الأربعاء, سبتمبر 28th 2022
Swiss banks have become the preferred haven for royalty and the wealthy elite to stash their money thanks to Switzerland’s banking secrecy regulations. Unfortunately, an unintended consequence of these financial secrecy laws is that it has also attracted illegal money from organized crime gangs, human rights violators, Nazis, and fraudsters. What can Switzerland do to mitigate this ‘black’ money, especially in light of the recent Credit Suisse scandal?
The UK’s Prince Andrew’s Swiss chalet is valued at more than CHF 20 million.
The origins of Swiss banking secrecy
Swiss banking secrecy began 300 years ago when French royalty sought more confidential banking choices, which offered strict secrecy and could hold vast amounts of money. To address this need, Swiss bankers created secret codes for offshore accounts during that period. Although Swiss banks initially catered to royalty, these bankers’ codes launched Switzerland’s reputation as a haven for anyone seeking to stash their assets.
Banking legislation dates back this far as well. In 1713, the Great Council of Geneva initiated laws that obliged all bankers to record registers of their clients. But, it forbade them from sharing data outside of the bank. The exception to this requirement was if the City Council agreed upon this need for information. Back then, bankers who released information were not subjected to criminal charges. At that time, only civil law governed banking secrecy. However, that changed with the Banking Act of 1934. (Read more: How Switzerland became a tax haven).
The Swiss Banking Act of 1934
In 1934, French authorities uncovered undeclared accounts of French church leaders, politicians, and judges after raiding a Swiss bank’s office. To prevent such future occurrences, Switzerland passed a law making such disclosures illegal, marking the birth of modern Swiss banking secrecy.
Article 47 of the Federal Act on Banks and Savings Banks of 1934 states that without the bank client’s consent and in the absence of a criminal complaint, sharing client information with third parties and foreign countries — even if it is in the public interest — would be a criminal offense. A breach of confidentiality could garner the banker in question a steep fine and a five-year prison sentence.
Even investigative journalists and whistleblowers can be prosecuted under this law. Article 47 allows customers to set up accounts with minimal questions so long as the banks are satisfied that the funds were not illegally obtained.
The law protects clients’ information from third parties – like how doctors and lawyers are mandated to protect their clients’ data by law. The Swiss franc remained a stable currency thanks to its centuries-old neutrality and the country’s economic and political stability. And unlike other European countries, Switzerland has remained neutral throughout the major European conflicts of the 20th century. As a result, money and investments poured in, making Switzerland an ideal banking haven to secure vast amounts of assets shielded against confiscation and loss.
This had special significance during WW2 when no bank would accept German currency, except for the Swiss. People turned to Swiss banks to protect their fortunes – both the Nazis and the victims of Nazi persecution. Swiss banking laws remained unchanged until the latter part of the 20th century. (Read more: Tracing stolen, Nazi gold through Switzerland).
In the following decades, the country became a magnet for wealthy businessmen, corrupt government officials, and criminal entities worldwide. Nevertheless, Swiss banks have maintained such a high level of security and confidentiality that the banks’ clients feel they are safer than banks in other tax havens. But their impenetrable privacy walls have begun to crack due to growing international pressure for Switzerland to provide greater transparency to end tax evasion, money laundering, and fraud.
البنكان المتنافسان "يو بي إس" و"كريدي سويس" متجاوران في ساحة باراديبلاتز في زيورخ.
The Walls of Secrecy begin to crack
In 2012, the Swiss government agreed to disclose information on 4,450 UBS accounts to the IRS and pay a hefty fine of $780 million for the IRS would drop its demand for data on 52,000 other accounts. But Switzerland withdrew this promise because Swiss courts had declared it unconstitutional.
Credit Suisse and Julius Baer suffered a similar fate. Both banks were forced to pay German authorities – $200 million and $66 million, respectively – to settle an investigation after thieves stole thousands of account details of undeclared holdings. HSBC was also ensnared when data from over 100,000 accounts were stolen and passed onto French investigators.
