Closer EU ties threaten banking secrecy

Switzerland is under heavy pressure to relax its banking secrecy laws as part of its efforts to forge closer ties with the European Union.

This content was published on April 27, 2002 - 10:15

For seven decades, banking secrecy has been enshrined in Swiss law and has helped to make the country the world's largest "offshore" banking centre.

But Switzerland is facing heavy pressure to weaken "bank customer confidentiality" - to give it its official name - as part of a new bilateral agreement with the EU on combating cross-border crime.

Brussels wants to clamp down on tax evasion and is seeking access to information about EU citizens' savings in Swiss banks so it can tax them accordingly. The Swiss are fiercely resisting the pressure - the government's official position is that banking secrecy is "not negotiable".

Swiss banks hold over $1 trillion in non-resident assets, and the government fears that many of those customers might move their money if third parties - such as their own tax authorities - were able to access information about their accounts.

"In today's world bank clients want to protect their privacy from the all-too-curious people in authority, who want to know about their banking transactions," Thomas Sutter from the Swiss Bankers' Association told swissinfo. "If we give up the privacy aspects we feel we would lose customers."

Protected by law

"Bank customer confidentiality" is protected by both Swiss penal and civil law, and any bank employee who reveals the name of an account holder is liable to be prosecuted.

Under current law, banking secrecy can be lifted only in cases where an account holder is suspected of being involved in criminal or terrorist activity, as defined by Swiss law.

And here lies the key stumbling block in negotiations with the EU. Because Switzerland does not recognise tax evasion as a crime it will not assist Brussels by providing information about EU citizens with taxable assets in Switzerland.

In a bid to resolve the impasse, Switzerland has proposed levying a withholding tax on EU citizens' income from savings and sending the money to Brussels. This would give the EU the tax revenues while still protecting the identity of account holders.

"The European Union wants to get back revenues from EU citizens' savings in Switzerland," the economics minister, Pascal Couchepin, told swissinfo in an interview on Thursday. "With our proposition of a withholding tax, we give a clear and positive answer to the interests of the EU so I think this is a good basis for an agreement."

Illicit funds

Switzerland has long suffered a reputation as a haven for ill-gotten gains, but the Swiss Bankers' Association points out that "know your customer" rules prevent money launderers and other criminals from salting away illicit funds.

Under the rules, banks are required to make sure that clients and funds are legitimate, and must report any suspicious transactions to the country's banking watchdog.

"Banks carry out research when they have suspicions [about clients]," explains Thomas Sutter of the Swiss Bankers' Association. "Once the customer opens an account you monitor their transactions. When you find out that one is out of the ordinary you get suspicious and so you get a good feeling for your customer."

These rules apply to all accounts, including the famous "numbered" accounts, according to Sutter.

"If you have a numbered account it's the same procedure as when you have an account in your own name," Sutter told swissinfo. "It's just that fewer people know who the person is behind the account."

Offshore banking

Polls have consistently shown that Swiss public opinion is firmly behind banking secrecy, partly because of the perceived detrimental effect its removal would have on the economy.

Banking accounts for 12 per cent of Switzerland's gross domestic product (GDP) - twice as much as in France, Germany and the United States.

The country is the world's largest "offshore" banking centre, handling a third of the world's cross-border asset management with banks holding over SFr1.7 trillion ($1.04 trillion) in overseas assets.

Banking know-how

Swiss banks vigorously deny that banking secrecy is the only magnet for overseas funds. Sutter is quick to point out that the country has an edge over its competitors because of its banking know-how, its safe environment and quality of service.

However, it seems almost certain that a weakening of banking secrecy would lead to an exodus of funds, although the extent is impossible to gauge.

A recent decision by the Italian government to grant a tax amnesty to citizens who repatriated funds from abroad persuaded Italians to move some €18 billion (SFr26.4 billion) from Switzerland to banks at home - a fraction of the estimated SFr400 billion held by Italians in Switzerland.

The blow was softened slightly by the discovery that much of the money had simply been transferred to Swiss banks with branches in Italy.

by Sally Mules

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