Offshore Blues For Private Banking

Offshore banking, the booking and management of assets outside an individual’s country of domicile, has taken a beating since the financial crisis.

Regulators across developed markets have aggressively pursued high-net-worth tax evaders, and Switzerland has been the favorite target.

In retrospect, UBS, one of the first major banks to come under the scrutiny of the US Justice Department, got off easy. It paid a $780 million fine in 2009 for helping wealthy US clients avoid taxes on income from offshore assets. In comparison, last year, Credit Suisse agreed to pay $2.5 billion in penalties. Criminal probes of Julius Baer and HSBC by US and other regulators continue to dog the Swiss banking sector, and dozens of financial advisers there have been indicted by foreign governments for abetting tax evasion by their clients.

“Switzerland has been the scapegoat for the off-shore banking market,” says Alois Pirker, an analyst with Aite Group. He estimates fees in the Swiss offshore market have come down 25% to 30% due to the erosion of the country’s bank secrecy laws. As a result, a significant amount of money in Switzerland has returned onshore or found other safe havens.

Singapore and Hong Kong, favorite offshore destinations for Chinese wealth, are attracting high-net-worth investors from around the world. The two banking centers account for $1.4 trillion in offshore wealth and assets and are expected to continue growing by more than 10% annually.

Swiss banking, however, is not dead. It remains the original model of private banking for the world’s wealthiest people—and firms there still manage $2.4 trillion in offshore financial assets.

“Switzerland has been hit by a legal and regulatory storm, but the changes will happen elsewhere too,” notes Anna Zakrzewski, a partner with Boston Consulting Group.