Banking in Switzerland

Swiss banking secrecy was born in Geneva during the 1700s.

Bank secrecy in the Swiss region can be traced[2] to the Great Council of Geneva which outlawed the disclosure of information about the European upper class in 1713.[2] As a way of avoiding the Protestant banking system, Catholic French Kings deposited their holdings in Geneva accounts.[2] During the 1780s, Swiss bank accounts began insuring deposits which contributed to their reputation for financial security.[2] In 1815, the Congress of Vienna formally established Switzerland's international neutrality which led to a large capital influx.[2] The wealthy, landlocked Switzerland saw banking secrecy as a way to build an empire similar to that of France, Spain, and the United Kingdom.[2] Swiss historian Sébastian Guex notes in The Origins of Secret Swiss Bank Accounts:

This is what the Swiss bourgeoisie are thinking: 'That's our future. We will play on the contradictions between the European powers and, protected by the shield of our neutrality, our arm will be industry and finance.'[3]

After a small scale civil war in the 1840s between the Swiss cantons, the Swiss Federation was founded in 1848.[2] The formation of the state, through a direct democracy, contributed to the political stability needed for banking secrecy.[2] The mountainous terrain of Switzerland provided a natural environment to excavate underground vaults for storage of gold and diamonds.[2] During the 1910s, Swiss bankers traveled to France to advertise its banking secrecy during World War I.[2] The war's contribution to political and economic instability, sparked a rapid capital movement into Switzerland.[2] As European countries began to increase taxes to finance the war, wealthy clients moved their holdings into Swiss accounts to avoid taxation.[2] The French banked in Geneva, the Italians in Lugano, and the Germans in Zurich.[2] While disclosing client information was a civil offence in Switzerland for centuries, the Swiss Federal Assembly made it a federal criminal offence in 1934 with the passage of the landmark legislation, the Federal Act on Banks and Savings Banks.[2] Colloquially known as the Banking Law of 1934 or the Swiss Banking Law of 1934, it codified banking secrecy.[4] The Federal Assembly enacted the law to quell controversy over the alleged tax evasion of wealthy French businessmen, military generals, and Catholic bishops.[5] An additional provision, Article 47(b), was drafted before its ratification to protect Jewish assets from the Nazi party.[4][6]

Switzerland's mountainous terrain helps to store gold in underground bunkers.

Along with protecting German Jewish assets, Swiss banks collaborated with Nazi Germany and their allies by storing their gold and cash balances in underground vaults.[4] Adolf Hitler maintained an account at the Union Bank of Switzerland (UBS) estimated at 1.1 billion Reichsmarks.[4][7] After the United States formally asked the bank to transfer the money in the 1990s, UBS wired US$400 to 700 million worth of Reichsmarks to U.S. authorities.[4] Banking regulations in Switzerland limit the amount of orphaned assets allowed to leave a bank's custody.[4] UBS, with consent from the Swiss government, froze the account containing Hitler's assets indefinitely, and clipped the Reichsmarks, stripping the currency of value.[7] During World War II, UBS also maintained accounts for hundreds of German Jewish businesspeople and households.[6] After the Banking Law of 1934 was passed, the bank aggressively protected assets of the "enemies of Nazi Germany".[6] When Hitler announced an (aborted) invasion of Switzerland in 1940, UBS contracted the Swiss Armed Forces to blockade their retail banks and transport Jewish assets to underground military bunkers.[8] The Swiss Bank Corporation (SBC) and Credit Suisse, did likewise but along with UBS, they were later fined hundreds of millions of dollars in reparations for their dealings with Nazi Germany.[4] Throughout the 1980s and 1990s, numerous international proposals for bank secrecy rollbacks were made by foreign states with little success.[4]

International pressure to roll back banking secrecy is seen as an attack on Swiss culture and values. The Swiss parliament expressed an interest in adopting banking secrecy into their constitution in 2017.

