LONDON — Switzerland’s private bankers fear cash-strapped Latin American countries pursuing billions of dollars in unpaid taxes will push the region’s wealthy to pull cash from their Swiss bank accounts.
For these banks, still recovering from European and U.S. clients withdrawing tens of billions of dollars following a post-financial crisis clampdown on tax dodging, the outflows come as Switzerland grapples with weaker bank secrecy.
These Swiss rules helped the world’s super-rich keep cash hidden from the taxman for decades. That has all changed in recent years as U.S. and European agencies offered them a chance to declare offshore accounts, pay penalties and settle back taxes.
Now governments in some of the emerging markets on which Swiss banks are pinning growth hopes are also chasing unpaid dues.
Brazil, Argentina and Mexico see such “regularization” programs, which do not focus only on assets held with Swiss banks, bringing in much-need revenues.
“After a few years of gross outflows from Europe, now when it ends we have the next issue which will go on probably not only for a few months but again for the next one or two years,” said Andreas Brun, a banking analyst at Mirabaud.
Clients take money out of their accounts to pay taxes and penalties, while those who decline to participate in amnesty programs move their accounts.
Withdrawals will make it harder for Swiss wealth managers to grow their pool of managed assets and are yet another challenge for banks facing record-low interest rates, turbulent financial markets, low commodity prices and cautious client activity.
Latin American withdrawals are expected to be smaller than outflows from Europe, which has always been a bigger market for Swiss banks.
However, Latin America has been growing for them and Boston Consulting Group estimates that by 2020, 14 percent of the offshore wealth booked in Switzerland will be from the region, compared to 33 percent from western Europe.
The assets, since they are managed offshore as opposed to in the client’s home market, can be more lucrative.
“Offshore assets tend to be more complex in their structure, which derives a higher fee,” said Seb Dovey, managing partner at wealth management researcher Scorpio Partnership.
Despite the threat of South American withdrawals, Switzerland’s three biggest private banks — UBS, Credit Suisse and Julius Baer — aim to take in more assets globally this year than they lose.
Nevertheless, all three flagged outflows from regularization programs in their most recent results, with Julius Baer Chief Executive Boris Collardi describing Latin America as a “second Europe” in terms of tax-related withdrawals.
Credit Suisse expects around five billion Swiss francs ($5.1 billion) in such outflows this year, though it does not give a precise breakdown of where these are likely to be from.
In Brazil, the government had hoped to raise as much as 21 billion Brazilian real ($6.5 billion) and senior officials with the country’s economic team have told Reuters they expect the final tally to be much higher as wealthy individuals rush to join the program that ends in late October.
Strict Swiss bank secrecy laws, which made it illegal for banks to share information on clients, helped Switzerland become the global capital for foreign wealth, a title it still holds with $2.3 trillion in its vaults in 2015, according to BCG. However, BCG forecasts strong growth in emerging wealth centers like Singapore and Hong Kong.
Switzerland has been working to rebuild its tarnished reputation, possibly making the short-term pain of the asset-clean up a price worth paying.
“If you look at this from a financial perspective, [the regularization process] is a negative,” said Philipp Zuend, a tax expert at KPMG in Switzerland. “But if you also look at things like reputation risk, it could be a good thing.”
Many rich people are keen to take part in the program before the introduction of a global tax sharing initiative orchestrated by the OECD club of wealthy countries.
Tax dodgers could face stiffer penalties once the Automatic Exchange of Information (AEI) comes into force. The OECD has said some countries will aim for their first information exchanges by late-2017, with more following in 2018.
The outflows are unlikely to end with Latin America.
Countries in Asia Pacific, a region in which Swiss banks have looked to expand in recent years, are also seemingly preparing their own tax programs.
“There is a new amnesty program in Indonesia,” said Zuend, “and other Asian countries will follow.”