Capco Blog

Nothing is more certain than death and taxes

There used to be a joke at Wegelin - the oldest banking establishment in Switzerland - that the only two ways of leaving the bank as a relationship manager was retirement or death. I'm afraid taxes got them first!

The closure of Wegelin is a significant event in the ongoing battle between Switzerland and global tax authorities, which started back in 2007 after an American banker based in Geneva provided protected client data for the review of US tax authorities. Wegelin is one of eleven banks under investigation by the authorities. The bank was previously heralded by many as a model of Swiss traditional private banking. Their unlimited liability partnership model meant that clients felt safer with them and they stood for long term trust and security. The fact that a small percentage of their assets under management were held by Americans who were hiding their assets from the IRS has led to their premature end.

Over the last five years, we have seen a series of events including data theft, financial penalties and individual charges of tax evasion. If anything, Wegelin symbolises the reality that banks will need to ensure they are compliant with tax authority rules. This includes FATCA and the bilateral tax treaties agreed with the UK and Austria and which are also in discussion in Germany and elsewhere. In a business which is based on trust and security, Switzerland’s banks must be pro-active in managing their client relationships. This investment has already cost the industry millions in changes to processes and systems, but the penalty for non-compliance - as seen by what has happened at Wegelin - could be even higher.

As they say, nothing is more certain than death and taxes.

Comments

Wegelin was for a long time one of the fastest growing private banks in Switzerland. Their senior partners, both ex-UBS Managers, showed a good feeling for the needs of their clients. Whereas Dr. Konrad Hummler was the networker and constantly present in the media, his counterpart Otto Bruderer had a more silent COO role. When comparing the profitability of family owned banking businesses and banks led by "managers" in the Swiss market, it is obvious that the family owned businesses are more successful. Fortunately the larger banks like Pictet, Vontobel, LODH etc. have a well-functioning corporate governance in place. However in some of the smaller banks like Wegelin, senior management has nearly unlimited power and influence. During good times this works well and grants extraordinary successes and profits.

However when Wegelin took over the non-taxed US-American clients from UBS, a more restrictive corporate governance would most probably have saved the bank from being closed. At this time it was already clear that accepting these clients will cause many problems in the future. But Wegelin had been on the fast lane for years,and the management could not believe that somebody could stop them.

As widely known, they finally were stopped. Switzerland had pratically to accept that in all other countries of the world there is no difference between tax evasion and tax fraud. The fact that Otto Bruderer blamed all other banks of doing the same during the negotiations with the US, represents more that he is a sore loser than reality. There were no other cases when banks in Switzerland had to get rid of a large number of non-taxed US clients. Consequently no other bank had the opportunity to make the same mistakes. Who knows, what would have happened otherwise ...

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