AT THE CENTENNIAL gathering of the Swiss Bankers Association last November, held at a swanky hotel in the hills above Zurich, the celebrations were muted. In his opening address the group’s chairman, Patrick Odier, felt obliged to note that “we have an image problem.” His worry was not that only half a dozen of the audience of more than 100 were women. Instead, he was referring to his industry’s travails since America launched its all-out assault five years ago on banks that served tax evaders.

Switzerland is still the world leader in wealth management, looking after $2.1 trillion in assets. But the attacks from Washington, DC, and, more recently, European capitals have sent its moneymen reeling. In 2009 UBS paid America $780m to end a tax-evasion investigation; when Switzerland’s oldest bank, Wegelin & Co, snapped up many of UBS’s undeclared clients, prosecutors took it to court. The bank pleaded guilty, paid a large fine and has decided to close. Under the UBS settlement thousands of client names were handed to America, knocking chunks out of the once-impregnable wall of Swiss bank secrecy.

The beleaguered Alpine country has since been badgered into agreeing to co-operate in cases of suspected tax evasion as well as fraud—“an earthquake” for a nation that treats evasion as a mere civil offence, says René Matteotti, a tax lawyer in Zurich. With help from leads generated by the UBS settlement, America is going after 11 other Swiss banks, including Credit Suisse and Julius Bär. Switzerland wants a single settlement covering all its banks, but America seems to want to pick them off one by one. Negotiations with European countries are no easier now that Germany has rejected a Swiss proposal to levy and pass on penalties for German tax cheats while preserving their anonymity. The Swiss banks worry that their government could end up with a dizzyingly complex patchwork of bilateral arrangements.

Less luxe

The industry’s commercial prospects are equally uncertain. Before the crackdown the Swiss found offshore private banking highly profitable. They could earn twice as much as banks in Britain doing the same thing, reckons one official, because they could build some of the tax savings on undeclared funds into their fees. Much of that easy money has gone. This is a challenge for “an industry with no real history of transformation”, says Peter Damisch, head of the global wealth practice at the Boston Consulting Group (BCG).

There is talk of a coming wave of consolidation once the legal clouds lift. Smaller banks could struggle to survive. Some of the independent outfits that help devise offshore holding structures for the banks’ clients have put themselves up for sale. The strongest of the survivors may have grounds for cautious optimism. Mr Damisch expects Swiss assets originating from Europe to decline by up to a third in coming years as undeclared money is “regularised” (American assets are already negligible). But he expects to see offsetting growth in emerging markets.

Still, the next few years will provide a stern test of the Swiss brand in private banking. They will have to show that the selling-points they have long touted—political and economic stability, top-notch service and a holistic investment approach—count for more than the ability to hide money.

They can at least console themselves that they still have some lobbying power. Amid fierce opposition, the Swiss government has dropped a proposal that would have required banks to reject deposits from clients who refused to declare that they were tax-compliant. This was to be part of a national “white-money strategy”, still in the making, to shed Switzerland’s image as a tax haven once and for all. Critics suspect it is a smokescreen.

All in all, the Swiss have played their hand badly since 2008. The banks gambled that other countries would continue to turn a blind eye to tax-dodging. The government underestimated the ferocity of the response and then fought fires as they appeared rather than pushing for an overall solution. “Switzerland always gets it wrong when there’s an external crisis,” says a former adviser to its banks, pointing to an earlier debacle over Holocaust-era accounts. “They think they’ll be forgiven because they’re neutral and play a useful role in global diplomacy.”

By contrast, next-door Liechtenstein, which produced many of the secrecy structures that Swiss banks sold, has won plaudits for reacting promptly to international pressure. Just months after a local tax-evasion scandal erupted in 2008, the tiny principality had launched comprehensive information-exchange agreements in Europe and America. It has made up for some of the lost business by crafting a unique deal with Britain, the Liechtenstein Disclosure Facility. Britons with tainted assets in the principality’s banks can come clean and pay a 10% penalty (which some think too lenient). Crucially, those who bring in money from other jurisdictions, including Switzerland, are also eligible. Liechtenstein hopes to kill two birds with one stone, winning new business even as it cleans up its own act. Half of the 3,000 people who have taken advantage of the facility so far have brought in their assets from elsewhere. Britain has tripled its forecast for the amount it will raise, to £3 billion.

