Banks have four choices. They can declare themselvescategory twoinstitutions (those with foreign clients who broke American tax laws), “category three” (those whose foreign clients were clean), “category four” (mostly domestic) or they can choose not to take part. “Category onecomprises 14 large banks, including Credit Suisse and Julius Bär, which cannot participate because they were already under investigation when the programme was set up.

They will have to negotiate individual settlements with the American authorities. The only large bank that has already done so is UBS, which paid $780m and handed over information on more than 4,700 American accounts.

Category-two banks will have to pay penalties of up to 50% of untaxed balances and provide some account data. Banks that claim to be in categories three or four, or refuse to participate at all, will be taking a big risk unless they are certain they have no tainted accounts. If they are later found to have had any, the firm and its executives could face criminal charges. They will know this is no idle threat, and not just because of Wegelin. America has gone after more than 30 Swiss bankers and lawyers, including Raoul Weil, UBS’s former head of wealth management, who is due to be extradited to America after being nabbed at an Italian hotel in October.

The banks have hordes of advisers poring over their books. Some are understood to have asked for an extension of the deadline as they struggle to assess the risks. For those that have not actively sought out tax evaders in the past, being sure that they have no troublesome accounts can be “immensely tricky”, says Michel Dérobert of the Swiss Private Bankers’ Association.

Some may have American clients without knowing it. A Brazilian who was born in America may not have informed his wealth manager that he is formally a dual citizen; if his account holds $50m, the bank could face a $25m penalty. It might even be liable for a client who held a green card at some point in the past ten years but did not tell the bank.

The programme does not distinguish between banks that willingly catered to tax dodgers and those that inadvertently served them. As a result, banks that believe they are clean but cannot be certain may join category two to be on the safe side.

Fears are growing that total penalties will be much higher than first thought, and that some private banks lack strong enough balance-sheets to cope with the combined fines and legal and administrative costs. Bankers complain that the Swiss government appears not to have properly calculated the potential painthough, to be fair, it had little leverage in negotiations. Some cantonal banks have looked at the possibility of trying to assert sovereign immunity as state-owned enterprises. But this defence almost certainly would not work for commercial activities.

Ironically, participating banks could end up paying far more, relative to their size, than more egregious offenders. UBS, which encouraged clients to hide behind opaque corporate structures and even smuggled diamonds for them, had $20 billion in untaxed American money, a whistle-blower claimed in court. If so, UBS’s fine amounted to less than 4% of those assets, a fraction of what dozens of smaller banks must now cough up (20%, 30% or 50% of untaxed balances, depending on when the accounts were opened).

Wegelin, which took on tax-dodging clients that UBS pushed out when it came under investigation, ended up paying $74m, less than a fifth of what it would have had to hand over under the new scheme, based on assets listed in court papers. Although the indictment led to its closure, it sold the bulk of its assets to another Swiss bank beforehand.
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The fines come at a difficult time. Private banks’ return on capital has tumbled as a result of the tax assault, accounting changes and competitive pressures from Singapore and other wealth centres (see chart). Though the stock of offshore money managed in Switzerland has remained stable, at more than $2 trillion, average profit margins have fallen by a third since the golden days of 2007, says Daniel Kessler of Boston Consulting Group. Nearly a quarter of all Swiss wealth managers—mostly smaller outfits—are loss-making, according to KPMG. It expects their number to fall by 25-30% in the next three years as weaker firms are taken over or liquidated.

The pace of mergers is likely to accelerate as the legal fog lifts. The disclosure programme may be harsh and inequitable, but for healthier, acquisitive outfits it may have a silver lining.