After the 2008 financial crisis, Switzerland signed the European Union Savings Directive (EUSD) which obliges Swiss banks to report to 43 European countries non-identifying annual tax statistics.[9] On December 3, 2008, the Federal Assembly increased the prison sentence for violations of banking secrecy from a maximum of six months to five years.[10] In late 2008, after an international, multi-state investigation into Switzerland's role in U.S. tax evasion, UBS entered into a limited, deferred prosecution agreement (DPA) with the U.S. Department of Justice.[11] The agreement initiated the landmark Birkenfeld Disclosure of information on more than 4,000 clients.[11]

In another step toward loosening banking secrecy, Switzerland signed the U.S. Foreign Account Tax Compliance Act (FATCA), after rejecting it twice in parliament.[11] The FATCA requires Swiss banks to disclose non-identifying U.S. client information annually to the Internal Revenue Service.[11] The agreement does not guarantee the semi-automatic information transfers, which remain at the discretion of Swiss government authorities.[13] If a client does not consent to having their information shared with the IRS, Swiss law prohibits the disclosure.[13] If a client does consent, Swiss banks send the IRS tax-related information about the account holder but are prohibited from disclosing identities pursuant to Article 47 of the Banking Law of 1934.[13] The 2018 Financial Secrecy Index stated: "this [does] not mean that Swiss banking secrecy was finished, as some excitable news reports suggest… the breach was a partial [dent]".[14]

In March 2015, the Swiss government entered into bilateral "Rubik Agreements" with Germany, Austria, and the United Kingdom allowing foreign holders of Swiss bank accounts to retain their anonymity in exchange for paying predetermined back taxes.[15] Switzerland adopted the International Convention on the Automatic Exchange of Banking Information (AEOI) in 2017, agreeing to automatically release limited financial information to certain countries for the sole purpose of tax auditing.[16] This agreement includes the Common Reporting Standard (CRS) which obliges Swiss banks to automatically send foreign tax authorities the client's name, address, domicile, tax number, date of birth, account number, account balance at years end, and the gross investment income.[17] The CRS does not, however, override the Swiss Banking Law of 1934, so the client's expenses (withdrawals) and investments are not disclosed.[14] Thus tax authorities cannot "go fishing" for tax evaders, they must directly link a financial crime to the client's account.[14] The disclosed information can only be used for tax auditing and Swiss authorities may prevent disclosure.[18]

In December 2017, the Swiss parliament launched a standing initiative and expressed an interest in formally embedding banking secrecy within the Swiss Constitution making it a federally-protected constitutional right.[19][20] In January, 2018, a U.S. district court ruled that Swiss bankers "[have] nothing to do with the choice that an American taxpayer makes to not declare offshore assets", later clarifying they should not be seen as facilitating tax evasion but rather provide a legal service that is made illegal by the client.[21] The Swiss Justice Ministry announced in March 2018 that disclosure of client information in a pending court case involving a Swiss bank is subject to federal espionage and extortion charges in addition to charges relating to banking secrecy laws.[22]

Switzerland, considered the "grandfather of bank secrecy", has been one of the largest offshore financial centers and tax havens in the world since the mid-20th century.[24] Despite an international push to meaningfully roll back banking secrecy laws in the country, Swiss political forces have minimized and reverted much of the proposed roll backs.[24] Disclosing client information has been considered a serious social and criminal offense since the early 1900s.[24] Whistleblowers, despite legal protections, often face professional set backs in Switzerland.[24][25] Swiss bankers who maintain offices exclusively in Switzerland are shielded from a foreign state's lawsuits, extradition requests, and criminal charges, as long as they remain within the country's legal jurisdiction.[21] In spite of minor adjustments to bank secrecy, bankers working in Switzerland and abroad at Swiss banks "have long adhered to an unwritten code similar to that observed by doctors or priests".[1] Switzerland's main lingual hubs, Geneva (for French), Lugano (for Italian), and Zürich (for German) service the different geographical markets.[24] It consistently ranks in the top three states on the Financial Secrecy Index and was named first many times, most recently in 2018.[24] The Swiss Bankers Association estimated in 2018 that Swiss banks held US$6.5 trillion in assets or 25% of all global cross-border assets.[24] These secrecy laws have linked the Swiss banking system with individuals and institutions seeking to illegally evade taxes, hide assets, or generally commit financial crime.[26]

Secrecy laws have been violated by four people since 1934: Christoph Meili (1997), Bradley Birkenfeld (2007), Rudolf Elmer (2011), and Hervé Falciani (2014).[1] In all four cases, the whistleblowers were served with federal arrest warrants, fined, and sustained professional setbacks in Switzerland.[27]

