Strategy

Asia Stands To Benefit As Swiss Bank Secrecy Comes Under Fire

Tom Burroughes, WealthBriefing Editor, London, 27 July 2009

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As Switzerland’s UBS prepares for a possible settlement of its fight to protect client details from US authorities, an assault on the Alpine state’s historic bank secrecy laws threatens to create a big beneficiary: Asia.

As Switzerland’s UBS prepares for a possible settlement of its fight to protect client details from US authorities, an assault on the Alpine state’s historic bank secrecy laws threatens to create a big beneficiary: Asia.

While financial centres such as Hong Kong and Singapore cannot avoid coming under pressure themselves from revenue-hungry governments, Asian jurisdictions are nevertheless well placed to grab any chunk of money fleeing Switzerland in the months and years ahead, say wealth management professionals.

The amount of money that could flow east is potentially huge. Although exact figures are notoriously hard to pin down, Switzerland is thought to hold about a third of the world’s biggest destinations for offshore wealth. PricewaterhouseCoopers, in a report issued in June, estimates that a total of $7.3 trillion of private banking assets are held in international private banking centres outside clients’ jurisdictions, according to data it cites from the British Bankers’ Association.

“The turmoil in Europe and North America is forcing private banks to look elsewhere for centres of growth and many are focusing on Asia,” Peter Flavel, global head of private banking at Standard Chartered Private Bank, told WealthBriefing.

“A huge amount of wealth is being created in the region and Asia and the Middle East are increasingly coming under the spotlight - eight of the fastest-growing markets for private banks lie in those regions - Singapore, China, India, Indonesia, Hong Kong, UAE, Korea and Taiwan,” he said.

“In terms of booking centres there's no doubt that Singapore and Hong Kong are increasingly being used as alternatives for money previously booked elsewhere. Our global headquarters are in Singapore and it is particularly well placed to grow in the current climate,” Mr Flavel said.

There will be a steady, if not rapid shift of offshore money eastwards, although a major driver of money into Asia’s financial hubs will continue to be from domestic clients, Ian Woodhouse, an independent management consultant in the wealth management industry, told this publication.

The outflows to Asia “will be a measured increase and focused only on certain types of offshore client segments”, he said.

“US clients will find it hard to use Switzerland for tax evasion purposes and US clients will look to use other global offshore centres and banks which have been less affected by recent events,” Mr Woodhouse said.

With banks such as UK-listed Standard Chartered continuing to add private bankers to their staff, firms continue to treat Asia’s wealth market as a strong business opportunity and the woes of Swiss banks in the US are an additional boost to Asia.

Swiss Banks Take Cover

UBS is the most high-profile example of a Swiss bank that has been torn between its Swiss legal requirement not to divulge client details to foreign governments on the one hand, and the pressure from governments to root out tax evaders, on the other. In February, UBS agreed to pay $780 million to US authorities to settle charges that it allowed wealthy US clients to dodge taxes. However, the bank has so far refused to pass over details on thousands of clients accused of avoiding taxes.

In the wake of the UBS case, a number of Swiss banks, such as Zurich Kantonalbank, or ZKB, have acted to avoid potential problems with US authorities. ZKB has decided to focus on its US private banking business and only look after clients who have disclosed their assets to the US tax authorities. Meanwhile, Migros Bank will no longer accept instructions from clients in the US by telephone, email or post. And Bank Sarasin no longer accepts deposits from US-based individuals, in part because of the US pursuit of offshore funds. Raiffeisen Group still accepts US funds, but recently put tougher measures into place for servicing them.

Over at HSBC, its Swiss private bank asked clients and independent investment managers last September to give up their right to the protection of banking secrecy to keep securities invested in 28 countries. The UK-listed bank has requested permission to give over the names of clients who want to keep their investments in countries - such as Brazil, China, India and Greece - where investor disclosure is required.

So the pressure on Switzerland is mounting and Asia should benefit. But wealth management observers warn that Singapore and other centres cannot count on easily picking up money from Switzerland.

“It is very easy for Middle East money to move eastward; less so for Europeans and even less for US. From my limited experience, there are really only three types of customers being sought, ME oil wealth, Asian small business owners and politicians,” according to Robert Ellis, principal, wealth management, at US consultancy Novarica.

“US citizens will be reluctant to utilise Switzerland. They will continue to utilise primarily Caribbean offshore venues (Panama, Cayman Islands, and Netherland Antilles). The pressure will be on those locations, but there will be a lot of 'looking the other way’ as those countries are so dependent on offshore money for their economy,” Mr Ellis told WealthBriefing.

Asked what will be the most popular destinations in Asia for Swiss-based cash, Mr Ellis replied: “Singapore is  number one. Chinese wealthy, including mainland, Taiwan and rest of Asia, do not trust China in matters relating to Hong Kong. 'Why take the risk?’ is the attitude.”

He continued: “The big global brands are going to be very careful in the East with wealth management. The business is too reliant on individuals for the global brands to succeed in the space. It will be the smaller players, primarily Chinese and Malaysian banks that are willing to take the reputation risk of supporting tax evaders.”

Middle Eastern clients are particularly concerned about losses to privacy, a factor that should benefit Singapore, Mr Ellis said.

Mr Woodhouse cautions that some of the focus on Switzerland stems from the fact that US authorities have chosen to make an example of UBS and Switzerland – but other locations could be in the firing line.

“The US is the most aggressive government with a low tolerance for offshore centres followed by the EU. They are seeking to develop a more concerted global approach via the OECD to stop their citizens using offshore centres for tax evasion and fraud purposes,” he said.

“Clients will look at their choice of a Swiss alternative based on a number of factors such as location, currency, language and affinity - alternative centres will not just be eastwards. If clients look eastwards the most popular destinations will be Singapore and Hong Kong,” Mr Woodhouse said.

“This [money shift] is likely to favour some of the large offshore global players – such as both big Swiss and non-Swiss with global networks and capabilities (particularly in the Far East) and also some of the mid-size cross border pure play private bank models,” he said.

One advisor in the industry warned that it is far from clear that Asian offshore centres can escape scrutiny themselves.

“Good advisors and relationship managers are telling clients there is nowhere to hide.  They are doing so because bank compliance is now in charge of due diligence and we have seen the damage to reputation and shareholder value that can be done when senior management does not pay attention to requirements pertaining to attracting offshore money,” said Eli Lenyoun, director, at Family Wealth Solutions in Singapore.

Of the jurisdictions that benefit, he only sees Hong Kong and Singapore benefiting from Swiss woes because these centres have political and financial stability, in contrast to some other parts of Asia.

But as Mr Woodhouse pointed out, it may anyway be premature to start calling time on Switzerland as a vital offshore centre.

“We need to keep this competition in perspective as Switzerland still remains the world’s largest offshore centre in market share terms by a long way with around a third of all global offshore money. This scale advantage brings with it with a great deal of expertise and competitive advantage for Switzerland and the banks within it. Other European centres are also strong. Competition will come from other established and newer centres and banks outside of Europe such as the Caribbean, US, Asia, Middle East,” Mr Woodhouse added.

 

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