Swiss Reject Tougher Regulation of Commodities Trading

By Catherine Bosley & Maria Kolesnikova 

Switzerland rejected calls for tougher regulation of commodity traders, including Vitol SA,Glencore International Plc (GLEN) (GLEN) and Trafigura Beheer BV, in favor of a voluntary industry code.

“Switzerland generally prefers voluntary standards, which are supported and upheld by businesses, to laws,” Economy Minister Johann Schneider-Ammann told reporters today in the Swiss capital, Bern. “It’s important that we make sure the framework in Switzerland isn’t less attractive than elsewhere.” The Swiss government started an investigation of the commodities industry in May, saying the Alpine nation was “exposed to risks to its reputation” by being an oil, grain and coffee trading hub. The decision to reject stricter rules will increase Switzerland’s appeal as a commodity-trading center as competition intensifies with Singapore, Dubai and London.

“Switzerland is very cautious that it doesn’t do anything that just might tip the balance and damage an industry that is extremely important,” Ben Knowles, a lawyer at Clyde & Co., said in an interview from Singapore. “Switzerland has had a good run in the past 10 to 15 years, but it’s now facing stiffer competition.”

Switzerland will study the impact of introducing transparency requirements similar to those in the U.S. and the European Union before deciding how to proceed, said Schneider- Ammann, after the government published a report on a commodity- trading industry that contributes 3.5 percent of Swiss gross domestic product. While the commodities business shouldn’t be “privileged,” the government won’t pursue “sector-specific regulation,” he said.

Regulations Ineffective

“Given the international nature of the commodity trading and chartering business, regulations adopted unilaterally by Switzerland would be ineffective,” said Stephane Graber, secretary general of the Geneva Trading and Shipping Association, which represents more than 70 companies in the city. Swiss trading companies “have willingly committed themselves to evolving their corporate governance,” he said.

Commodity trading, concentrated in Geneva and Zug, boosted its share of the Swiss economy 10-fold over the past decade, according to Zurich’s KOF research institute. The trading industry accounts for about 20 billion Swiss francs ($21 billion), according to the State Secretariat for Economic Affairs.

Tax Competitiveness

“There is no evidence, at present, of a general trend amongst companies to move away from Switzerland, but much will depend on whether Switzerland succeeds, also in the future, in providing a competitive legal and economic setting for conducting business,” the government said today. “Switzerland thus faces the challenge of maintaining and strengthening the features that make it an attractive and reliable business location, including the competitiveness of its tax regime and the efficiency of its financial centers.”

The pressure to regulate the industry comes as the European Union pushes Switzerland to abandon a so-called auxiliary regime that has attracted commodity traders by allowing them to pay less tax on income from outside the country. That permits traders in Geneva to pay an average tax rate of 12 percent.

While the commodities industry created about 8,000 jobs in Geneva alone, the costs outweigh the benefits because the “dodgy activities” of trading companies could damage Switzerland’s reputation, Carlo Sommaruga, a lawmaker for the Social Democratic party, the second-biggest in the Swiss lower house, said last year.

Corruption Threat

The kind of corruption seen under the United Nations oil- for-food program for Iraq underSaddam Hussein could damage Swiss companies’ chances of winning contracts abroad and diminish the country’s role as a global financial center, according to Sommaruga. A UN found 2,253 companies made illegal payments to Iraq to win oil business, former U.S. Federal Reserve Chairman Paul Volcker, who led the report, said in October 2005.

In May 2006, Trafigura pleaded guilty 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. Vitol, which had revenue of almost $300 billion last year, pleaded guilty to grand larceny in November 2007 and paid $17.5 million restitution for its actions when buying Iraqi oil under the program.

The Swiss government proceeded with the joint investigation of the commodities industry by the finance, economy and foreign ministries even after lawmakers voted 98 to 93 against it 12 months ago.

Human Rights

The review follows Switzerland’s decision in March 2009 to meet international standards to avoid being listed as a tax haven and attempts to settle a U.S. investigation of at least 11 banks that allegedly helped American clients hide money from the Internal Revenue Service. Some Swiss lawmakers are concerned that the lack of commodities industry regulation may hurt a nation struggling to shed its image as a haven for undeclared assets.

“The Federal Council expects of all companies operating in or out of Switzerland to conduct themselves responsibly, and with integrity, in complying with human rights, environmental, and social responsibility standards, both in Switzerland and abroad,” the Swiss government said in the report.

To contact the reporters on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net; Maria Kolesnikova in London at mkolesnikova@bloomberg.net

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