UBS CASE: SWISS PERSPECTIVE AND A WAY FORWARD \

2009-03-04 15:48:00 09BERN98 Embassy Bern CONFIDENTIAL VZCZCXRO9450\ RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR\ DE RUEHSW #0098/01 0631548\ ZNY CCCCC ZZH\ R 041548Z MAR 09\ FM AMEMBASSY BERN\ TO RUEHC/SECSTATE WASHDC 5692\ INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE\ RHMFISS/DEPT OF JUSTICE WASHINGTON DC\ RUEATRS/DEPT OF TREASURY WASHINGTON DC C O N F I D E N T I A L SECTION 01 OF 02 BERN 000098 \ \ SIPDIS \ \ DEPT OF JUSTICE FOR B.SWARTZ \ \ E.O. 12958: DECL: 03/04/2019 \ TAGS: ECON ETRD EINV SZ SUBJECT: UBS CASE: SWISS PERSPECTIVE AND A WAY FORWARD \ \ Classified By: CDA Leigh Carter for reasons 1.4(b) and (d). \ \ ¶1. (C) Summary. UBS' handover of client information to the \ Department of Justice incited criticism in numerous press \ articles and from several Swiss political parties calling the \ U.S. action one of extortion and blackmail. However, the \ step was supported by elements of the moderate to left \ parties. In discussions with econoff, several banking, \ business, and government representatives expressed disbelief \ at the extraordinary and criminal actions taken by UBS and \ surprise at the Swiss government's lackluster response and \ failure to fine UBS. The press lamented that the UBS case \ will mark the beginning of the "end of banking secrecy", \ despite public assurances by President (and Finance Minister) \ Hans-Rudolf Merz to the contrary. The Swiss public and \ government cherish banking secrecy as a (highly-profitable) \ national institution. The public's ire at the U.S. (and EU) \ for pressuring Switzerland should not be underestimated and \ could have a long-lasting negative backlash to bilateral \ relations and increased anti-Americanism. President Merz's \ overtures for concessions and incremental changes to secrecy \ open the door for a way forward: approaching Switzerland to \ discuss renegotiation of our bilateral agreement to \ incorporate the broader scope of coverage found in the \ U.S.-Liechtenstein tax agreement, specifically to include tax \ evasion. End Summary. \ \ PRESS CRITICIZE U.S. AS HEAVY HANDED \ -------------- \ \ ¶2. (U) UBS' handover of client information to the Department \ of Justice incited criticism in numerous press articles and \ from several Swiss politicians. However, the step was \ supported by elements of the moderate to left parties. As \ the continual lead story in most papers, the majority of \ quoted opinions recognize UBS' criminal conduct, however, \ they equally criticize the U.S. for exerting undue pressure \ in a time of global economic crisis to obtain documents prior \ to the conclusion of Switzerland's legal assistance \ proceedings. Many articles cite "extortion", "bullying", and \ "blackmail" by the U.S. Department of Justice in forcing UBS' \ and the Swiss government's hand in violating their judicial \ proceedings and bank secrecy laws. \ \ BUT UBS CONDUCT WENT TOO FAR! \ -------------- \ \ ¶3. (C) Despite these press articles, business, banking \ industry and government representatives expressed disbelief \ at the extraordinary criminal conduct of UBS bankers. Martin \ Naville, CEO of Swiss Amcham, told econoff that given the \ clear criminal actions, he was surprised by the Swiss \ government's reaction, which he opined made the situation far \ worse. He criticized the government for failing to provide \ the documents immediately upon the Federal Council's public \ announcement to do so, which allowed the courts to become \ involved and slowed down the process further. Naville, in a \ press interview, attempted to shore up U.S.-Swiss bilateral \ relations by stressing that the case is a U.S. domestic \ affair involving a bank licensed to do business in the U.S., \ with U.S. clients, and under U.S. laws. He criticized, \ however, the U.S. for moving forward prior to the conclusion \ of the legal assistance proceedings. This same opinion was \ reiterated to econoff by Swiss National Bank Deputy Head of \ Financial Stability Juerg Blum and other government officials \ in the financial arena. \ \ ¶4. (C) Bank representatives were equally surprised at the \ degree in which UBS skirted the law and the qualified \ intermediary agreement. CreditSuisse Managing Director of \ Public Policy Rene Buholzer stated that Swiss banks' biggest \ concern is that the U.S. will capitalize on UBS' egregious \ conduct as fodder to renegotiate the tax treaty and qualified \ intermediary (QI) agreement. Buholzer commented that the QI \ was riddled with loopholes that needed to be tightened, but \ regardless UBS had entered into criminal territory in \ exploiting them. He also could not understand why the Swiss \ banking authority, FINMA, did not fine UBS as well, and only \ gave them a slap on the wrist. Roland Marxer, Liechtenstein \ Deputy Foreign Minister, who has spent the last year working \ with the Liechtenstein-U.S. Tax Information Exchange \ Agreement (TIEA) and its impact on Liechtenstein's banking \ secrecy laws, also expressed shock that FINMA did not impose \ criminal fines on UBS. \ \ \ THE DEMISE OF BANKING SECRECY? \ -------------- \ \ \ BERN 00000098 002 OF 002 \ \ \ ¶5. (C) The media and pundits have questioned whether the UBS \ case will mark the end of banking secrecy. President Merz, \ on the other hand, stated in his press conference that the \ UBS case is an individual incident, involving criminal \ behavior that was always covered by the U.S.