Commodity sector hails light touch approach

The Swiss commodities trading company Glencore trades in metals, minerals, agricultural products and raw materials for energy production Keystone

Haunted by the spectre of tax hikes and worsening publicity, the Swiss commodities industry has been thrown a lifeline by the country’s refusal to force greater transparency on the sector.

But the regulatory respite has been thrown into the shade by continued foreign attacks on banking secrecy and cantonal tax perks. The cosy Swiss conditions enjoyed by traders may be coming to an end, with rival countries queuing up to poach disgruntled firms.  

Traders have heaped praise on last month’s recommendations of a government white paper on the commodities industry, calling them “well considered”, “appropriate” and “balanced”.

Especially welcoming was Switzerland’s refusal to emulate the hardline regulatory crackdown of Washington and Brussels that demands companies to reveal financial transactions to other governments.

The rising clout of the industry was one reason Switzerland’s white paper was so highly anticipated. The sector’s astronomic recent growth (the profit of the world’s top 20 traders soared from $2.1 billion in 2001 to a peak of $33.5 billion in 2008, according to an estimate by the Financial Times) has attracted both wealth and lurid tales of exploitation, corruption and environmental damage.

But Martin Fasser, chairman of the Zug Commodity Association, said the Swiss decision not to require financial information was neither here nor there. Fasser argues that international traders are already obliged to open up their books to the authorities as the US Dodd-Frank legislation already demands and the proposed EU transparency directives threaten.

“New transparency requirements are not generally being viewed as a game changer in the grand scheme of things,” he told swissinfo.ch. “The financial information is already available so it would be no big deal to disclose payments in the notes of financial statements.”

“I have not heard of any company that would consider moving to Switzerland to escape Dodd-Frank or EU legislation, or of any that would move out of Switzerland if the Swiss government would change its approach and implement transparency regulations here,” he added.

Conspiracy theories

But for Emmanuel Fragnière, who runs a commodities degree course at Geneva’s HEG of Business Administration, financial secrecy is the lifeblood of the industry, oiling the complex transactions that move raw materials around the world.

Setting the right price for a trade is a delicate balancing act that can mean the difference between profit and loss. Such data is crucial to maintain competitive advantage over rivals and is fiercely protected.

Fragnière believes the US and European demands for greater transparency from commodities companies are linked to an ongoing global “attack” on the Swiss financial sector.

Regulations should be enhanced to stave off “pirate” operators that seek to exploit rather than practise fair trade, he said. But he objected to the dogmatic approach of the US and the EU.

“Switzerland is a playground for international commodities dealers, but it has been operating in a ‘wild west’ environment,” he told swissinfo.ch. “Even a sector built on secrecy needs rules, but these need to be applied in a much more practical manner than by dictating new constraints.”

Singapore threat

Samir Zreikat, who runs commodities consultancy firm Dealigents, also believes that the transparency crackdown is an extension of the attack on Swiss banking secrecy. He fears that Switzerland’s stock of top-in-class lawyers, accountants and financial specialists could follow assets being transferred out of Switzerland by overseas clients.

“As wealthy people move their assets from Swiss banks to other jurisdictions I have no doubt that some service companies will follow them, reducing the attractiveness of Switzerland as well as the general level of expertise,” he told swissinfo.ch.

Singapore is one such location that stands to benefit. The island state has already built up an impressive commodities sector – partly attracted by its vicinity to China, but also by its low tax regime.

Some 280 companies benefit from the relaxed Singaporean regulatory environment, directly employing some 12,000 workers (slightly more than the Swiss market), according to official sources.

Switzerland vs Singapore

Swiss towns such as Winterthur, Lucerne and Lausanne have a long tradition of trading in commodities such as cotton or coffee, stretching back to the 19th Century.

After the two world wars, Switzerland became a favourite venue for many international companies that wanted a neutral base from which to trade raw materials – often in politically sensitive regions.

There are now an estimated 10,000 workers in the sector, generating some 3.5% of Switzerland’s economic output.

Singapore entered the market relatively late by comparison, launching its “global traders programme” to attract big players in 2001.

But the industry has seen meteoric growth, employing some 12,000 professionals in 280 companies. The top traders generated some $1 trillion in revenues in 2011.

No mass exodus

Singapore-based entities face an effective tax rate as low as five per cent compared to some ten per cent in Switzerland. EU pressure on Switzerland’s cantonal tax regime for international companies could force the Swiss rate up to around 13 per cent in the near future.

Last year, international commodities trader Trafigura sent shock waves through the Swiss sector when it relocated its main trading booking centre to Singapore. But the company insisted this was for geostrategic reasons rather than tax.

Fasser is still concerned by the threat of Singapore, but he believes changing tax rates are more likely to affect future growth of the sector than spell an exodus from Switzerland.

“The commodities industry has become less welcome in Switzerland than in the past and tax regimes in some other jurisdictions have become more competitive,” he said. “For outside firms thinking of expansion, there are fewer reasons to come to Switzerland than 15 years ago.”

Gennady Timchenko, co-founder of the oil trading giant Gunvor, has also warned Switzerland not to give up too much ground to EU tax demands. Timchenko currently lives in Geneva, which is also home to many of the company’s traders.

“If I was not here, the company would probably also not be here,” he told the Neue Zürcher Zeitung newspaper. “We feel at home in Geneva, but if the government radically changes the framework conditions we would have to recalculate.”

“We could move to Singapore at any time, we already have an office there. Singapore is also a safe and stable location. The climate is perhaps a little different, but we could get used to that.”

Regulatory environment

The US Dodd-Frank Act of 2010 contains a mass of regulation for several sectors in the financial sector.

Section 1504 requires any US-listed commodity extractor (such as mining firms) to disclose payments above $100,000 made to foreign governments that relate to their commercial projects in these countries.

Such transaction could include taxes, bonuses, royalties and licensing fees.

Dodd-Frank also beefs up rules on derivative trading, an instrument widely used by commodities traders.

The European Union is poised to issue a similar transparency directive after finalising the wording of the new law earlier this month.

The new law, that is expected to come into force later this year, will force companies to reveal payments to foreign governments of more than €100,000, also includes logging companies – unlike Dodd-Frank.

Future changes

The government is due to issue a report by the end of 2014 on Switzerland’s efforts to draft a national strategy to implement the so-called “Ruggie Rules” – UN principles to strengthen the human rights performance of businesses around the world.

“A strategy to implement the Ruggie guidelines will act as a catalyst and enable a more coherent government approach as each department will have to explain their strategy on specific issues,” said Urs Rybi of the non-governmental organisation, Berne Declaration.

Parliament has also commissioned a comparative law study on human rights due diligence to see whether further legislation is necessary. This decision was taken in response to the handing in of a petition to the federal authorities in 2012 demanding clear legal rules to force Swiss-based firms to observe human rights and environmental standards worldwide.

A number of parliamentarians are also pushing for further action on commodities. Alec von Graffenried, a member of the Corporate Justice network and a Green Party parliamentarian, has called for a joint strategy on commodities trading, together with colleagues from across the political spectrum. He plans to file a motion on commodities transparency and financial flows.