Gordon Gekko’s Swiss Tax Haven Lures Rich From Emerging Markets
Wealthy emerging-market clients are flocking to Switzerland as a haven from instability, filling a gap as Americans and Europeans flee a crackdown on tax evasion.
Customers from developing economies deposited a record 52 percent of the 1.96 trillion francs ($2.3 trillion) held in offshore Swiss bank accounts last year, according to Boston Consulting Group. Their share may climb to 63 percent by 2015 from 37 percent as recently as 2007, the firm said.
Last year’s handover of UBS AG (UBSN) accounts to the U.S. Internal Revenue Service has tarnished Switzerland’s reputation for protecting the secrets of millionaires. As the private banking model evolves, a scene in Oliver Stone’s 2010 “Wall Street” sequel where corporate raider Gordon Gekko repatriates $100 million from a Swiss account evokes a bygone age.
“For most banks, business with American clients is incredibly complicated and will cause more trouble than it’s worth,” said Peter Damisch, a partner at Boston Consulting in Zurich. “There will be a big shift from mature markets toward emerging markets.”
North American assets will fall to less than 30 billion francs in 2015 from a peak of about 150 billion francs in 2007 and 60 billion francs last year, Boston Consulting estimates.
Swiss offshore assets will grow at an annual rate of 2.5 percent during the next five years as money from the Middle East, Africa and Latin America outweighs redemptions from European clients, Damisch said.
While bank secrecy helped Switzerland attract 27 percent of the world’s offshore wealth, most undeclared assets are in the country for “stability reasons,” according to the International Monetary Fund. Those “safe-haven attributes” are drawing investors amid political upheaval in the Middle East and growing speculation that Greece may be the first country in the 17-member euro region to default, the IMF said on May 26.
Switzerland has been a financial refuge for fugitives from unrest since Geneva’s Pictet & Cie. and Lombard Odier Darier Hentsch & Cie. were established more than 200 years ago to safeguard the riches of aristocrats fleeing the French Revolution.
UBS, Switzerland’s biggest bank, attracted 11.1 billion francs at its wealth-management unit in the first quarter after customers withdrew 198.7 billion francs in the nine quarters through June 2010. Funds from emerging market investors and net new money at its Swiss division countered withdrawals by Europeans from cross-border accounts, the Zurich-based bank said.
The commitment to regulatory and tax compliance will put “tremendous pressure on Switzerland” as western European clients repatriate their wealth or transfer it to other investments such as real estate, Boston Consulting said in a May 31 report.
As Swiss wealth managers lose lucrative cross-border clients, they must spend to build onshore networks in Germany, Italy and other European countries.
“Easy money is an addiction and it’s very hard to go from earning a lot of money for doing very little to earning much smaller margins for investing much more,” said Philip Marcovici, a Hong Kong-based lawyer who advises banks and governments on taxes. “How much knowledge do you need to say ‘let’s hide your money and go to lunch’?”
UBS’s wealth business, the world’s second biggest, earned 88 cents for every $100 of international assets it managed last year, compared with $1.12 for those booked in Switzerland.
Focus on Taxes
The Swiss government hopes the country’s commitment to attracting only taxed assets will boost its appeal.
“That increases the legal security and the competitiveness of Switzerland as one of the world’s top financial centers,” Michael Ambuehl, state secretary to the finance ministry, said in e-mailed comments to Bloomberg News.
Switzerland may get more attractive should it negotiate withholding taxes with the U.K. and Germany on the interest, dividends, capital gains and investment income earned by clients with offshore accounts. While imposing additional administrative costs on Swiss banks, the arrangement would allow them to keep customer identities secret.
Inflows from emerging markets may help Swiss offshore assets rebound to about 2.3 trillion francs by 2015, according to Boston Consulting. This suggests the country’s bankers can overcome the loss of their traditional tax advantage, said Lukas Haessig, author of “Paradise Lost -- The End of Swiss Banking Secrecy.”
“Switzerland didn’t consist only of banking secrecy, although it’s often depicted like that in Hollywood movies like Wall Street,” said Haessig. “Yes, Switzerland is a bit boring, but boring and safe is better than sexy and risky.”
The country’s staid image offers stability that lures clients, said Lawrence Howell, chief executive officer of Zurich-based EFG International AG (EFGN), the private bank controlled by Greek billionaire Spiro Latsis and his family.
“The cultural reality is it isn’t a particularly revolutionary society,” Howell said. “That supports the idea that Switzerland will continue to be a sovereign-risk haven as opposed to a tax-evasion haven.”
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