Banking secrecy faces an uncertain future

RDB Archiv

Switzerland's tradition of banking secrecy has come under renewed pressure as the United States takes on the country's largest financial institution.

While it has long been the subject of international criticism, banking secrecy – or client confidentiality, as the Swiss call it – has been redefined on a number of occasions.

The idea is anchored in legislation passed in 1934 after the global turbulences caused by Wall Street’s 1929 crash. The question now is whether Switzerland’s laws will be able to stand the test of the challenges mounted against it this year in the United States.

The subject is on everyone’s lips after the Swiss Financial Market Supervisory Authority (Finma) and UBS – under pressure from US authorities – handed over details of up to 300 clients who are said to have evaded US taxes.

History appears to be repeating itself. In the crisis before the Second World War, European countries were anxious to limit the flight of capital abroad.

In 1932, French police for example seized lists of thousands of clients at the Basler Handelsbank offices in Paris in what became known as the “Paris affair”.

Tradition of discretion

The violation of the practice of discretion, which had been cultivated for centuries by Swiss bankers, was one element that prompted authorities to enshrine the principle of secrecy in law.

The Swiss Banking Law still protects confidentiality, which has contributed both positively and negatively to Switzerland’s image abroad.

Banking secrecy guarantees clients of Swiss banks that their information will be kept confidential and will not be passed on to private individuals or official bodies.

Bankers believe their professional obligation is similar to the confidentiality provided by lawyers, doctors and the clergy. If banking secrecy is violated, offenders can be liable to a fine or even imprisonment.

But over the years, international pressure has somewhat limited, redefined and weakened the fiduciary principle.

Investigations by Switzerland’s banking watchdog and by criminal authorities can override it. The law can also be lifted on the order of a judicial authority, even against the client’s will.

Evasion or fraud

Up to now, Switzerland has succeeded in safeguarding the distinction it created between tax evasion, a civil offence, and tax fraud, a criminal one. The principle of secrecy stands in civil cases but is waived in instances in which authorities suspect a crime has occurred.

It is because of this distinction that Bern only grants administrative and judicial aid to other countries in fraud cases.

However, the case involving UBS could chip away at that distinction. The European Union and the US have been demanding its abolition for years.

Regularly criticised by Washington for all kinds of evils – as in the case of dormant accounts from the 1990s or after the terrorist attacks in the US of September, 2001 – banking secrecy is also a target of Brussels, which feels it goes against harmonising taxes among EU member states.

The last serious case dates back to 2002, when the EU wanted to impose an automatic exchange of information among national tax authorities.

Accord with EU

Switzerland, which is not an EU member, managed to preserve its banking secrecy by signing a 2004 bilateral accord on the taxation of savings, which introduced a withholding tax on the savings income of EU residents with Swiss bank accounts.

There is no doubt that the issue of taxation will be high in forthcoming talks between Bern and Brussels and a number of politicians have already made their positions clear. The outlook is not very favourable for Switzerland.

At the end of a meeting on fighting tax havens last autumn, German Finance Minister Peer Steinbrück had wanted Switzerland’s name to be added to a blacklist of the Organisation for Economic Cooperation and Development.

For the time being, only Liechtenstein, Andorra and Monacco are judged to be “non-cooperative” but the list is to be revised by the middle of 2009.

From an economic standpoint, the stakes are high for a number of reasons.

Escaping the taxman

Germany’s central bank, for example, claims that the equivalent of SFr745 billion escapes its tax authorities every year and estimates that 28 per cent is managed in Switzerland.

A US Senate committee recently estimated that the equivalent of SFr100 billion, held in Switzerland, Liechtenstein, the Bahamas and the Cayman Islands, escaped its taxation authorities.

About a third of global foreign savings is said to be in the hands of Swiss banks. Britain and its territories share around 24 per cent of the very lucrative and coveted wealth-management business, and the US and its territories manage around 19 per cent.

The renewed attacks on Swiss banking secrecy can also be seen in the context of the battle among global financial centres.

Today, there is no estimate on the possible consequences for Switzerland as the distinction between tax evasion and tax fraud weakens, let alone the abolition of banking secrecy.

With a financial sector that generates 11.5 per cent of gross domestic product (GDP), such scenarios may help understand why Switzerland is leaving its banking secrecy to a fate of perpetual redefinition.

swissinfo, based on an article in French by Carole Wälti

Fines

On February 18, UBS agreed to pay $780 million (SFr915.8 million) and name up to 300 United States clients to resolve criminal fraud charges against it.

First reactions in Switzerland were negative, with accusations that the country had bowed to pressure at a time when legal proceedings were still taking place and banking secrecy was under pressure.

Swiss Finance Minister Hans-Rudolf Merz told a news conference in Bern that banking secrecy was “intact”.

The European Union said it hoped that its members would receive the same treatment from the Swiss as the US authorities had received.

A day later, the US Justice Department demanded that UBS reveal the names of 52,000 clients with assets put at $14.8 billion.

On February 24, lawyers acting on behalf of eight US clients of UBS accused UBS and Finma of flouting banking secrecy legislation.

Banking secrecy

It’s strongly associated with the image of Switzerland. In literature or on the big screen, it’s never far away; think of James Bond, for example.

But banking secrecy is far from being a simply Swiss phenomenon.
The European Commission is also targeting Belgium, Luxembourg and Austria.

The Organisation for Economic Co-operation and Development also considers that Andorra and Monaco are non-cooperative tax havens, whereas Liechtenstein has cooperated with the EU since last year.

Britain and the US: Banking secrecy is limited but the two countries do have territories where it is less restrictive – for example Jersey, the Isle of Man, the Bahamas and the Cayman Islands.

Singapore has drafted plans in the general direction of the OECD. But when it comes to Hong Kong, China is deaf to EU demands for more transparency.