Wednesday, January 9, 2013

Fitch Ratings Cites Swiss Settlement with U.S. as "Best Option" (1/9/13)

Fitch Ratings, homepage here, one of the three principal rating organizations along with Moody's and S&P (see below), has a release titled "US Global Tax Settlement Best Option for Swiss Banks," (Fitch Ratings 1/7/13), here.

According to Wikipedia, here:
Fitch Ratings, dual-headquartered in New York and London, was one of the three Nationally Recognized Statistical Rating Organizations (NRSRO) designated by the U.S. Securities and Exchange Commission in 1975, together with Moody's and Standard & Poor's. It is considered one of the "Big Three credit rating agencies" (Standard & Poor's, Moody's Investor Service and Fitch Ratings).
Some significant excerpts from the release:
A government-led global settlement would be the best option for all Swiss banks involved in the dispute with US authorities about the private banks allegedly helping US citizens evade taxes, Fitch Ratings says.  
A global settlement has been pursued by the Swiss government since early 2012. While potentially costly, in our view it would remove the risk of potential indictments and other legal action, including ultimately the exclusion from US dollar clearing. This would allow the banks to refocus management attention on their core (non-US) private banking operations. 
Repercussions from inquiries and potential indictments by US authorities could be significant, take a long time to resolve and ultimately damage the banks' business models. This is despite US offshore clients typically accounting for a small proportion of the banks' earnings and assets under management.  
* * * 
The Swiss private banks will have to continue to centre their business models on fully-declared off-shore client assets and on-shore operations, notably in European markets given the US investigations and also negotiations between Switzerland and several European countries (including Germany) about revised double-taxation agreements. Many banks, in particular the larger private banks, have pursued this strategy since the late 1990s, anticipating continued pressure on undeclared client assets.
This gives me an opportunity to expound some thoughts I have discussed with various persons since the Wegelin guilty plea was announced.

1.  Most importantly, the tax evasion antics of the Swiss banks -- a significant excess profit center for them -- are over, at least as regards the U.S. and many of the European countries with clout.  Hopefully, the Swiss can exploit different and legal models to earn profits, but they will have to compete.  Previously, their willingness to help people cheat on taxes and their penchant for secrecy gave them a competitive advantage.  That is gone.  Of course, they can still help drug dealers, potentates and others hide ill-gotten gains, and the global community will have to find some other way to bring the Swiss to the mat on those anti-social activities.  A good start was the HSBC resolution, but I suspect that Swiss banks were not the only banks to exploit the money laundering model.

2.  The Swiss banks need to bring the negotiations with the U.S. to a successful conclusion.  That will be costly, and it should be, given the conduct for which they are "paying."

3.  I can't speak for the U.S. Government, but I don't think the U.S. Government relishes any further indictments of Swiss banks that may have the collateral effect of bringing the indicted bank(s) down.  As noted above, often, the U.S. illegal activities were a small proportion of the banks' activities.  To bring an organization down for that, with the collateral damage to many innocent people, is not something that, I think, the U.S. Government really would prefer to do.  That is not to say that the U.S. Government won't do it.  It is just to say that I think it prefers not to if some other reasonable solution can be reached that is consistent with punishing the behavior.  Solutions might include, for the more serious offenders, a deferred prosecution agreement such as reached with UBS or some other solution.  But it will be costly, and, in my view, the banks encouraged by the Swiss Government (with such law changes as necessary) should move swiftly to those solutions.  (Of course, other countries with clout will likely attempt to extrapolate their own solutions, also costly to the Swiss banks.)

4.  Keep in mind that, whatever solutions will be reached will likely involve some estimation of the tax damage, based on the Swiss banks' data for U.S. depositors for some finite number of years such as perhaps 2003 forward.  The truth is that that data set is far less than the real numbers involved, for the Swiss banks have been in this game for a much longer time and have assisted clients in stealing money from the U.S. (and other countries) for a much longer period and in much larger amounts.  In that sense, any solution will involve what might be viewed as forgiveness of a significant portion of the damage from their behavior.

5.  Part of the Wegelin plea agreement was the following:
Wegelin agrees to preserve all documents, including electronically stored documents, concerning any U.S. taxpayer and any account opened, directly or indirectly, on behalf of a U.S. taxpayer or on behalf of a corporation, foundation, trust, or other entity or structure with a U.S. beneficial owner, including, but not limited to: (a) all account-opening documents; (b) all documents concerning the beneficial owner of any account; (c) all documents reflecting any transactions in any account; (d) all documents reflecting any correspondence or communications concerning the account or transactions in the accounts; and (e) all internal correspondence concerning the accounts, pending further instruction by Wegelin's primary regulator or other authority. Within three days of the execution of this Agreement, Wegelin shall detail to the Government the manner in which such documents have been preserved.
This provision probably looks forward to a resolution with the Swiss Government that will permit the U.S. access through a treaty request to some subset of those documents.  I would suspect that the U.S. has already obtained an agreement from the other banks and/or the Swiss Government to maintain the records for similar use when a settlement is reached.  I would think that the U.S. would be mightily angered if the banks destroyed documents, and that alone might provoke an indictment that the U.S. Government might have otherwise preferred to avoid.

6.  One of the questions I have is whether the bank resolutions will resolve only the banks' exposure but might leave some of their employees or agents subject to U.S. prosecution.  Some Wegelin employees or agents have been indicted, and those indictments were not resolved.  There was some speculation (and as far as I know, it was speculation) that the Wegelin agreement, although disavowing resolution as to individuals associated with Wegelin, perhaps included some unstated understanding that there would be no more indictments of individuals associated with Wegelin.  That is not what the plea agreement says, but might, I suppose, have been an unwritten premise.  I would suspect that the U.S. Government will fire some more indictment bullets at Swiss bank individuals, but a global resolution could, I suppose, limit or mitigate the number involved.  Of course, the truth is that the U.S. Government cannot spend a lot of time indicting Swiss bank employees or agents who will never come to the U.S.  A few more show indictments to up the ante during the negotiations might be brought.

7.  I think the bottom line of my views, consistent with Fitch Ratings, is that the Swiss need to move promptly and in good faith to resolve this matter.  Should the Swiss drag their feet, there might be another indictment as a further warning shot across the bows of the other banks.  But, my views are not particularly weighty, since I am just an attorney in the hinterlands of power in the U.S. without any entre to anything other than what I read in the publicly available sources.


  1. Jack, a couple of comments on your thorough analysis.

    Point 1 is silent on activities of Swiss (or for that matter US, British, and many tax havens) banks activities with untaxed money from Latin America, Asia, or ex-USSR. I suspect that it will be business as usual regarding those countries.
    Point 5: Unlike UBS which also had many small account holders whose details were not disclosed, Wegelin's account size minimums make it likely that most such accounts will be subject to disclosure, with the possible exception of US persons who have not resided in the US for many years.
    The retention of records provision doesn't add much to requirements of Swiss law or bank procedure. In practice many such records are often kept far longer than required by law.
    Point 6: Protection from prosecution for Wegelin employees might not mean much; a substanbtial portion of employees are likely to have worked at other Swiss banks before or after being employed by Wegelin, so any agreement would only protect them from conduct while employed at Wegelin.

  2. Perhaps it is the really senior level people that Wegelin really wanted to protest. There may have been more stability at the senior level and, of course, senior level people are who senior level people want to protect most.

    Jack Townsend


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