Singapore zing

The Swiss are keeping an eye on the rise of Asia’s private-banking centres, particularly Singapore. For years the offshore world has swirled with rumours that money from Switzerland, Jersey and other European centres was heading east. They may have been exaggerated: the portion of wealth of European origin managed in Singapore and Hong Kong has gone up by only one percentage point in the past three years, to 8-9% of the total, according to BCG. But the Asian offshore centres do not need help from Europe. Singapore has been sucking in vast sums from South-East Asia, particularly Indonesia, and smaller amounts from India and China. If recent growth continues, Singapore and Hong Kong combined could overtake Switzerland in the next 15 years, reckons BCG.

One question is how they will deal with growing international pressure for greater openness. Singapore, for instance, has strict bank-secrecy laws and a poor record on exchanging information. Four years ago it was branded “out on a limb” by the OECD’s tax chief. Recently it has made concessions, signing dozens of bilateral information accords and making tax evasion a “predicate” offence for money-laundering, which means it can be dealt with more sternly. Local lawyers say secrecy is no longer absolute. In any case, Asians generally choose to bank in Singapore for its economic and political stability, not to hide untaxed income, says Barend Janssens of RBC Wealth Management.

Singapore’s apparent commitment to greater openness has yet to be tested. Meanwhile Hong Kong, which registers 150,000 new companies each year, has taken a step in the opposite direction, making it harder for outsiders to identify the directors of private companies. Asia’s offshore centres are becoming big sellers of corporate and investment vehicles, some of them deliberately opaque. Singapore is big in trusts—unregistered asset-protection vehicles that practitioners argue are “relationships” rather than owned entities. These are increasingly popular with rich Chinese keen to preserve newly acquired wealth.

Offshore centres have to strike a delicate balance when levying fees and taxes on the industry

Private-equity firms have become big investors in the offshore-incorporation business, lured by the strong, stable cashflows from registration and renewal fees. They like “midshore” jurisdictions such as Singapore and Hong Kong that combine offshore traits (low tax, secrecy) and onshore ones (sophisticated, well-staffed financial centres). Martin Crawford, chief executive of OIL, a big offshore service provider, argues that midshores will thrive as regulatory pressure on pure offshore centres grows.

This eastern expansion will present both opportunities and threats to Switzerland. Some of its banking clients are defecting to Asia, but the big Swiss firms, particularly UBS, are wealth-management leaders in that region. Much the same applies to the main Anglo-Saxon tax havens, such as the Cayman and British Virgin Islands and Jersey. Asians are familiar with the products they offer, particularly those from Cayman and the BVI; indeed, some Chinese use “BVI” as a generic term for an offshore firm. But these jurisdictions worry that Asian clients will increasingly shop closer to home, and have responded by stepping up their marketing efforts in Asia, sending high-level delegations and opening representative offices.

According to an industry survey by OIL last year, Hong Kong could overtake the BVI as the leading seller of offshore firms within five years. A senior BVI official expresses regret that his jurisdiction did not see this coming earlier and push harder into areas such as hedge and private-equity funds. To be taken seriously in such higher-end businesses, the BVI would have to smarten itself up: its capital, Road Town, is charming but shabby, as are most corporate offices. The small, dingy meeting room of its sole vaguely international bank is more bedsit than bastion of finance. Richard Peters, the BVI’s pre-eminent corporate lawyer, sees a “slow run-off over time” in the islands’ core business and thinks “it may be too late for all those new products now.”

After the party

Cayman, the most diversified of the Caribbean havens, has its own worries. Its banking assets have declined by 20% from their peak and structured finance is down by considerably more. Overall deal flow fell by 40% during the crisis and is now in “a very shallow climb,” says Kevin Butler of Conyers Dill & Pearman, a law firm. Cayman has maintained its spot as the main hedge-fund domicile, though numbers have dipped by 9%. A lot of fund administration work has gone back onshore, enticed by Canadian provinces, American states and Asian countries dangling tax breaks. The recent ousting for alleged corruption of the Caymanian premier, McKeeva Bush, has not helped.

Cayman’s public sector expanded hugely in the go-go years before the crisis, but it became a fiscal albatross as fees from offshore firms shrank. In response, the government tried to introduce a direct tax on expatriate workers but scrapped it amid fierce opposition from the foreign residents, who make up 40% of the population. Cayman bankers expect their annual licence fees to rise by up to 50% as officials try to plug holes.