A handful of larger Swiss banks operate undisclosed or otherwise secretive bank vaults, storage facilities or underground bunkers for gold bars, diamonds, or other valuable physical assets.[8][28] Most of these underground bunkers are located near or at the foothills of the mountainous regions of the Swiss Alps.[29] These facilities are not subject to the same banking regulations as banks in Switzerland and do not have to report holdings to regulatory agencies.[29][30] The Swiss defense department estimates that of the ten former military bunkers available for sale, six of them were sold to Swiss banks to house assets during the 1980s and 1990s.[8][31] Storage in these underground bunkers and bank vaults is typically reserved for clients that pass a multi-stage security clearance.[29] Some of these bunkers are not accessible by road or foot and require aircraft transportation.[8]

Many banks in Switzerland offer clients numbered bank accounts, accounts where the identity of the holder is replaced with a multi-digit number known only to the client and select private bankers.[32][33] Although these accounts do add another layer of banking secrecy, they are not completely anonymous as the name of the client is still recorded by the bank and subject to limited, warranted disclosure.[32] Some Swiss banks supplement the number with a code name such as "Cardinal",[21] "Octopussy"[34] or "Cello"[34] that identifies the client, alternatively.[35] However, to open this type of account in Switzerland, clients must pass a multi-stage clearance procedure and prove to the bank the lawful origins of their assets.[36]

UBS Group AG came into existence in June 1998, when Union Bank of Switzerland, founded in 1862, and Swiss Bank Corporation, founded in 1872, merged.[66] Headquartered in Zurich and Basel, it is Switzerland's largest bank.[66] It maintains seven main offices around the world (four in the United States and one each in London, Tokyo, and Hong Kong) and branches on five continents.[66] UBS has been at the center of various tax evasion investigations since its founding.

Credit Suisse Group is the second-largest Swiss bank.[67] Based in Zurich and founded in 1856, Credit Suisse offers private banking, investment banking and asset management services.[67] It acquired the First Boston Corporation in 1988 and merged with the Winterthur insurance company in 1997; the latter was sold to AXA in 2006.[68] The asset management services were sold to Aberdeen Asset Management during the 2008 financial crisis.[67] Credit Suisse has been at the center of various tax evasion investigations or money laundering activities since its founding.[69]

The central bank of Switzerland, the Swiss National Bank (SNB) is headquartered in Bern.

The Swiss National Bank (SNB) serves as the country's central bank. Founded by the Federal Act on the Swiss National Bank (16 January 1906), it began conducting business on 20 June 1907. Its shares are publicly traded, and are held by the cantons, cantonal banks, and individual investors; the federal government does not hold any shares.[70] Although a central bank often has regulatory authority over the country's banking system, the SNB does not; regulation is solely the role of the Federal Banking Commission.[71]

Raiffeisen Banks "assumes the role of central bank" in providing treasury services, and is the third largest group consisting of 328 banks in 2011, 390 in 2012 with 1,155 branches.[72][73] During February 2012, P. Vincenz was chief executive.[74] During January, an announcement was made that the non-U.S. businesses of Wegelin & Co, the oldest Swiss bank, would be bought by the Raiffeisen group. The group has 3 million plus clients within Switzerland.[75][76]

The term private bank refers to a bank that offers private banking services and in its legal form is a partnership.[77] The first private banks were created in St. Gallen in the mid-18th century and in Geneva in the late 18th century as partnerships, and some are still in the hands of the original families such as Hottinger and Mirabaud.[77] In Switzerland, such private banks are called private bankers (a protected term) to distinguish them from the other private banks which are typically shared corporations.[77] Historically in Switzerland a minimum of CHF1 million was required to open an account, however, over the last years many private banks have lowered their entry hurdles to CHF250,000 for private investors.[77]

There are, as of 2006, 24 cantonal banks; these banks are state-guaranteed semi-governmental organizations controlled by one of Switzerland's 26 cantons that engage in all banking businesses.[78] The largest cantonal bank, the Zurich Cantonal Bank, had a 2005 net income of CHF810 million.[79]