Italy cracks down on tax shelters, bankers rejoice

Amid the deep lakes and green mountains of Italy`s northern border, police armed with infrared cameras and computers are beefing up their crackdown on cash flowing illegally into Switzerland.

At frontier crossings, where trillions of lire once poured out of Italy, tech-savvy anti-fraud officers are waging the hard end of the government`s campaign to woo back home under a tax amnesty as much as €50 billion held abroad.

The dragnet, launched in February, has so far pulled in a paltry five entrepreneurs carrying wads of undeclared cash including the director of a Milan-based company weighed down with €155,000 in banknotes.

Officials say the low arrest rate shows their highly visibly crackdown is scaring would-be tax cheats straight.

"There`s also a deterrent effect from the presence of the new cameras," said Captain Antonello Reni, head of the tax police in Como which melds into Chiasso in Switzerland, apart from the customs checkpoints that split the two towns.

"Since we increased the controls we`ve actually seen the illegal currency pulled in diminish from last year," he said.

Nearby, at one of the downtown checkpoints, Reni`s men stop and search the car of an elderly couple who drew attention to themselves by driving a sports car and wearing expensive-looking Swiss watches.

The top-to-bottom search of the car and its occupants turns up €20,000 in cash, just within the legal limit of €10,329 each person can take over the border undeclared.

Prime Minister Silvio Berlusconi hopes the threat of tighter border controls, paired with a limited-time tax amnesty, will convince wealthy Italians to bring back about €50 billion of an estimated €550 billion secreted away abroad, equivalent roughly to about half Italy`s annual economic output.

Switzerland alone is estimated to shelter about €270 billion of Italy`s undeclared foreign savings.

By the end of February, €14 billion had come home under the amnesty. Berlusconi hopes the money will be used more productively in Italy, whether invested in local property, businesses or the country`s asset management industry which is hungry for new funds amid an extended bear market.

The funds will also generate tax revenues for a government struggling to meet its deficit reduction targets.

The tax amnesty idea could spread. Germany is reported to be considering a similar move after elections in September and some Swiss bankers are worried that France and others might follow Italy`s lead.

Fifty kilometres to the south of Como, private bankers in Milan are rejoicing over the amnesty, the idea of Finance Minister Giulio Tremonti.

"It`s very important for us," said Stefano Malferrari, chief executive of Monte Paschi di Siena`s Banca Steinhauslin private bank in Milan.

He said the bank was opening two offices as part of a broader expansion, given the abundance of funds heading back into Italy: "This represents a break with the past."

For Steinhauslin and other expanding private banks such as Esperia, a joint venture of venerable investment bank Mediobanca and middle-class asset gatherer Mediolanum, the amnesty is a chance to show customers they can match the sophistication and confidentiality of their Swiss rivals.

Steinhauslin lured €250 million from returning funds through April 24, or 15 per cent of its €1.65 billion in assets under management. That total may increase further as the May 15 deadline draws closer to take up the government`s offer of a reduced fine of 2.5 per cent on repatriated funds.

Esperia has had €260 million in inflows so far, 14 percent of its €1.8 billion of assets.

Bigger banks will also benefit, though to a lesser extent. Top three banks IntesaBci, Sanpaolo IMI - particularly its fund management unit Banca Fideuram - and UniCredito, will probably see value accretion of three to five per cent, according CS First Boston forecasts.

Bear Stearns analysts were more conservative, forecasting gains of just 1.3 per cent for the three big banks likely to benefit most: Intesa, Sanpaolo and Monte Paschi.

"It shouldn`t be that material," said Holger Klotz, an analyst at Fox-Pitt, Kelton in London, noting most of the funds held in Switzerland and other shelters were likely to stay put.

The spectre of communism, high inflation or currency devaluation in the decades before Italy joined the euro zone prompted some savers to hide legitimately earned money, and they might take up the government on its offer, he said.

But others used the accounts to squirrel away loot from illegal dealings and the amnesty would still leave them exposed.

"It`s important, but it`s relative," said Giuseppe Di Sisto, the head of private banking at UniCredito. "It`s not like it will allow us to double our market share."

UniCredito expects to capture nine to 10 per cent of the total funds returning to Italy, or about five billion euros, if projections of a repatriation of 50 billion come true.

Some Italy banks including Banca Profilo are even offering to pay the 2.5 per cent repatriation penalty to lure tax amnesty money, though usually on the condition that the client commits to keeping funds at the bank for a given period.

Competition for the funds is tough, most of all from Swiss banks who see one of their main sources of livelihood at risk.

"The Swiss are our strongest competitors," Malferrari said, especially such large banks as Credit Suisse and UBS which have ample branch operations in Italy and have been encouraging clients to bring their deposits out of the black economy through the institution that has traditionally managed their wealth.

Italians can bring themselves into compliance by declaring assets without physically moving them back into the country, again favouring the status quo the Swiss banks represent.

Some Swiss bankers say the Italians` high-tech border controls, rather than persuading secret savers to leave their tax shelters, will instead make them worry about a more invasive government approach that could threaten their confidentiality.

"(Our Italian clients) were thinking "Is this Big Brother?," said Giorgio Ghiringhelli, president of the bankers` association in Ticino, the Swiss province directly across the border. "That was a big help to the Swiss banks from the Italian government. We couldn`t have done it better ourselves."