Swiss banks have thrown out thousands of clients in recent years for not declaring their taxes. Or have they? A report from the clean-up front, where a small number of stubbornly stray clients are causing banks a big headache.
Punished by years of bruising investigations by U.S. and other officials, Swiss banks have vowed to eject thousands of clients for not declaring their hidden offshore accounts to the taxman.
By and large, they have done so, if and with varying degrees of rigor from bank to bank. Still, a small and unknown number of what the private banking industry terms «unwelcome» clients remain at Swiss banks, in part through sleight of hand and the bank’s inability – or unwillingness – to catch them. The lack of a clean sweep poses considerable risks for banks, especially those which have already been in regulatory crosshairs, according to one expert.
«Considerable Risk»
«There are no exact numbers, but it is certainly a small number of cases linked to a considerable amount of risk,» says Veit Buetterlin, consultant with AlixPartners who is specialized in forensic financial investigations.
These clients have typically received a series of increasingly alarmed calls from their Swiss bank, urging them to come clean to the tax man. Fearful or regulatory reprisal, some banks have gone as far as to banish clients of certain nationalities, regardless of their tax status, and simply want the money to leave their firm as soon as possible.
So far, so good – in theory. The reality is these clean-up efforts are anything but clinical and surgical. They are messy, complex and in some cases, can take years to offload clients, who often seek to remain with the bank or in Switzerland in another form.
Assets Return to Same Bank
Schemes to avoid detection range from simple to complex, but the common theme is obfuscation: clients may open a new account with a second passport, or transfer funds to family or associates like an external asset manager in Switzerland – who may even chose to come full circle by re-depositing the funds at the very same bank.
Insofar as indications are available, the onus remains on financial firms to root out the schemes, according to AlixPartners’ Buetterlin.
«If a client returns with the same name and date of birth but a different passport, and the bank is in possession of historical data with identifying characteristics and the client’s transactional data, then the institute is going to find it difficult to explain how the client was still taken on again.»
Private Bankers Make Bad Enforcers
If it sounds like deceptive clients tricking well-meaning private bankers, the reality is far more nuanced. The role of the private banker, some of whom have maintained decades-long relationships with clients, has become conflicting.
Only very rarely in the past have Swiss private bankers had to turn away funds – and they aren't particularly good at it. The service-based role that bankers are meant to fulfill is contrary to one of a heavy-handed enforcer who, with the most recalcitrant of clients, would simply liquidate accounts and write a check for the proceeds.
In reality, this happens very rarely, not least because banks are concerned about holding dormant assets over a long period of time, something which has caused them additional regulatory and legal headaches in the past, according to Juerg Birri, KPMG’s Zurich-based global legal head.
Clues from Anti-Money-Laundering
To be sure, the vast majority of unwelcome clients are aware of Switzerland’s impending cooperation with international data-sharing laws from next year, and have either brought their assets to light, or found another home for them outside of Switzerland.
There are no reliable statistics about the holdouts – how much in assets or how many accounts are meant to be shut – but experts claim cases of obfuscation aren’t isolated incidents.
Ironically, banks are increasingly taking cues from anti-money-laundering experts, especially for big accounts, such as monitoring transactions for evidence of that someone other than the account owner is the real beneficiary.
Buying Groceries in the U.S.?
In the American example, if everyday transactions like grocery shopping or purchasing a car pass through a Swiss account, indicating that this person spends more than a little time in the U.S., «a bank might get into trouble making excuses for it if they don't act on it,» says Buetterlin, the AlixPartners consultant.
Banks which have been successful in identifying schemes like these have been able to break down barriers between departments like transaction monitoring and filtering and teams which deal with recalcitrant clients and tax obligations.
Buetterlin also highlights the importance of interlinking bank-wide data to identify U.S. clients, but also good data quality and availability as well as robust IT infrastructure. These efforts are complicated by acquisitions, for example, which lead to various IT systems, or subsidiaries, where inadequate cross-checking of data can lead to clients slipping through the net.
