By Dominic Elliott | LONDON
Credit Suisse knows the importance of keeping its nose clean. The Swiss bank confirmed on March 31 that its offices had been raided by authorities in several countries in relation to possible tax evasion. It later stressed its “strict zero tolerance policy”, pointing to a review initiated in 2011 to purge it of any dicey clients. A guilty plea and $2.6 billion settlement with U.S. authorities over tax evasion in 2014 have given the bank good reason to be scrupulous. Such raids act more as a reminder than a warning.
Swiss private banks face two kinds of risk: past and future. The first comes from the recent 180-degree reversal in public opinion about the industry’s function. Where the secrecy it used to peddle was once prized, it is now associated with corruption, underhand dealing and tax evasion. Banks have worked hard to scrub themselves of old wrongdoings, but after decades of working to mask the true intentions of clients, there is a high chance that historic problems may have been missed.
The future risks come from chasing growth. Countries experiencing the biggest rise in numbers of wealthy citizens are also those with the laxest controls on tax evasion and graft. Think of the scandal involving the Malaysian leadership and its 1MDB fund, or Indonesia’s haul of more than $300 billion from a tax amnesty launched last year. International agreements to exchange information on tax miscreants could leave the biggest private banks with large asset outflows – increasing the temptation to add new, sketchier clients.
There’s a third risk too: the good client gone bad. Anti-money laundering experts at banks say that a formerly compliant customer engaging in illicit behaviour can be the hardest type of wrongdoing to spot, given the intensity of the monitoring needed to identify defectors.
Credit Suisse may have a tight grip on all such threats – and the latest raids prove nothing to the contrary. The fact that the latest probe involved authorities in five countries and 55,000 suspect accounts suggests it extends beyond Credit Suisse’s client base. For investors, it’s really a question of what kind of discount to apply to the steady cash flows that come from wealth management fees. Fines and run-ins with the authorities are, in a sense, becoming an unconventional cost of doing business.
.Source: Reuters