07/03/17

Latin America: Latam tax amnesties test private banks' stamina

Recent programs in Brazil and Argentina have triggered chunky outflows at wealth managers UBS <UBSG.S> and Credit Suisse <CSGN.S>, and other Latin American countries are following suit, reports Nasdaq.

This cleanup process risks further bleeding for the banks in a region that accounts for 8 percent of global wealth assets. Moving onshore could help the Swiss giants retain their piece of the pie.

Amnesties can be powerfully effective. Italy, which pioneered the approach some 15 years ago, has uncovered well over $100 billion of wealth. Other Western nations, including the United States, have used amnesties or voluntary disclosures to lure back undeclared funds and crack down on tax evasion, putting pressure on Switzerland's wealth-management industry.

The focus is now on emerging markets, where investors have tended to stash large proportions of their wealth offshore because of weak enforcement and political instability at home. Indonesians declared a staggering $316 billion of previously hidden assets during a 2016 tax amnesty; one-fourth of those funds were held offshore. Cash-strapped Brazil and Argentina saw their tax revenue jump last year on the back of tax programs targeting undeclared assets.

In January, Mexico announced its own amnesty program. Peru and Honduras are taking similar steps, and others are likely to follow. More than 100 countries - including such offshore wealth hubs as Switzerland, Hong Kong and Singapore - have signed up to an international tax information sharing agreement that kicks in next year.

As money finds its way back home, local banks and asset managers stand to benefit. The Swiss private-banking giants should consider moving onshore or bulking up existing local operations to capture some that wealth, as they have done in Europe.

Argentina's history of expropriation remains a strong deterrent, but in Brazil UBS has a significant banking presence and its compatriot has a strong wealth franchise in Credit Suisse Hedging-Griffo. Credit Suisse opened an advisory office in Mexico in October.

A continued outflow of money from offshore havens will test the endurance the private banks. Yet clearing the deck of dodgy clients can avoid the risk of hefty regulatory penalties while onshore offices can strengthen client relationships. Consider it short-term pain for long-term gain.