Tax Analysts Blog

Swiss Bankers Are Smiling

Posted on Jul 1, 2009

These days we hear a lot of talk about tax havens. If the headlines are to be believed there is a global crackdown on offshore tax evasion. That's good news, if it's true. I pay all my taxes, so it's only natural I'm peeved that others avoid paying their fair share by stashing money away in a foreign bank account and then lying about it on their U.S. tax return. What worries me, though, is that this crackdown might be more spin than substance. I hope I'm wrong.

Switzerland's private banking sector has become the poster child for offshore tax evasion. You have to admit it's a reputation that's well deserved. Congressional hearings into the matter have revealed crazy tales about Swiss bankers smuggling diamonds through international airports in tubes of toothpaste on behalf of wealthy clients seeking to dodge taxes. Shocking stuff, really.

The biggest Swiss bank is UBS, which has been embroiled in complicated legal battles with Uncle Sam. In February UBS admitted it helped U.S. taxpayers illegally shelter money in secret bank accounts and paid $780 million to settle criminal charges against it. Sounds like a lot of money, but the consensus was that UBS got off easy. The punishment could have been much worse.

That wasn't the end of the story. The IRS is going after the account holders and a federal court in Miami hit UBS with a summons ordering it to fork over the names of about 52,000 Americans with undisclosed offshore accounts. UBS claims it can't comply with the summons without violating Swiss bank secrecy. The bank is in a legal bind: damned it if complies with the summons, but also damned it doesn't. The court's decision is still pending; the trial is scheduled to begin July 13.

Meanwhile the UBS affair has risen beyond mere tax collecters and tax attorneys. Diplomats have been shuttling across Washington in hope of avoiding a broader rift between the two countries. We've seen media reports that UBS is prepared to pay up to $5 billion to make the whole matter go away once and for all.

You'd think this unwelcome attention would have an adverse effect on the Swiss banking sector as a whole. Not necessarily. No less an authority than the Wall Street Journal is suggesting Swiss banks have a rosy future.

The WSJ's 'Heard on the Street' column (June 30, 2009) is reporting that Swiss banks other than UBS (such as Credit Suisse, Julius Baer, and Sarasin) are attractive investment options for stock market investors seeking undervalued assets. Their depressed share prices are described as a lucrative "opportunity." The theory goes that UBS's woes will translate into boom times for rival Swiss banks.

Evidence supports the theory. While UBS has suffered significant capital flight as nervous account holders withdraw funds -- more than $75 billion over the last six months -- those other banks are reporting a sudden increase in new deposits despite the global recession. It seems former UBS clients are keeping their wealth safely hidden in Switzerland -- they're just moving it down the street to another bank. Sadly, that means there remains a thriving industry of private bankers dedicated to helping Americans cheat on their taxes.

Call me skeptical, but it's difficult to believe the global crackdown on tax havens is legit so long as Swiss bank secrecy is intact.

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