-Swiss bilateral \ arrangement, and therefore does not call into question \ banking secrecy. He compared it to money laundering and \ other financial crimes, and reminded the Swiss that banking \ secrecy is not designed to protect criminal behavior. \ Despite Merz' confident assurances in the institution of \ banking secrecy, the Federal Council created a task force to \ delve into the UBS criminal case and to determine the best \ path forward on the pending civil case. \ \ ¶6. (C) The industry appears less concerned than expected \ regarding the fate of banking secrecy. Buholzer stated that \ he does not equate "the end of secrecy with the end of \ banking." BSI Bank Director General Vincenzo Piantedosi \ agreed with this assessment, although he cautioned that a \ "transition period" would be needed to "absorb excess labor \ forces" as the asset management business dwindled. Marxer \ noted that Liechtenstein has not experienced any fall in \ current wealth management assets since the TIEA was signed, \ but that the rate of new deposits was declining. Although \ SNB has not completed a study on the impact of secrecy on \ wealth management, Blum estimated it would have "some \ impact", but did not think its loss would affect "too many \ banks." \ \ ¶7. (C) Bankers did warn that a level playing field was \ necessary to end bank secrecy without undue financial harship \ to the Swiss. Both Buholzer and Marxer cited Singapore as a \ prime player that would benefit from the demise of secrecy in \ Europe. Piantedosi was not so concerned with non-European \ countries' markets since they do not offer the same history \ of reliability and stability, but did express reservations if \ other European havens, such as Austria, remained secrecy \ strongholds, while Switzerland did not. \ \ ¶8. (C) While the bankers provide an optimistic view should \ secrecy be abolished, the Swiss public and government cherish \ banking secrecy, not just as a contributor to the financial \ sector and GDP, but as a national institution and part of \ Switzerland's cultural identity. The Swiss government will \ push hard against the 52,000 John Doe summons, which they \ view as a fishing expedition, outside of legal assistance and \ in violation of their banking secrecy laws. The public's ire \ at the U.S. (and EU) for pressuring Switzerland should also \ not be underestimated and could have a long-lasting negative \ backlash on bilateral relations and increased \ anti-Americanism. \ \ THE WAY FORWARD \ -------------- \ \ ¶9. (C) Both the Swiss and Liechtenstein governments, as well \ as bankers, have intimated at a solution that would provide \ them with much needed political cover and still allow the \ U.S. to breach the current tax fraud versus tax evasion \ cut-out in our bilateral agreements. President Merz admitted \ at a recent conference that banking secrecy, while not at its \ end, must evolve to match current times. He suggested that \ concessions must be made to stave off criticism and \ blacklistings. Marxer confirmed that Liechtenstein also \ recognized secrecy was evolving, but he warned that changes \ needed to be incremental to allow citizens and financial \ institutions to adjust. As an example, he cited \ Liechtenstein's expansion of exceptions to secrecy laws first \ through money laundering restrictions, then the QI, and \ finally the more recent TIEA. \ \ ¶10. (C) Given President Merz's overtures for concessions and \ the incremental changes that have already occurred within \ Switzerland, post recommends that the USG approach \ Switzerland to discuss renegotiation of our bilateral \ agreement to incorporate the broader scope of coverage found \ in the U.S.-Liechtenstein TIEA, specifically to include tax \ evasion. The Swiss government can spin the bilateral \ agreement as a further step in our relations that assists \ both countries in halting willful criminal conduct. At the \ same time, by not opening the door completely, it will enable \ the government to assure the public that secrecy exists \ absent criminal conduct, as well as provide the Swiss some \ defense against the EU's expected campaign to eliminate \ secrecy altogether. \ CARTER \v