Testing times for Swiss-based traders as scrutiny increases
Switzerland struggles to adapt to increased regulation and transparency rules
As the spotlight focuses on Switzerland’s response to financial regulation, sanctions on Iran and tax, so too have the Swiss-based major commodity trade houses found themselves under increasing scrutiny.
A light-touch regulatory regime, low corporate taxes and reputation for discretion has helped Switzerland become one of the world’s major commodities trading hubs, and Geneva into an oil-trading centre, handling about 35% of total global volume. Glencore, Vitol, Trafigura, Mercuria and Gunvor all have oil-trading operations in Switzerland and have, while clocking up profits, seen no need to trumpet their successes. But things are changing.
Over recent years, Swiss trading firms have altered their business models from trading entities to become vertically integrated companies, bringing together production, distribution and trading under the same umbrella, often employing thousands around the globe.
Are these publicity-shy giants’ starting to lift the mantel of secrecy that has surrounded them?
Only recently Gunvor, the fourth largest crude oil trader in the world after Glencore, Vitol, and Trafigura, created a website showcasing its operations. Representatives from these firms have been out speaking at conferences; Gunvor, Vitol and Trafigura are tweeting and the firms appear to be sharing their views on the market to what seems like a wider audience than usual.
So why? "It is all about access to funding," said one European banker. As lending requirements have become tougher and the European banks that have traditionally helped fund the Swiss trading companies look to boost their capital, traders have had to seek new sources of financing, especially as equity markets shrink.
Moves to buy refineries, stakes in producers, and expand their assets all require funding and potential investors want a window into the company. But the shift from private to public company, as was the case for Glencore, has also transformed the information flow surrounding the operations and financial transactions made. Investors want information before they stump up cash, and this appears to have been key to this new transparency. Glencore raised an eye-watering $10 billion in London and Hong Kong this year for its initial public offering. Trafigura tapped the bond market for the first time last year, raising €400 million ($512.2m) and is looking to spin-off of its subsidiary Puma Energy.
For others in Switzerland, the newer openness is all about promoting corporate social responsibility. It also comes as critics, including Swiss non-governmental organisation (NGO), the Berne Declaration, whose book on the activities of the commodities firms, Commodities: Switzerland’s Most Dangerous Business, caused a stir earlier this year. The book’s authors have called for greater transparency, claiming that the activities of trading companies would benefit from greater oversight. They further argued that Switzerland’s lack of regulation, tax benefits and lack of transparency has attracted the industry "as a dunghill attracts flies".
Aside from pressure by NGOs, the likelihood that the industry-backed Extractive Industries Transparency Initiative (EITI) will broaden its focus to include oil trading could have implications for the publicity-shy Swiss-based trading industry. The EITI is a 10-year-old voluntary scheme to improve transparency in the natural resources industry. Until now, it has focused on mining and oil companies’ payments to governments, including royalties and taxes.
Regulators too are pushing for further transparency, with the US and EU taking steps towards EITI-inspired financial disclosure requirements, underpinned by legislation. In the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was due to come into force early in 2013, will require US-listed companies to disclose payments made to governments on a project-by-project, country-by-country basis. The EU is moving towards the drafting of a financial transparency directive, similar in scope to section 1504 of Dodd-Frank. Both these moves are putting increasing pressure on Switzerland to adapt its regulatory framework.
The EU wants Switzerland to end what it has claimed are uncompetitive cantonal corporate tax practices. Geneva, for its part, plans to eliminate tax breaks for commodity trading houses by 2018. This will end the so-called fiscal holidays enjoyed by firms like Vitol, Mercuria and Gunvor.
The country is also facing US and EU pressure over sanctions imposed on Iran over its nuclear programme. Oil trading firm Naftiran Intertrade Company (NICO), which is owned by the Iranian government, and Petro Suisse Intertrade Company, an alleged front company for NICO, are both based in Switzerland. Both companies were sanctioned by the US in 2012.
Switzerland, however, has reasserted its traditional neutrality, opting out of some of the sanctions, most importantly the EU oil embargo.
Iran’s central bank has not been added to a Swiss sanctions list either. However, since July 2012, oil and petrochemical transactions with Iran have had to be reported to the Swiss authorities. Vitol, Trafigura and Mercuria have publicly stated they have halted trades in Iranian oil.
According to a recent Reuters report, some Western diplomats fear Swiss neutrality could be used to cloak deals with sanctioned entities, as it was when Apartheid-era South Africa was subject to trade sanctions.
But much has changed since the 1980s. The challenge facing Switzerland, and the commodities traders based there, is how to adjust the changes a more open, regulated global marketplace is demanding.