Seeds of Hope in Swiss Banking

Greetings from Zurich, where your jet-lagged blogger landed yesterday morning after a grueling 16-hour trip from Phoenix. I’m here to meet with Swiss banks, money managers, and attorneys to learn more about how the Swiss financial industry is reacting to the worst threats against it in 70 years, since the rise of Nazi Germany. And also to explore the opportunities that are developing from the carnage.

The threat this time around isn’t from invading armies, but from the demands of high-tax governments for Switzerland to enforce those countries’ tax laws. Here, this is an outrageous intrusion into Swiss sovereignty. One of the Swiss bankers I’ve met with put it this way:

“How would U.S. politicians react if Switzerland threatened the United States with financial sanctions due to provisions of U.S. domestic laws? The United States has no more right to demand that Switzerland enforce other country’s tax laws than Switzerland has to demand that the United States abolish the death penalty or suffer financial devastation.”

Be that as it may, there’s no question that “might makes right.” Little Switzerland will be badly hurt if the United States and other high-tax follow through on their threats to impose financial sanctions against it. And so Switzerland has in principal agreed to significantly relax in its strict bank secrecy laws.  Not because any other country has the right to dictate to Switzerland, but because isolating Switzerland from the global financial system would lead it to economic ruin.

At the same time, the reaction of Swiss banks to the legal onslaught from abroad has been anything but rational, according to the experts I’ve met. Because the United States has made the loudest threats against Switzerland—and carries the biggest battering ram against bank secrecy—the largest Swiss banks are unilaterally severing accounts with U.S. clients, even fully tax compliant clients who have maintained accounts for decades.

That’s an unspeakably rude way to end long and successful relationships with valued clients who have done nothing wrong.  But, within this crisis spring the seeds of opportunity.

Tens of thousands of U.S. depositors in big Swiss banks are now looking for a new home for their money. Smaller banks and service providers that have no significant U.S. presence have much less to lose if U.S. authorities target them. And a few of them are now positioning themselves to begin accepting what could become a landslide of new business.

These banks will do things differently than the large Swiss banks that actively courted U.S. depositors. They won’t advertise or market in the United States. They’ll be very selective of the clients they accept and may insist upon proof of U.S. tax compliance. Many will do business only with U.S. clients referred to them by trusted intermediaries, or by other clients. They may also require U.S. clients to operate their accounts through offshore structures.

Even the larger Swiss banks are catching onto this trend, according to an attorney I met with today. They’ve developed U.S.- compliant banking operations managed in accordance with U.S. tax and securities laws. Some of the banks closing U.S. accounts are now offering depositors the option of moving their funds to these subsidiaries.

One thing is for certain. The Swiss financial industry has been forced to retreat, but it hasn’t given up.  It’s adapting to the new reality. And some farsighted banks will not just survive, but prosper in the years to come.

Copyright © 2009 by Mark Nestmann

(An earlier version of this post was published by The Sovereign Society.)