ANALYSIS-Italian raids on Swiss banks may hinder tax amnesty

Published: 01 Nov 2009 16:54:51 PST

* Raids prove anonymity for tax evaders can be breached

* Tax offenders still active in business may be scared off

* More than 200 bln Sfr of Italian money managed in Ticino

ZURICH, Oct 30 - Police raids on Swiss banks based in Italy risk working against the ongoing Italian tax amnesty because some tax offenders may get cold feet for fear of retaliation once they move the money back to Italy.

Italian Finance Minister Giulio Tremonti, the mind behind this and two previous generous tax amnesties, is keen to capture as much undeclared money as possible before year-end to stem the country's budget deficit, which is expected to mushroom to near 5 percent of gross domestic product in 2009.

But there is a clear danger that Italian tax cheats, many of whom like Silvio Berlusconi's centre-right government because of its perceived relaxed stance on tax evasion, may think that the promise of anonymity linked to the amnesty may be broken.

"On one side the raids ramp up the pressure on clients (of Swiss banks), but it also shows what they are getting into if they repatriate money," said Stefan Stalmann, a bank analyst at UniCredit.

Rome carried out raids on 76 Swiss bank branches in Italy on Tuesday, sparking a diplomatic row and prompting authorities in the Swiss frontier town of Chiasso to ask citizens to report any suspected Italian tax agents crossing the border.

"I am convinced that these raids are having the opposite effect on our clients," said Franco Citterio, head of the banking association of the Italian-speaking Swiss canton of Ticino, where Italians hold over 200 billion Swiss francs.

"Those who were thinking of taking advantage of the tax amnesty are now scared and wavering," he added.

The current tax amnesty envisages a one-off payment of 5 percent of assets, which need to be repatriated if held in Switzerland.

Bankers in Lugano, Switzerland's third-biggest financial centre and just an hour's drive from Italy's economic engine, Milan, have said the tax amnesty is well suited for those no longer working and who have inherited an offshore account.

But it poses problems for those who still run a business based on inflated expenses and undeclared gains, bankers say.

Although the amnesty offers anonymity, the Italian government could easily breach it, as the raids show.

"Such domestic terrorism cast doubts on the promise of anonymity for those opting for the tax amnesty and for any guarantee there will be no future checks on those who choose to declare," Bruno Chastonay, a Lugano-based financial advisor.

ITALIAN BANKS TO GAIN?

Italians are estimated to be the second-largest source of undeclared assets for Swiss private banks after the Germans. Most of the assets are in the Ticino hubs of Lugano and Chiasso and in the chic ski resort of St. Moritz, in the Grisons canton.

The Ticino banking group said the region manages 400 billion francs, or 10 percent of Switzerland's banking assets, and 50 to 60 percent belongs to Italians. Not all of it is undeclared.

Bankers say Rome's loud noises on tax are scaring off those holding small fortunes and may help Italian banks attract funds.

"The specific raid on foreign banks surely aims to destabilise trust in foreign banks and the standing of the financial centre Switzerland," said Mathias Bueeler, an analyst with Kepler.

But large tax offenders, especially if they are well-known Italians, are unlikely to be wooed, private bankers say.

The threat from the first two tax amnesties was serious enough to prompt Swiss banks to move into Italy. This way, they managed to recapture more than half of the assets lost.

However, some of the funds went back to Switzerland after the amnesty rush, as may happen again this time.

"We saw in previous amnesties that in first instances quite significant amounts left Switzerland to Italy. But a large part of it went to subsidiaries of Swiss banks in Italy and part of it came back after the amnesty," said Urs Roth, Chairman to the Swiss Bankers Association.

Italy had tax amnesties in 2001 and 2003, with a rock-bottom one-off penalty of 2.5 percent of assets to be declared.

The two amnesties generated estimated tax revenues of over 2 billion euros from around 80 billion euros of assets that came back to Italy from Switzerland and other offshore centres.

When the Swiss government and UBS agreed to reveal 4,450 UBS account names to the U.S. to settle a tax row in August, the IRS said the accounts at one point were worth $18 billion.

"Rome estimates that 100 billion euros are held offshore and undeclared. But a potential real impact of the amnesty is very hard to guess," said Bueeler.

The outflows from the first two amnesties represented only around 1 percent of assets under management for top Swiss wealth managers UBS and Credit Suisse.

To try an appease tax cheats the current amnesty was broadened to include accounting fraud.