Attacks from European governments, investigations against Swiss banks in the United States and international arrest warrants against bankers - in the space of just a few years, banking secrecy has turned into a costly burden.This content was published on August 30, 2012 - 11:00
"Today I met several bankers in Zurich. They were all shaking their heads saying, ‘In 40 years of operations we’ve never had a crisis like this one – a war like the one being waged against the Swiss banking system. We’re in the artillery sights of every country and every day there are new attacks’,” recounted Paolo Bernasconi, a business law professor at St Gallen University and former Ticino public prosecutor.
"Many bank directors are unable to leave Switzerland because they risk being arrested.”
The storm sweeping through the Swiss banking sector can also have terrible consequences for those not directly involved. In August, the two teenage sons of a Geneva banker who flew to the US on holiday were detained by customs officials on arrival and grilled about their father’s activities.
This is not the first time that banking secrecy has been targeted by other countries, but until a few years ago they were isolated attacks rather than orchestrated campaigns launched by the world’s leading economic powers.
Swiss banks, as well as many tax havens, had always been able to place part of their activities in a grey zone, which is seen by most governments to be black. Eleven Swiss banks are under investigation by US authorities looking into allegations the banks helped Americans evade taxes.
“For 50 years, Swiss banks have lived by the following rule: we strictly uphold Swiss legislation while ignoring foreign legal norms. This has earned us a great deal of money – not just for the banks, but us as well,” Bernasconi said.
“Today we’re paying the price. But it’s not just those who were responsible in the past who are paying for it, but the new generation as well; they are losing their jobs and suffering from the impact of the crisis.”
Not so long ago, bank directors and politicians claimed that banking secrecy was “not negotiable”. But they underestimated the speed with which attitudes were changing in the international fight against tax evasion.
In 2009 when the G20 and the Organisation for Economic Co-operation and Development (OECD) officially took up the battle against banking secrecy, Switzerland was placed on a grey list of countries accused of not cooperating on tax matters.
In the crossfire
To avoid ending up on a blacklist, Switzerland was obliged to urgently adopt a range of OECD standards, including ending the historic distinction between tax fraud and tax evasion, which was unacceptable for other countries.
Under pressure from the US, the Swiss were also forced to hand over data on thousands of clients of Swiss banks to American authorities.
The Swiss government was caught in the middle. While the centre-left parties demanded absolute transparency immediately, for the rightwing Swiss People’s Party, supported by the nationalist Campaign for an Independent and Neutral Switzerland group (ASIN), it was clear that the cabinet had caved in under pressure.
“We have a weak government that capitulated in a humiliating way to the EU and the US, who keep trying to weaken our financial sector and banking secrecy,” said People’s Party parliamentarian and banking expert Hans Kaufmann.
Bernasconi said the rightwing parties’ viewpoint was “suicidal”.
"The People’s Party and ASIN have to realise that Switzerland is small fry compared to the US, the EU, and the OECD. Our country is completely tied to the global trading, banking and payment systems; it can’t afford to end up on a blacklist. Today, no one can avoid the OECD standards,” he warned.
To avoid the automatic exchange of tax information, which would effectively mean the end of banking secrecy, the government is currently pursuing a new path – negotiating bilateral tax treaties, known as Rubik accords, with interested countries.
Bilateral tax agreements have already been signed with Germany, Britain and Austria. Switzerland has agreed to levy a punitive retroactive tax on undeclared capital to regularise the past and apply a withholding tax to future interest income from those accounts.
But right-of-centre Swiss parties have launched a referendum against the three Rubik treaties already signed.
“These agreements are unacceptable. They do not contain any kind of reciprocity. They represent an administrative burden that is too high for the banks and the tax rates are almost confiscatory,” said Kaufmann.
“In two years, once they have pocketed the money, these countries will denounce the agreements and try to impose the automatic exchange of tax information.”
Bernasconi disagrees: "Rubik is not the answer to all our problems but it can solve some of them. The automatic exchange of tax information will definitely arrive one day as the OECD and the US are determined but at least we will have time to get ready and we will receive fewer blows from other countries.”
He said another thing should not be forgotten: “These tax agreements serve as a guaranteed amnesty for Swiss bankers who today can no longer risk leaving Switzerland.”
In the face of such unprecedented attacks, will the Swiss banking industry be able to survive the death of banking secrecy or is there a risk it will lose huge amounts of managed funds?
“The greatest strength of the Swiss banking industry is not banking secrecy, but the country’s stability,” explained Jan-Egbert Sturm, head of KOF, the leading economic institute at Zurich’s Federal Institute of Technology.
“Switzerland is seen as an island of security, both politically, economically and from a monetary perspective. Just think about the strong Swiss franc.”
Sturm said this stability is particularly important during times of crisis such as the current problems in the eurozone: “And despite all these attacks against banking secrecy, massive amounts of funds continue to flow from abroad into Swiss bank accounts.”
RUBIK TAX DEALS
Switzerland negotiated accords with Germany, Britain and Austria on taxing undeclared offshore assets.
They are scheduled to come into effect at the beginning of January 2013.
The three deals, with slightly different terms, were agreed by the respective governments over the last 12 months.
However, the deals are still subject to approval by the parliaments in Britain and Germany. They were agreed by the Swiss parliament in May 2012 but are being contested by a referendum.
They are the first deals of the kind with EU member states. The 27-nation bloc wants to introduce an automatic exchange of banking data, but non-EU member Switzerland wants to maintain its banking secrecy rules.End of insertion
Tax haven Switzerland
Banking secrecy was enshrined in Swiss law in 1934.
France and Germany attacked Switzerland in October 2008 for allegedly helping foreign tax evaders hide their assets.
The country has been under continuous attack over the issue ever since CDs of stolen bank data were sold to various European countries.
The OECD placed Switzerland on a “grey list” of uncooperative tax havens in April 2009. The Swiss were removed in September 2009 after adopting a range of OECD standards, including ending the historic distinction between tax fraud and tax evasion, but have refused to automatically transfer tax information.
The most damaging tax evasion case against Switzerland involved the activities of UBS bank in the US. In February 2009, UBS was fined $780 million after admitting it helped US citizens dodge taxes.
In September 2010, the Swiss government agreed to transfer the details of 4,450 UBS clients to the US – in effect violating Swiss banking secrecy to prevent a ruinous court case for UBS.
Switzerland agreed to ground-breaking withholding tax deals with Germany in August and with Britain in October 2011 that preserve banking secrecy. The European Commission had threatened to take Britain and Germany to court if they implemented the original deals, which were later revised to comply with EC law.
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