Swiss Banks Freeze Out U.S. Clients

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ZURICH -- In a sign that UBS AG's high-profile spat with the Internal Revenue Service is chipping away at Switzerland's private banking industry, some Swiss banks are cutting off or curbing business with American clients for fear of crossing U.S. authorities. A number are no longer accepting deposits from U.S.-based customers, or allowing them to open accounts. Spurring the shift is UBS's standoff with the IRS, which wants access to 52,000 client accounts in a move aimed at rooting out possible tax fraud and, in the process, potentially breaching Swiss bank-secrecy laws. Some analysts say they expect UBS to pay a hefty settlement to resolve the matter before it goes to court, which could end the case and still protect the identities of its clients.

The U.S. and Swiss governments are in negotiations on the matter, with a hearing slated for next month.

The battle has made some banks in Switzerland see clients based in the U.S. -- regardless of nationality -- as an expensive liability. At least four Swiss financial-services firms have put extra measures in place for dealing with clients living in the U.S. or declined to accept money from U.S.-based individuals.

Though these banks are relatively small compared with Switzerland's dominant private-banking giants such as Julius Baer and Credit Suisse Group -- both of which declined to say if they had changed their procedures for handling U.S.-based clients -- the moves show how the UBS dispute is undermining the secrecy that Swiss banks traditionally have offered.

The curbs on U.S. clients by the Swiss banks come as wealthy Americans face stepped-up scrutiny by the IRS of offshore accounts and foreign income, an effort that could affect tens of thousands of taxpayers.

For American citizens, who are taxed by the U.S. government on all world-wide income, regardless of its origin, Swiss banks don't offer obvious legal tax advantages. U.S. taxpayers are required to disclose overseas holdings and income. For that reason, Swiss banks have traditionally been circumspect in marketing to Americans, and most of their deposits come from the rest of the world.

Over the past several weeks, Zurich-based retail bank Zürcher Kantonalbank decided to no longer accept business from U.S. clients, a spokesman for the state-controlled bank said. A spokesman for Basel-based Bank Sarasin & Cie., which focuses on wealthy clients, said it no longer accepts deposits from U.S.-based individuals, in part because of the U.S. pursuit of offshore funds.

Others, such as cooperative Raiffeisen Group, and Migros Bank, owned by Switzerland's largest retailer Migros-Genossenschafts-Bund, still accept U.S. funds, but recently put tougher measures into place for servicing them. For example, Raiffeisen requires that each account have an individual living outside the U.S. with power-of-attorney over its funds. Raiffeisen also requires that accounts have a correspondence address outside the U.S. Migros refuses to correspond entirely -- by telephone, mail or electronic mail -- with clients on U.S. soil.

"We wanted to ensure that we avoid any activity that could interpret Migros Bank as an active provider of financial services in the U.S.," bank spokesman Matthias Hunn said.

UBS last year began shutting down its money-management business for wealthy American investors at its private bank in Switzerland. It routed that business to its U.S. wealth-management unit, formerly PaineWebber, or through an SEC-regulated unit based in Switzerland called Swiss Financial Advisors. Investors who don't transfer to one of those units are being asked to leave the bank.

Small banks' wariness about dealing with U.S.-based customers has led to complications for some Swiss nationals living in America. In November, UBS told a retired Swiss couple living in Georgia that they had to liquidate their account because they lived in the U.S., the couple says. The couple -- Swiss citizens who have been UBS clients since the mid-seventies, turned to Credit Suisse, which ultimately rebuffed the funds, saying it "could not take funds formerly with UBS."

The couple, who said they maintained the UBS account to be able to pay their Swiss tax bill, were then rebuffed by a cantonal bank before ultimately depositing the UBS funds with Raiffeisen.

"At times, it felt as though we were being treated like criminals," one member of the couple said. Credit Suisse declined to comment. UBS confirmed that in Switzerland it no longer handles retail accounts for U.S.-based individuals, as a result of shutting its offshore arm last year.

Most small Swiss banks declined to specify how much in U.S. funds they manage. One exception, ZKB, said U.S. money makes up only 1% of its overall $114 billion in assets.

The Swiss-American Chamber of Commerce in Zurich said efforts are under way to find a solution short of a blanket ban on U.S. business.

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