Swiss Target Commodities Secrets Risking $21 Billion Hegemony
Vitol SA, one of the world’s biggest oil traders, is being enticed from its Geneva base by Dubai and Singapore as Switzerland considers scrapping policies that made the country a global center for commodities.
“I’m concerned for the future both in Switzerland and elsewhere,” said David Fransen, chief executive officer of Vitol Group’s trading arm, citing the threat of over-regulation and higher taxes. “Other jurisdictions are actively courting us,” he said, including Malaysia and the Caribbean.
The Swiss government, which has been probing the commodities industry since May, said the Alpine nation is “exposed to risks to its reputation” by being an oil, grain and coffee trading hub. The review, due later this year, follows Switzerland’s decision in March 2009 to meet international standards to avoid being listed as a tax haven and attempts to settle a U.S. investigation of 11 banks that allegedly helped American clients hide money from the Internal Revenue Service.
While Vitol, Glencore International Plc (GLEN) and Trafigura Beheer BV surpass Nestle SA as the biggest Swiss companies by sales, politicians are concerned a lack of industry regulation may hurt a nation struggling to find a response to a global crackdown on tax evasion.
“Switzerland faces a dilemma over whether to bow to mounting pressure to regulate its burgeoning commodities sector or risk losing its status as a global trading hub,” said Ben Knowles, a lawyer at Clyde & Co. in London.
Commodity trading, concentrated in Geneva and Zug, boosted its share of the Swiss economy 10-fold over the past decade, according to Zurich’s KOF research institute. The trading industry accounts for 20 billion francs ($21 billion), or 3.5 percent of gross domestic product, according to the State Secretariat for Economic Affairs.
The pressure to regulate the industry comes as the European Union pushes Switzerland to abandon a so-called auxiliary regime that has attracted multinational commodity traders by allowing them to pay less tax on income from outside the country. That permits commodity traders in Geneva to pay an average tax rate of 12 percent.
“The bigger commodity traders are going to end up with whoever offers the lowest tax rates,” said Vladimir Langhamer, managing director of the Zug-based trading arm of Austrian oil company, OMV AG. “If policies change, companies and people might move out as quickly as they moved in.”
While the industry created about 8,000 jobs in Geneva alone, the costs outweigh the benefits, said Carlo Sommaruga, a lawmaker for the Social Democratic party, the second-biggest in the Swiss lower house.
The kind of corruption seen under the United Nations oil-for-food program for Iraq under Saddam Hussein could damage Swiss companies’ chances of winning contracts abroad and diminish the country’s role as a global financial center, according to Sommaruga. A UN probe found 2,253 companies made illegal payments to Iraq to win oil business, former U.S. Federal Reserve Chairman Paul Volcker, who led the report, said in October 2005.
“Resource trading companies’ dodgy activities will not only result in a bad reputation for them,” he said. “We are afraid the whole of Switzerland will suffer from a loss of reputation.”
In May 2006, Trafigura pleaded guilty in a U.S. court to falsely telling energy companies that Iraqi oil it sold them in 2001 had been obtained in compliance with the UN’s oil-for-food program. Vitol, which had revenue of almost $300 billion last year, pleaded guilty to grand larceny in November 2007 and paid $17.5 million resititution for its actions when buying Iraqi oil under the program.
Even if Switzerland adopts U.S. standards of sanctions against Iran, the lack of trading oversight raises the risk of a repeat of the oil-for-food corruption, said Sommaruga.
“There is no special authority to check the legality of commodities traded in Zurich, Zug or Geneva,” he said. “You can never be certain another scandal won’t blow up.”
Over-regulation will hurt the efficiency of companies such as Vitol that buy and sell physical shipments of commodities, Fransen said at a meeting of the British-Swiss Chamber of Commerce on Sept. 18, referring to U.S. measures aimed mainly at financial investors that bet on contracts also used by traders and shippers to hedge their transactions.
“It will end with higher consumer costs, which is not what the politicians want,” he said, declining to comment specifically on the Swiss investigation.
Financial firms, such as banks and hedge funds, rather than physical traders, are the root cause of oil and commodity price volatility, according to a report by the Geneva-based United Nations Conference on Trade and Development this month.
The Swiss government proceeded with the industry probe even after lawmakers voted 98 to 93 against it in March. The joint investigation is by the Swiss finance, economy and foreign ministries.
Secrecy means no one knows the extent of bribery or tax evasion in the commodities industry, according to Josef Zisyadis, a former lawmaker for the Alternative Left party.
“These companies are characterized by a complete lack of transparency, human rights infringements and damage to the environment,” he told Parliament 12 months ago, speaking about the industry generally. “They are masters of tax evasion that inflicts massive damage on resource-rich countries.”
Zisyadis confirmed those comments when contacted by Bloomberg News.
