Latin American Tax Clampdown Poses New Risk to Swiss Bank Accounts – Reuters

By Joshua Franklin

LONDON – Private bankers in Switzerland are increasingly concerned that struggling Latin American countries, seeking billions in unpaid taxes, will prompt the region’s wealthy individuals to withdraw their funds from Swiss banks.

These institutions are still recovering from substantial withdrawals by European and U.S. clients, which totaled tens of billions of dollars following intensified regulatory scrutiny aimed at curbing tax evasion. The situation is further complicated by Switzerland’s diminishing bank secrecy protections.

Historically, Swiss financial regulations allowed affluent individuals to keep their assets concealed from tax authorities for many years. However, recent initiatives by U.S. and European agencies have encouraged clients to come forward, declare their offshore accounts, pay fines, and settle unpaid taxes.

Now, governments in several emerging markets, which Swiss banks have targeted for expansion, are also pursuing outstanding tax obligations. Countries such as Brazil, Argentina, and Mexico are implementing "regularization" programs to recoup much-needed revenues, not exclusively from assets held in Swiss banks.

Andreas Brun, a banking analyst at Mirabaud, noted, "After experiencing several years of significant outflows from Europe, we are now facing the next challenge that will likely persist for the next one or two years." Many clients are withdrawing money to settle taxes and penalties, while those opting out of amnesty programs are relocating their accounts.

Such withdrawals pose additional hurdles for Swiss wealth managers who are already grappling with historically low interest rates, volatile markets, reduced commodity prices, and cautious client behavior. Although outflows from Latin America are expected to be less significant than those from Europe, which has traditionally been a larger market for Swiss banks, the Latin American segment is on the rise. Boston Consulting Group projects that by 2020, 14% of the offshore wealth reported in Switzerland will originate from Latin America, compared to 33% from Western Europe.

Assets managed offshore can yield higher profits for banks, as they often come with complex structures that typically incur larger fees, according to Seb Dovey, managing partner at Scorpio Partnership.

Despite the potential for withdrawals from South America, Switzerland’s three largest private banks—UBS, Credit Suisse, and Julius Baer—are striving to attract more assets overall than they foresee losing this year. Nevertheless, all three banks have indicated a trend of outflows related to regularization programs, with Julius Baer’s Chief Executive Boris Collardi describing Latin America as a "second Europe" concerning tax-related withdrawals. Credit Suisse anticipates around 5 billion Swiss francs in such outflows during the year, although it has not specified the geographic breakdown.

In Brazil, government officials had set hopes for raising approximately 21 billion Brazilian real and have shared with financial news sources that they expect the final figure to be considerably higher, as wealthy individuals move to take advantage of the program concluding in late October.

Switzerland’s stringent bank secrecy laws have historically positioned the country as the global hub for foreign wealth, with an estimated $2.3 trillion held in its financial institutions as of 2015. However, forecasts suggest that wealth centers in regions like Singapore and Hong Kong are poised for significant growth.

To restore its reputation, Switzerland is making efforts to clean up its financial practices, which involves facing short-term challenges but could pay off in the long run. Philipp Zuend, a tax expert at KPMG in Switzerland, remarked, "From a financial standpoint, the regularization process may seem negative, but in terms of managing reputation risk, it could prove beneficial."

Many wealthy individuals are eager to participate in these programs before the implementation of a global tax information-sharing initiative led by the OECD, which has indicated that some countries will begin their first exchanges of information by late 2017, with more to follow in 2018.

The trend of withdrawals is likely not confined to Latin America. Countries in the Asia-Pacific region, where Swiss banks have recently sought to expand, are reportedly preparing their own tax programs. "There is a new amnesty program in Indonesia," Zuend added, "and other Asian countries are expected to follow suit."