Banks that are doubling down on wealth management, seen as a promising source of revenues for margin-strapped firms in investment banking, are going to have to be very, very careful about who they engage with and what services they provide.
Know your client (KYC) processes are already onerous, but could result in knowing that your client is an internationally recognised material benefactor of the public corruption of an infamous dictatorship, for example.
Despite the legality of using some tax havens, banks are almost certainly going to get some serious heat turned on them by politicians, even if the total of such entities they are reported to have requested for clients represent a small portion of the 214,000 set up by Panama-based law firm Mossack Fonseca.
But since 500 banks and their subsidiaries and branches are among the intermediaries that requested offshore tax havens for clients — the International Consortium of Investigative Journalists says they’re behind 15,600 of the entities — it is almost a certainty that public disgust is going to result in some serious backlash for the industry.
The full ream of documents aren’t yet publicly available, but it’s already clear that branches of HSBC (two of them, in fact), Credit Suisse, UBS and Société Générale are among the 10 banks that requested the most offshore entities for their clients.
Other reports have indicated that branches of, among others, Deutsche Bank, Commerzbank and Berenberg were also involved. Yet more are likely to be named. No accusations of illegal wrongdoing has been levelled at any of the banks, as of Thursday.
If every one of the offshore entities created by these banks was entirely legal, and none are being used to hide assets for tax evasion (illegal) rather than avoidance (legal), it will still be a steep uphill battle to fend off public and political ire.
It wouldn’t tax (no pun intended) the fancy much to imagine authorities pursuing ex post facto litigation. In fact, it has already been done in the UK, to cut down on tax avoidance (and what a difference it made! Hong Kong, the UK and the Isle of Man are number one, three and eight, respectively, in the ICIJ list of the countries with the most active Mossack Fonseca clients). The 2008 double taxation Treaty Arrangements retrospectively created tax liabilities for 3,000 people who didn’t have any at all beforehand.
Any public and political damage is likely to fall squarely on wealth management divisions at the firms, rather than their trading or corporate finance businesses.
Among these firms named so far, a few have made notable commitments to wealth management.
Deutsche split its asset and wealth management divisions late last year in what was seen to be a signal of commitment to the latter. Credit Suisse, of course, has made a lot of noise about its wealth management business being at the front and centre of its restructuring plans. UBS is more or less synonymous in most people’s minds with private wealth management. HSBC not too long ago received a slap on the wrist for its part in hiding client’s money from the tax man.
Whether it finds evidence of illegal activity or not, the fallout from the Panama Papers will likely stretch out a long time and result in a lot of sustained rage — like PPI, Libor rigging, FX manipulation and sanction violations — and, perhaps, fundamentally change the regimes underpinning private banking and wealth management.
Banks that are pinning their hopes on those businesses should expect upheaval, heavy scrutiny, and more limits than ever before on the activities they can become involved in, and the clients they deal with. Expect outrage, and expect change.