Banks in Andorra are clearly not shy about promoting their private banking activities. When driving into the small principality from Spain, a visitor's first sight is a large advertisement for the private banking services of Banc Internacional d'Andorra - Banca Mora (BIBM), one of the country's five banks. Next is a similar banner for BIBM's rival, Andbanc. And immediately after that, the visitor's attention is attracted by a giant outdoor poster for Banca Privada d'Andorra, publicising its wealth management capabilities.
Private banking, based on a tradition of bank secrecy, has been one of the main reasons behind the remarkable wealth achieved by this country of 75,000 people, which has kept its independence since 1278 despite being sandwiched between two large neighbours, France and Spain. Andorra's financial sector accounts for about 16% of the country's gross domestic product, and assets held by its five banks amount to 500% of the country's total wealth, according to ratings agency Standard & Poor's.
Like other tax havens, however, Andorra has had to adapt to a new world where there is decreasing tolerance of opaqueness in the financial sector and governments are showing an insatiable appetite for tax revenues. Under pressure from the EU and entities such as the Organisation for Economic Co-operation and Development (OECD), Andorra has had to sign agreements that allow the exchange of information with other countries. Seventeen such agreements have been already signed, which has had the salutary consequence of taking Andorra's name out of the OECD's grey list of tax havens. More importantly, Spain, France and Portugal, the countries from where most of the clients of Andorran banks allegedly originate, have each negotiated understandings to exchange banking information with Andorra.
Such changes could well herald problems for a banking sector that relies heavily on offering the levels of bank secrecy and discretion that are the hallmarks of the private banking industry. Some analysts argue that the disclosure commitments assumed by Andorra will cause the country to lose much of its attraction for offshore banking clients. Andorra does not offer the possibility of setting up trusts and foundations, vehicles that are so appreciated by the practitioners of creative tax strategies. Only residents in Andorra, an extremely limited customer base, would still benefit from keeping their money there under the new arrangements, the argument goes.
Andorran banks disagree. "We don't think the information exchange agreements will change the current situation much," says Joan Quera, the chairman of the Andorran Banking Association (ABA) and CEO of BIBM. "The agreements only provide for the exchange of information on clients under specific circumstances. They don't allow fishing expeditions." In the case of the agreement with Spain, for instance, information about a particular account holder will only be disclosed if he or she is under investigation by the Spanish treasury.
Reform may be toothless
The view that little if anything is likely to change under the information-exchange agreements is shared to an extent by some other observers, including tax-justice activists, who complain that information agreements modelled on OECD guidelines allow so many exclusions that they are likely to prove toothless.
"If Andorra really wanted to put an end to its current singular [tax] situation, it would have to request admission to the EU," says Juan Hernandez Vigueras, a tax havens expert at the non-governmental organisation ATTAC España, which promotes 'global justice'. "But former political leaders have said that it will never happen."
Anyway, says Mr Hernandez Vigueras, financial advisors can often find creative strategies to circumvent restrictions. "The IMF [International Monetary Fund] itself has noted that, after Andorra began adhering to the 2003 EU Savings Directive, much wealth was simply transferred from Andorran bank accounts to investments and insurance products," he says. The savings directive's final goal, according to experts, is to enable a more fluid flux of information among members.
But Mr Quera argues that, even before the information-exchange agreements were signed, Andorra already had instruments in place that enabled the prosecution of account holders in cases of money laundering. To strengthen their claims that it is business as usual in the principality, Andorran banks have denied that they have registered major movements of assets outside their clients' accounts as a result of the increased focus on transparency.
The Spanish media has reported that the number of people intercepted by the customs police leaving Andorra with large sums of money in their wallets has been on the rise, but the Andorran government has attributed such cases to the liquidity needs of a few clients, rather than a consistent flight from private banking accounts. But banks are nonetheless striving to diversify their activities, although they are keeping the focus on private banking, which amounts to about 60% of their business, according to the ABA.
One major change that could benefit Andorra's banks would be an increased ability to operate abroad. This could come about due to the recent spate of agreements and to tax and regulatory changes being introduced by the country's government. Andorra's parliament has approved laws that create a more internationally recognisable set of regulations for its financial sector. One of them regulates the supervision of banks and other financial firms, a demand made by other countries since Andorra does not have its own currency or central bank. The law is intended to pump up the supervisory capabilities of the Institut Nacional Andorrà de Finances, the official regulator.
Another new law paves the way for Andorran banks to be 100% owned by foreign entities. Today, foreigners can own at most 51% of the capital, and only one Andorran bank, Banc Sabadell Andorra, is controlled by a bank based outside the country (Spain's Banc Sabadell). This new law, which is expected to come into force by the end of the year, should make viable the signature of reciprocity agreements with other countries, opening the way for Andorran banks to make acquisitions abroad. "These are requirements demanded by countries such as Spain and Switzerland to allow Andorran banks to expand there," says Pere López, Andorra's finance minister.
