The Swiss Secret

Swiss National Bank

Just what does the Swiss Secret Scandal mean for the future of offshore banking?

Is offshoring coming to a grinding halt? That was the question on everyone’s mind last month, as the United States and Switzerland reached a watershed agreement that would essentially redefine the Swiss principle of banking secrecy. The seminal deal came as the conclusion in a closely watched trial, which involved accusations of tax evasion and other fraudulent financial practices. Several rich American citizens had been accused of dodging fiscal legislation, by stashing billions into Swiss bank accounts. Up until this decision, banks in Switzerland had been committed to safeguarding the secrecy of their clients’ identity, yet now that they are facing hefty fines, as well as disclosure obligations, all this may change. How will this affect the offshore scene at large?

The Swiss secret: Has it expired?

It might just be too soon to tell, but at least according to the recently signed deal between the U.S. and Switzerland, most banks based in the country of chocolate, Heidi, and Alpine skiing slopes will have to deal with some serious new transparency measures. For one thing, they will have to reveal all the details of banking accounts that taxpayers from America have an interest in. Then, they will also have to provide public information about banks that have made transfers into secret accounts or that took money from closed secret accounts. All trans-national transactions are also fair game for disclosure under the treaty and tax evaders from America will have to have their accounts closed down.

It’s important to note that not all Swiss banks fall under the scope of this agreement, since 14 of them are still being criminally investigated. They include Credit Suisse, Julius Baer, some regional banks, and other Swiss-style banks. This is significant, because they likely represent a sizeable proportion of the over $2 trillion in overseas deposits stashed away by Americans in Switzerland. As of the writing of this article, it remains unclear whether or not these banks are going to be facing prosecution. Those that are covered by the current treaty will be considered for non-prosecution agreements, under which they will not be charged or criminally penalized in any way. As for the rest of the Swiss banks, per the statements of the U.S. Attorney general, some might have already expressed a refusal to cooperate, which, in turn, might lead to indictments.

Financial firms not off the hook either

In early October this year, it became apparent that the current investigations have the potential to reveal far darker secrets and deeper issues with the so-called ‘Swiss secret’. There are some GBP3 trillion transacted on currency markets every day and, under this investigation, several financial institutions and lenders from around the world are being scrutinized for having potentially tampered with their integrity. Swiss authorities are currently collaborating with banks from around the world, in order to get to the end of this debacle. It is also reminiscent of the UK’s own June investigation of foreign exchange markets, which took a close look at the part benchmarks play on some of the world’s most dynamic and liquidity-rich markets. Banks such as Barclay’s, UBS, and RBS have all already been fined for rigging benchmarks and it looks like the current Swiss secret scandal is going to further destabilize the credibility of this index.

What next for offshoring?

While all of the above might paint a potentially uncertain future for offshoring and its discrete segments, such as the setting up of an overseas company and tax account, it should be noted that plenty of locations remain available for this around the world. Companies specialized in mediating offshore banking and shelf company purchases are becoming increasingly prominent and active. This is indicative of the fact that, much like anything else, offshore financial activities are best left handled by professional, authorized, experienced bodies which can ensure a smooth (and legal!) transition into this process. Otherwise, the owner of an overseas account or company might just find themselves staunchly caught up in a repeat of the Swiss secret scandal.