We now know that Switzerland has banked some of the world’s most notorious dictators and criminals, such as Egypt’s Hosni Mubarak and Ukraine’s Viktor Yanukovych. The latest round of leaks found that Switzerland has been banking a human trafficker from the Philippines, a Hong Kong stock exchange executive in jail for bribery, executives who embezzled from Venezuela’s state oil, and an Egyptian billionaire charged with murdering his pop star girlfriend.
One of Switzerland’s most famous bank accounts? The Vatican.
The global exchange of financial information
In 2014, the economic think tank, the Organization of Economic Co-Operation and Development (OECD), prepared a declaration known as the Convention On Mutual Administrative Assistance on tax matters, signed by more than 50 countries. This global information exchange, whereby countries agree to disclose data about their respective taxpayers’ bank accounts, effectively marked the end of banking secrecy. Switzerland also joined in with the promise to reveal its clients’ financial information.
The automatic exchange of information era
On January 1, 2017, Switzerland joined 38 other countries in adopting the automatic exchange of information (AEOI) system. AEOI is an international standard initiated by the OECD to fight tax evasion, discourage wealthy foreigners from stashing undeclared assets in Switzerland, and ensure that tax law is adhered to worldwide.
Under this system, all banks send client account data to national tax authorities with information on foreign residents. In turn, banks share the information with tax authorities in the client’s home country with the AEOI, which works both ways. The Swiss government plans to increase global cooperation on banking transparency and stated the agreement, “This will contribute to strengthening the competitiveness, credibility, and integrity of Switzerland’s financial center.”
Credit Suisse was founded in 1856 in Zürich.
Credit Suisse Data leaks
However, despite the Swiss government’s efforts toward increased transparency, a Credit Suisse data leak earlier this year revealed over 18,000 accounts with over $100 billion in collective holdings of dirty money, which sparked a debate around the Swiss banking regulations. (Read more: Is Credit Suisse splitting up?).
Media outlets disclosed that the client accounts involved human rights abuse, drug trafficking, money laundering, and businessmen who had been placed under sanctions. Credit Suisse vehemently denied the allegations saying that media reports were based on “partial, inaccurate or selective information taken out of context.”
However, Swiss courts found that Credit Suisse has a policy of turning the other way in managing client relations with criminal organizations and monitoring anti-money laundering laws. These allegations ignited the European People’s Party (EPP) to call on the EU Commission to demand a re-evaluation of Switzerland’s banking practices as a high-risk money laundering country, as well as including the alpine country in the EU’s dirty-money blacklist. The EPP Coordinator on economic affairs, Markus Ferber, stated that the findings of the data leak point to substantial shortcomings of Swiss banks in preventing money laundering.
“When Swiss banks fail to apply international anti-money laundering standards properly, Switzerland itself becomes a high-risk jurisdiction,” he said.
Zug has been referred to as “Little Moscow” because of the high concentration of wealthy Russians living there.
What now? Does banking secrecy still exist?
“Today, Switzerland meets all international standards on the exchange of information in tax matters and on fighting against money laundering, terrorist financing, and corruption. Switzerland has been participating in the international automatic exchange of information (AEOI) on account data since 2017, now with over 100 countries,” according to the State Secretariat for International Finance, in an emailed statement from February 2022.
Swiss banks have indeed taken a stricter stance on anti-money laundering, but it continues to walk a fine line between upholding its tradition of secrecy and mollifying foreign governments. Furthermore, in the last decade, the OECD’s implemented rules regarding the AEOI has aided countries in accessing data required to expose illicit financial flows and tax evasion. Still, the rules are not working effectively in most developing countries.
As a result, these countries pay a hefty price because ill-begotten assets continue to flow out of their countries. And as numerous leaks and scandals over the years have proven otherwise, it is clear that the era of banking secrecy is not over.
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