Swiss banks prepare to bow to US demands, grudgingly

Gianluca Colla | Bloomberg | Getty Images

Many are leaving it to the last minute to tell the Swiss financial regulator whether they will participate in a U.S. programme to settle tax evasion suspicions that could trigger large fines and force them to identify U.S. customers suspected of using their Swiss accounts to dodge taxes.

Listed banks which participate in the programme could start telling investors from next week whether or not they have to take provisions against possible fines.

If they do not settle, individual banks and their senior staff risk criminal prosecution and, if a large number refuse to cooperate, it could hold up a future settlement for around a dozen of Switzerland's largest banks, including Credit Suisse , Julius Baer, Pictet, and local government-backed Zuercher Kantonalbank (ZKB).

(Read more: Swiss banks apologize for assisting tax cheats)

Most of the 300 or so smaller banks are expected to participate but they are anxious to find out what others are doing and wrestling with the risk of giving up client confidentiality, which could put off customers.

"Probably a few dozen will risk being pursued by the U.S. later and stay out of the current programme altogether," said a lawyer involved in bank talks.

Despite knowing the terms of the August deal for months, many banks are going down to the wire with their decision, according to several sources involved in the talks.

U.S. tax lawyers worked the Thanksgiving holiday for their Swiss bank clients and flew into the country this week as hundreds of boards gather to make their call.

"It's really an elaborate game theory going on right now," said one U.S. lawyer working for Swiss banks.

"It's a herd mentality."

The U.S. Department of Justice and Switzerland's financial regulator FINMA declined to comment on how many banks had so far agreed to settle.

(Read more: Swiss tax haven closes for wealthy Americans)

Fear of reprisals

Tax dodgers have been under huge pressure from governments since the financial crisis blew a hole in public purses and banks in Switzerland, the world's biggest offshore financial centre, are also under investigation in Germany and France.

The United States has so far prosecuted more than 70 taxpayers, at least two Swiss banks and more than 30 bankers, lawyers and advisors worldwide. Its hard line has prompted taxpayers to volunteer $5.5 billion in owed taxes.

In 2009 UBS, Switzerland's largest bank, was fined $780 million and agreed to hand over the names of U.S. clients with secret Swiss bank accounts to avoid facing criminal charges.

The cost of settling, and the potential hit to earnings, weighs heavy on Switzerland's bankers. They could face penalties of up to 50 percent of the value of the assets they managed on behalf of Americans.

(Read more: US near deal withsome Swiss banks in offshore tax probe)

If a bank feels it has had relatively little to do with undeclared U.S. accounts, it might decide not to participate in the U.S. programme.

But the fear of reprisals if the U.S. takes a different view is strong.

Two Swiss private banks, Frey & Co and Wegelin, folded after U.S. authorities targeted them over client tax evasion.

The arrest of Swiss banker Raoul Weil, a former UBS executive, while holidaying in Italy in October sent shockwaves through Switzerland's financial community. Weil, arrested on five-year-old U.S. charges which allege he helped rich Americans evade tax, has said he has committed no wrongdoing.

There is also the added pressure of obstructing progress for the larger banks, which want to seal their own deals with the United States and end uncertainty over the tax issue, which has been dragging on for years.

"The Americans have said very clearly that they want to see how successful the current program is and how many Swiss banks register with them," ZKB Chief Executive Martin Scholl said in a radio interview last month.

Nine banks contacted by Reuters declined to comment on potential fines and most said they were still evaluating whether to agree to settle.

"Participating in the programme is absolutely an issue for us," said Alex Josty, spokesman for Berner Kantonalbank. Its board meets on Thursday to take a final decision for the bank, which is listed but majority local government-owned.

Corner Bank, a small lender in Switzerland's Italian-speaking southern region, is considering signing up to the U.S. programme, a spokeswoman confirmed.

The bank's CEO Paolo Cornaro complained in an interview published in Swiss newspaper Handelszeitung on Thursday that the U.S. programme did not distinguish between banks that actively sought undeclared U.S. money and those which had opened accounts for a few Swiss clients who possibly also had U.S. passports.

Vontobel, EFG International and Banque Cantonale Vaudoise declined to comment.

Others such as St. Galler Kantonalbank, which owns private bank Hyposwiss, and Linth Bank, said they had not decided on a plan of action yet.

With so many banks procrastinating, the Swiss financial regulator waded into the controversy last week, urging them to settle and warning that further U.S. sanctions "must be feared".

The comments from FINMA rankled some bankers and triggered an outcry in the local media, which accused it of siding with the United States and failing to stand up to what many in the industry see as heavy-handed U.S. methods.

Despite the bluster, most banks are expected to yield.

"The U.S. programme is at the limit of the bearable for the banks, but it is the only remaining solution," said Sindy Schmiegel, a spokeswoman for the Swiss banking lobby.