Geneva’s French Ties Fray as Banks Warn Offshore Clients

For more than a century, the Swiss city of Geneva has provided wealthy French families with a convenient and safe place to stash their money.

Switzerland’s political neutrality and stability and its tradition of bank secrecy kept their fortunes beyond the reach of warring powers and the most determined tax collectors, even though Geneva is less than three miles from the French border. In turn, French funds have helped build the city into a showpiece for Gallic culture -- and the world’s largest concentration of wealth managers.

Now those longstanding ties are unraveling as France toughens tax laws and Paris prosecutors investigate Switzerland’s largest lender UBS AG and London-based HSBC Holdings Plc over whether they helped clients hide wealth in Swiss accounts. Already bruised by battles with the U.S., Geneva bankers are pressing French clients to “regularize,” a polite way of saying they must come clean on undeclared funds. Failure to do so will result in account closings, clients were told.

Banks are “very scared,” said Remi Dhonneur, a Paris-based tax lawyer at Kramer Levin Naftalis & Frankel LLP. “Clients are being kicked out or pushed to regularization.”

Adding weight to the threat, banks are combing through tens of thousands of accounts to identify potential tax cheats, a caseload that spans three or four generations of wealth deposited offshore by affluent French families, he said.

French families have at least 250 billion euros ($339 billion) parked in offshore accounts, more than half of which are probably undeclared, according to a Geneva-based banker who asked not to be named, saying the figures were supplied confidentially by a consulting company.

Hard Line

French-speaking Geneva oversees about 80 percent to 90 percent of that wealth, according to five tax lawyers interviewed by Bloomberg News. That’s about equal to Malaysia’s gross domestic product.

France offered last June to cut fines on unreported offshore wealth to encourage voluntary declarations. The program has yielded 764 million euros of taxes from 1,260 cases reviewed, with a further 1.8 billion euros expected this year from more than 20,000 other disclosures, the French government said in late May.

France is investigating UBS after the country’s banking regulator fined the Swiss lender 10 million euros last year for deficient controls against tax fraud and illegal sales practices. Tax investigators searched the bank’s offices in Paris, Lyon and Strasbourg.

With HSBC’s private bank, which is suspected of helping 3,000 French customers avoid paying more than 4 billion euros of tax, investigating judges “clearly” want to bring charges, Le Monde said on June 10. The government built its case from a client list of leaked from the bank’s Geneva unit by a former software technician. HSBC declined to comment on the report.

U.S. Push

Wealth managers also are taking a hard line after a U.S.- led international push that resulted last month in Credit Suisse AG becoming the first bank in more than a decade to admit to a crime in a U.S. courtroom.

The unit of Switzerland’s second-largest lender pleaded guilty to a decades-long pattern of helping Americans evade taxes in offshore havens and agreed to pay $2.6 billion in penalties.

The settlement clears the way for other Swiss banks to resolve their own U.S. tax disputes. Many of these banks, including Pictet & Cie. Group SCA and HSBC’s Swiss unit, are the same ones turning up the heat on their French clients.

Separately, a French law adopted in December gives authorities more power to go after suspected tax cheats and provides a 2 million-euro fine and a sentence of as many as seven years for bankers, wealth managers, advisers and lawyers who organized tax fraud.

Bank Initiative

“I’m dealing at the moment with an enormous number of cases of regularization,” said Nicolas Marguerat, a Paris-based lawyer and academic. “Most clients came to me due to the initiative of the bank, because the bank contacted them six months ago and told them: ’You must regularize. If you haven’t done this by March 31, 2014, we will throw you out and give you a check.’”

Banks wanted time to verify compliance before the French tax reporting season, which runs from May through June depending on the type of return. The French government has not clarified the deadline for the disclosure program, said Jerome Barre, a partner at Franklin, a law firm in Paris.

Marguerat said most of his French clients have between 100,000 euros and 2 million euros and are regularizing, while others with dozens of millions stashed abroad may be looking for other ways to keep it offshore.

Some have tried to shift assets to Dubai or the Bahamas or use safes in Switzerland that aren’t connected to bank systems, according to Dhonneur, who says he advises against this.