Trafigura was fined 1 million euros ($1.3 million) by a Dutch court in July 2010 for shipping harmful waste to Ivory Coast and for failing to inform authorities of its danger. The waste from a ship hired by Trafigura in 2006 was given to a local company, Compagnie Tommy, and dumped near the commercial capital, Abidjan.
Residents of Abidjan said the waste caused deaths and illness. An Ivory Coast appeals court in 2008 dropped criminal charges against Trafigura and a U.K. judge said that he had “concerns” about media reporting on the case because “experts” were “quite clear” that the dumping couldn’t have caused the most serious health problems.
Officials from Glencore and Trafigura declined to comment for this story.
The European Union wants Swiss-based commodities companies to reveal more about their cash flow, Michel Barnier, EU financial services commissioner, said in an interview with Switzerland’s SF television station last November. His spokesman had no immediate comment when reached last week.
The commodities industry is under similar pressure to that faced by Swiss banks five years ago, said Philipp Aeby, CEO of RepRisk AG, a Zurich-based consultancy that evaluates threats to company reputations.
Swiss banks, the biggest managers of offshore wealth, have seen secrecy erode since UBS AG (UBSN) admitted in 2009 to fostering tax evasion and paid a fine of $780 million to avoid prosecution in the U.S. Switzerland’s largest bank later turned over data on about 4,700 accounts to the IRS.
That puts Swiss banks “ahead of the curve,” said Aeby, who said he expects the commodities industry to become more transparent over the next five years.
New rules in the U.S. and Europe will put pressure on Switzerland to introduce tougher regulations for commodity traders, said Oliver Classen, a spokesman for the Bern Declaration, a non-governmental organization that monitors the conduct of Swiss companies.
On Aug. 22, the Securities Exchange Commission ruled that U.S.-listed oil and mining companies must disclose tax payments to foreign governments and make efforts to trace any “conflict minerals” illegally mined in the Democratic Republic of Congo and its neighbors.
The Swiss Financial Markets Supervisory Authority is waiting to see if global rules evolve for the commodity industry, according to the regulator’s CEO, Patrick Raaflaub.
“There are no international regulatory standards,” he said Sept. 4 in Zurich. If some rules develop, “then the country will have to form a view on where it wants to position itself,” he said.
Lawmakers are being spurred on by an April 2011 complaint filed against Glencore with the Organization for Economic Cooperation and Development. The complaint lodged by the Bern Declaration and three other campaign groups -- France’s Association Sherpa, Zambia’s Centre for Trade Policy & Development and MiningWatch Canada -- alleges that the Baar, Switzerland-based company sidestepped taxes in Zambia.
Glencore and Canada’s First Quantum Minerals Ltd. overestimated operating costs and underestimated production by Mopani Copper Mines Plc, which they control, the groups said. Sales of copper by Mopani to Glencore were timed with dips in market prices, contravening the OECD’s so-called arm’s length principle.
That depressed Mopani’s profit and cut the taxes the mining company paid in Zambia, the campaigners said, citing an audit by Grant Thornton LLP and Econ Poyry for the Zambian government.
Mopani is confident the tax paid was “correctly calculated,” Glencore said in June 2011, adding that the audit report on which the complaint was based contains “fundamental factual errors.” Glencore declined to comment further, according to Charles Watenphul, a Baar-based spokesman.
Zambia’s tax agency settled a dispute with some unidentified mining companies on outstanding taxes in August last year, according to the country’s Revenue Authority.
African governments probing corruption are stymied by Swiss rules, according to Savior Mwambwa, head of the Lusaka, Zambia-based CTPD.
“For people in Africa, it’s quite clear that for a long time countries like Switzerland have, through their financial regulations and their banking law, provided the environment to protect companies like Glencore and encourage them to evade taxes,” he said. “The countries affected want to investigate but if they try, they don’t get the cooperation of the Swiss authorities.”
Commodities companies must be forced to reveal payments to governments to help uncover corruption, said Ulrich Thielemann, head of Berlin-based ethics research group, Denkfabrik fuer Wirtschaftsethik.
“Whether on legitimate or non-legitimate grounds, Switzerland has become a center for the extractive industry,” he said. “Now they have a responsibility to regulate it.”
Tougher rules will threaten the country’s position, said lawyer Knowles.
“If Switzerland were seriously to increase the regulation on commodities companies then that could, theoretically, favor some of the other hubs over Switzerland,” he said. “Switzerland has to have a perceived advantage over the other hubs in order to retain the commodities business.”
EU pressure on taxes is also a concern. Replacing Switzerland’s auxiliary tax system with a higher standard rate may deter investment, according to the Geneva Trading and Shipping Association, which represents more than 70 companies in the city.
“I’m concerned about the increased costs of our Geneva office,” said Vitol’s Fransen. “Overall tax rates in Switzerland are increasing and threaten to increase further.”