules on client identification in the world,” Yves Mirabaud says. “It’s been impossible for years to open an account in Switzerland without being clearly identified.”
Not My Job
Still, once a depositor’s identity and the source of his money have been confirmed, the bankers say it’s not their job to investigate whether he or she has paid taxes.
“We believe in individual responsibility,” says Eric Syz, founder of Banque Syz & Co., a private bank and asset manager he set up in 1996. “Bankers should not be tax agents. It’s the responsibility of the client to pay his taxes.”
EU and U.S. officials maintain there’s no distinction between tax evasion and criminal tax fraud -- and that was the focus of the argument with Swiss bankers and their government until March.
The Swiss first eased up in 2004, when they signed an agreement with the EU to provide more help in cases where there’s evidence of criminal tax fraud such as the forging of documents.
Then, in 2005, after a decade at the negotiating table, Switzerland adopted the EU Savings Tax Directive, which levies a 20 percent withholding tax on interest income earned by EU citizens who hold accounts outside their home country.
Riddled with Loopholes
The tax is riddled with loopholes: It applies only to individuals, not corporations, and dividend income, capital gains and income from derivatives are exempt. In practice, wealthy clients have many ways to arrange their assets to avoid the tax, Helvea’s Thorne says.
Switzerland finally cracked in the wake of UBS’s abuses. The Zurich-based bank says it sent private bankers not registered with the Securities and Exchange Commission into the U.S. to solicit business from wealthy Americans.
In February, criminal prosecution for facilitating tax fraud was deferred after UBS agreed to release the names of about 300 clients and pay $780 million in fines. The next day, the U.S. government sued UBS to force the bank to disclose the names of 52,000 additional U.S. citizens it alleges hid Swiss bank accounts from the Internal Revenue Service.
UBS insists that disclosing the names would violate Swiss bank secrecy laws.
In March, the government agreed to follow the OECD guidelines, and in June Switzerland and France modified their bilateral tax treaty to conform to OECD standards.
“What matters is how it works in practice,” says PWC’s Jensen. “If foreign tax authorities pass a certain burden of proof, Swiss private banks will release the required information -- but probably piecemeal.”
Swiss banks will continue to go to great lengths to protect their clients’ privacy. That involves the well-ingrained use of code names and nicknames when discussing depositors, bankers say. “If the client’s an industrialist, we might call him the widget manufacturer,” says Pictet’s de Saussure. “We know internally who we’re talking about.”
De Saussure says he recently got a call from an important client who was worried that Pictet had hired someone from his home country. “We try to avoid spreading the names of clients even within the company,” de Saussure says. “People who have well-known names tend to be talked about, and that’s why we need to be especially careful about confidentiality.”
Traveling poses challenges to private bankers worried about keeping the identities of their clients under wraps. In Geneva, many private banks bar their relationship managers from living across the border in France -- a mere 20 minutes from the city center -- because it would pose a security risk if they carried client details past customs officials daily.
About four years ago, Credit Suisse began drawing up detailed manuals for each country the bank operates in, laying out rules for what licenses each relationship manager must hold in order to solicit business. “The compliance burden has tripled,” says Walter Berchtold, 47, head of Credit Suisse’s wealth management business.
Swiss bankers say they can cope with any erosion of bank secrecy. A major chunk of the wealth flowing into banks in Geneva and Zurich in the past five years has been from clients in low-tax countries, such as Russia and the United Arab Emirates, who aren’t trying to avoid taxes at home. Instead, they’re attracted by Switzerland’s rock-solid currency and political stability.
A Safe Haven
“Many clients have come to Switzerland as a safe haven -- not to dodge taxes,” Lombard Odier’s Patrick Odier says. “This tradition of protecting the private sphere attracts more and more clients.”
Lombard Odier has opened offices in Prague and Singapore in the past two years. Mirabaud & Cie. opened a branch in Dubai at the end of 2007 and now has more than 10 relationship managers based there. Pictet is expanding the staff at its Frankfurt office to attract more onshore money from German clients and has expanded its money management business for institutional investors around the world. Julius Baer announced plans in May to split its private banking and asset management units after outflows at its GAM hedge fund unit hurt investor confidence.
Pressured by clients for better returns from their portfolios, Switzerland’s bankers in recent years became entangled in the complex financial instruments being peddled by Wall Street and the City of London. Some are rethinking that strategy in the wake of the market crash.
“Clients developed a risk appetite for high returns,” says Alexandre Zeller, CEO of HSBC Holdings Plc’s Swiss private bank. “Today, we’re going back to basics. Clients want to see capital preservation, and banks will adapt extremely fast.”
UBP, a Madoff victim, is keeping tight control of new investment vehicles. In May, the firm created a new macro hedge fund that makes bets based on broad economic trends. The de Picciotto family ponied up 50 percent of the initial investment.
“The advantage of hedge funds is that their remit is in line with private banking because they try to make money and limit the downside,” says UBP Chief Investment Officer Christophe Bernard.
However steeped they may be in their tradition of discretion and secrecy, Swiss private bankers are eminently adaptable. “The world thinks Geneva is on its knees, but I think it’s looking to the next level,” says Sebastian Dovey, managing partner of Scorpio Partnership Ltd., a London-based wealth management adviser. “The Swiss private banking industry has a genetic ability to survive, as it has done for centuries.”
That doesn’t mean there won’t be casualties. At the Rolle yacht club on Lake Geneva, de Picciotto says the regatta hasn’t been spared. “There are fewer sponsors these days,” he says.
After abandoning the race in May for lack of wind, de Picciotto returned in June to find the wind whipping violently on Lake Geneva for the next regatta. His black-and-silver-striped Zen Too finished eighth, while the squalls capsized two of his competitors.
The race was a fitting event in one of the worst years in memory for Swiss bankers.