Is Swiss banking a criminal enterprise?
Feb 19th 2009 11:15AM
Updated Dec 4th 2009 10:50AM
It doesn't take much imagination to see that banking could be a bit of a scam on the public. But to keep that scam going it takes big buildings, plush offices, corporate jets, complex product names . . . and a veil of secrecy. Secrecy is important because without it, the mystique is lost. And by mystique, we're sometimes talking about illegal money-making schemes.
That's what Switzerland's premier bank, UBS AG (UBS), got caught running. And after forking over $780 million to U.S. authorities, it will have made only a small down payment on its penalties owed to society. How so? UBS is going to turn over the names of its clients to the U.S., which marks the end of a centuries-old franchise for Switzerland -- the inviolate secrecy of the Swiss bank account.
Secrecy is great for covering up crimes. You can remove money from the place you made it to avoid taxes. You can steal the money and property of people before whisking them away to concentration camps. You can even engage in all sorts of illegal enterprises like dealing drugs or stealing peoples' identities and using it to buy things with fake credit cards. Once you get that money to a secret Swiss bank account, you are free to use that money as you see fit and not pay any taxes on your ill-gotten gains.
Why did UBS agree to this deal? Prosecutors suspect that between 2000 and 2007, UBS helped American clients illegally hide $20 billion, letting them evade $300 million a year in taxes. And for this tax evasion, UBS exacted a price -- $200 million a year in profits. How did it pull it off? Prosecutors charged UBS with falsifying or not properly obtaining or filing specific tax forms required of both the bank and its clients.
UBS agreed to pay the $780 million because it's a low-priced deal: $380 million disgorges profits from UBS's cross-border business -- the additional $400 million is U.S. taxes that UBS failed to withhold on the accounts, plus interest and penalties. But if the bigger figures above are correct, between 2000 and 2007 alone, UBS made $1.6 billion while helping taxpayers evade $2.4 billion in taxes.
The only problem for UBS is that investigators are examining 19,000 accounts and UBS will need to disclose the names of hundreds of them. This is a problem for UBS because journalists will look to make their investigative bones by delving deep into the stories of each of these names. And each headline will represent bad publicity for a central tenet of Swiss banking -- the secret bank account.
If there are people who have not already emptied out their Swiss bank accounts to avoid criminal penalties for the crimes they've committed, that bad publicity will surely complete the exodus. Unfortunately, for society, the tax evasion charges which UBS has settled are probably the tip of the iceberg.
And since UBS has taken $50 billion in losses in the collapse of the American mortgage market and received a $60 billion bailout from the Swiss government last October, its best days may be behind it.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.