October 9, 2012

Swiss Commodities Business May Be Revamped

Changes could threaten $21 billion in existing business

Switzerland is considering changing the policies governing its commodities business—one that is currently worth $21 billion per year—as it works to comply with global standards that will keep it from being listed as a tax haven. Such changes could threaten its reputation as a global commodities trading hub.

Bloomberg reported Tuesday that even as new policies are being considered, commodities traders are being wooed by such countries as Singapore and Dubai. The secrecy that was formerly a hallmark of Swiss banking also extends to commodities trading, and Switzerland is afraid that its reputation could be destroyed amid inquiries on illegal activities such as tax evasion, bribery, human rights abuses and environmental damage.

In May the Swiss government launched an investigation into the commodities industry, and said that the country was “exposed to risks to its reputation” through its oil, grain and coffee trading activities.

Although commodity trading, centered mostly in Geneva and Zug, has given a tenfold lift to the Swiss economy in the past ten years, according to Zurich’s KOF research institute, its risks are also rising as the European Union (EU) increases the pressure on Switzerland to move away from a so-called auxiliary regime that has drawn in multinational commodity traders with the promise of lower taxes.

Trading brings in some 20 billion francs ($21 billion), or 3.5% of GDP, according to the State Secretariat for Economic Affairs. But Carlo Sommaruga, a lawmaker for the Social Democratic party, the second-biggest in the Swiss lower house, has said that the costs outweigh the benefits.

Citing the corruption endemic in the U.N. oil-for-food program for Iraq, Sommaruga said in the report that similar corruption could harm Swiss companies in finding foreign contracts and also shrink the country’s position as a global financial center. The 2005 report on a U.N. investigation into the oil program found that 2,253 companies made illegal payments to Iraq to win oil business.

Trafigura Beheer and Vitol, two of Switzerland’s largest companies by sales, have both seen their share of scandal. The former pleaded guilty in May 2006 in a U.S. court to falsely telling energy companies that Iraqi oil it sold them in 2001 had been obtained in compliance with the UN’s oil-for-food program. The latter pleaded guilty to grand larceny in November 2007 and paid $17.5 million in restitution for its actions when buying Iraqi oil under the program.

Trafigura was also involved in the shipping of toxic waste to the Ivory Coast and failing to identify its dangers. For that it was fined a million euros by a Dutch court in July of 2010.

Sommaruga was quoted saying, “Resource trading companies’ dodgy activities will not only result in a bad reputation for them. We are afraid the whole of Switzerland will suffer from a loss of reputation.” He added, “There is no special authority to check the legality of commodities traded in Zurich, Zug or Geneva. You can never be certain another scandal won’t blow up.”

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