Wars, Policies

Geneva, with a population of less than 200,000, counts 122 banks and more than 4,000 independent asset and financial intermediaries vying for a share of Switzerland’s $2.3 trillion of offshore wealth. With the 2008 financial crisis, European governments began casting a greedy eye on this wealth.

While some French shifted money to Geneva banks during the 1870-71 Franco-Prussian War and during World Wars I and II, changes in tax policy in the last century prompted much of the movement offshore, according to Christophe Farquet, a history researcher at the University of Lausanne in Switzerland.

“Wealth management for French individuals and families in Geneva really began at the start of the 20th century and surged when tax rate rose after 1920,” Farquet said. “Each time there was a Socialist government, money flowed to Switzerland.”

The labor strike in 1968 challenging Charles de Gaulle’s Fifth Republic and the arrival in 1981 of Socialist President Francois Mitterrand, who introduced an annual tax on wealth that survives today, made Switzerland an appealing safe harbor.

Hollande’s Reign

More recently, taxes put in place by Socialist President Francois Hollande after his 2012 election prompted some wealthy French to leave the country. Billionaire Bernard Arnault, chief executive officer of LVMH Moet Hennessy Louis Vuitton SA, applied for Belgian citizenship, though he said he would continue to pay French taxes. The application was turned down.

Banks have a responsibility to encourage customers to put their tax affairs in order by cooperating with governments where they are domiciled for tax, the Swiss Bankers Association told more than 300 members in a letter on Nov. 29.

Swiss banks “are doing as much as they can” to guide French clients through their country’s “costly” and “complicated” disclosure program, Patrick Odier, chairman of the association and Senior Partner at Cie. Lombard, Odier SCA, said in an interview with L’Agefi newspaper on May 8.

His family’s firm, Lombard Odier, is Geneva’s oldest bank, dating to 1796. The bank even featured in French author Jules Verne’s 1865 novel “From the Earth to the Moon” as the financier of the fictional voyage.

No Hemorrhage

Geneva’s largest private bank, Pictet, has offices in Paris and is run by a descendant of one of Louis XIV’s bankers. Both banks declined to comment on their policy on French clients.

Edmond de Rothschild Group, a relative newcomer to Geneva, reported outflows of 3 percent to 4 percent of 37 billion francs ($41 billion) booked in Switzerland for 2013. Customers settling unpaid taxes accounted for some of the withdrawals, said Manuel Leuthold, the firm’s chief administrative officer.

He insisted that there is no hemorrhage. “For the moment clients are not repatriating all their assets when they regularize.” Edmond de Rothschild was established in Paris in 1953 and acquired its bank in Geneva in 1965.

Credit Suisse “is asking clients to regularize their tax situation,” Jean-Paul Darbellay, a Lausanne-based spokesman for the company, said by e-mail.

Cahuzac Scandal

Americans and Germans with accounts in Switzerland also have come under pressure after their governments took on Swiss banks, whose bank-secrecy tradition cracked under the assault.

Since 2009, U.S. tax probes have cost Switzerland’s biggest banks, UBS and Credit Suisse, more than $3 billion in fines and felled the nation’s oldest bank, Wegelin & Co., founded in 1741. About a dozen other banks are under investigation for allegedly helping wealthy Americans cheat on their taxes.

France is trying to regain credibility after its former budget minister, Jerome Cahuzac, was found last year to have had a secret Swiss account -- a scandal that forced his resignation and prompted Hollande to step up measures against tax evasion.

Still, “it’s the change in attitude of Swiss banks that explains the number of applicants for regularizations,” said Mathieu Le Tacon, a tax partner with Delsol Avocats in Paris. Bankers didn’t encourage clients to use previous amnesty programs such as the one offered by France in 2009, he said.

New World

That Geneva bankers are backing the programs this time shows the waning sway of old French money.

With emerging markets capturing a growing share of the world’s wealth, banks are eager to tap in and tax disputes are holding them back. Millionaires in the Asia-Pacific region are expected to account for $61 trillion by 2018, surging from $37 trillion at the end of last year, according to a report by Boston Consulting Group. That compares with an estimate of $44.6 trillion, from $37.9 trillion, in western Europe.

For most clients of Paris-based lawyer Lea Falcon, Geneva still holds appeal.

“They still trust Switzerland more than they trust France,” Falcon said. “They are scared their assets might be taken by the state if they are with a local French bank. ”