Expanding overseas
Andorran banks are eager to expand abroad. Thanks to years of cautious proprietary investment strategies, Andorran banks have sailed through the financial crisis virtually untroubled and boast enviable financial health. Capital adequacy ratios closed 2009 averaging 22.02%, up from 19.34% the year before. Liquidity ratios reached an average of 75.07%, and debt-to-capital ratios were kept at an average of 62.44%. "Andorran banks have survived the crisis well, thanks to our conservative policies," says Mr Quera. "We have always kept our solvency and liquidity ratios well above global standards, particularly compared with our neighbours."
With money available, Andorran banks are on the look-out for prey. Spain, where the banking sector is facing a hard time, could provide some good options. In fact, Banca Privada d'Andorra has already agreed to purchase Banco Madrid, a private banking outfit that belongs to a group of savings banks, for €100m. Once a reciprocity agreement between Spain and Andorra is in place, which Mr Quera expects to happen by the autumn, this and maybe other takeovers could be finalised.
"Today, there are some things that we cannot do and some markets where we cannot operate because Andorran regulations are not recognised in other countries," says Xavier Cornella, the business deputy general manager at Crèdit Andorrà , Andorra's largest bank by assets. "These changes will enable us to compete on an equal footing with other international banks in a private banking and wealth management market that is increasingly globalised. They will help us to consolidate our ongoing international expansion."
Crèdit Andorrà began to work abroad in 2003, when it set up an asset-management firm in Switzerland, followed by a collective investment scheme in Luxembourg and an asset-management unit and an insurance brokerage in Spain. In recent years, however, the focus has turned to the other side of the Atlantic, as Latin American markets have outperformed their peers in Europe. In 2008, Crèdit Andorrà set up a bank in Panama, and last year it established a broker-dealer in the same country. The bank also has a brand new representation office in Uruguay and a wealth management firm in Mexico, which was opened in June.
The strategy of expanding overseas, although in its early stages, has already borne fruit, according to Mr Cornella. "New business coming from Crèdit Andorrà 's international expansion has enabled us to mitigate the reduction of assets under management from our traditional business," he says. "In three to five years we believe that our international operations will account for a significant share of our revenues." In its international adventures, Crèdit Andorrà is keen to find partners that can provide local expertise about new markets, he adds.
The key to success in expanding abroad, says Mr Cornella, is to take advantage of Crèdit Andorrà 's small size, compared to its main rivals, and to provide personalised attention to the top bracket of the private banking market.
"We don't focus on selling investment products. We aim to provide family office-like services for very high-net-worth clients," he says. "That's the most important difference between us and Swiss private banks, which are our main competitors in Latin America and are mostly focused on the sale of products."
Pere López, Andorra's finance minister
Taxing times
More than a tax haven, Andorra should probably be qualified as a 'taxless' haven, as its economy is particularly known for the absence of direct levies on individuals or companies. Andorrans have never had to pay income or corporate tax, and even indirect taxes, such as import duties, have always been scarce and very low. Until recently, products sold in Andorra attracted no value-added tax (VAT), which made the country an appealing destination for tourists and inveterate shoppers. The strategy was successful: income per capita is estimated at $45,500 by Standard & Poor's.
But, with so few sources of revenues, it is not surprising that, when the global financial crisis became a severe economic downturn in Europe and the flow of tourists from Spain and France became a trickle, Andorran finances were badly hit. Standard & Poor's has recently lowered the rating of the country's short- and long-term debt to A and A-1, respectively, which is not too far from junk status. The agency estimates that the debt of the Andorran government will reach 300% of revenues by 2012. As a result, the government has been forced to act on the tax side. "We are promoting thorough tax reform, which must be seen as a platform for the new Andorran economy," says Mr López.
The measures adopted or proposed so far are not too sweeping by European standards. The government has consolidated indirect taxes into a single VAT levy of 4%, which is less than a quarter of corresponding rates in France and Spain. Bills that aim to impose income and corporation taxes are being considered by parliament but, even if they are finally approved, their 10% rates are much lower than elsewhere in Europe. Even then, Standard & Poor's has expressed concern that further action on taxes could have a negative effect on Andorra's economic prospects.
Magnet for the wealthy
For a long time, Andorra has been a magnet for wealthy European pensioners, especially from France and Spain, tax exiles and tourists. They may have been attracted to some extent by Andorra's wonderful mountain scenery, but the absence of tax has also been a part of the country's draw.
Mr Lopez, however, insists that tax changes are unavoidable. "This is the first step towards enabling Andorra to negotiate double taxation agreements [with other countries], and for Andorran, French, Spanish and international businesspeople to see Andorra as an attracting location," he says. The government hopes to attract businesses in sectors such as education, design, intellectual property and research to the country once its tax framework is recognised by other European countries.
But banks believe they will keep attracting offshore clients thanks to the services they provide to wealthy customers and the strength of Andorra's tradition of bank secrecy. One banker has noted that in Andorra it would be very hard to buy confidential information from disgruntled employees, as the banks are not in the habit of keeping digital databases on clients.
The aggressive stance of some European governments when it comes to fighting alleged tax evaders is a concern, say the banks. But they are confident that the country's status as a private banking centre will survive the current wave of changes in the global financial markets.
