Swiss banks seen as victims of own tradition

Swiss banking secrecy dates from the 1930s Keystone

More than ten Swiss banks are in serious trouble in the United States for allegedly having helped thousands of clients avoid paying taxes.

This content was published on February 10, 2012 minutes

The banks had thought that they could always count on banking secrecy – a tradition that Switzerland still retains.

Security, quality and trust… and banking secrecy. These are the qualities that have made the Swiss financial centre so successful. But it’s this very banking secrecy that is threatening the future of Swiss banks.

Eleven Swiss banks are under scrutiny by the US authorities for allegedly aiding tax evaders. An investigation launched in January helped bring down Switzerland’s oldest private bank, Wegelin.

A hearing into the Wegelin case opened in New York on Friday, but – as had been widely expected - no-one from the bank or from its legal team showed up. The US side is now considering what its next moves will be, for instance if arrest warrants could be issued against the bank's partners. The bank is now legally considered a fugitive.

Other Swiss banks could face the same problem. “The US considers tax evasion a very serious crime. Don’t forget that [in 1931, gangster] Al Capone was convicted of and served a long sentence in prison for tax evasion and not for any of his other crimes,” said Robert Vogler, a banking historian.

Incomprehensible difference

But why do banks allegedly continue to support tax evasion? “They have in some way been blinded by tradition,” believes economic historian Tobias Straumann,

For a long time the Swiss authorities have only given administrative assistance to other governments in cases of tax fraud but not evasion. It’s a subtle legal difference, incomprehensible for other countries, but one on which banking secrecy has long thrived.

“Swiss banks thought until now that Swiss legislation would be enough to defend their actions and that Switzerland was able to defend its own legislation. They thought that they were invincible, otherwise they would not have continued to violate other countries’ laws,” Straumann said.

Special case

Political leaders also believed this, firmly convinced of the Swiss “special case”– that banking secrecy would not be broken.

“It’s not just the banks which have easily earned a lot of money thanks to banking secrecy, but also the authorities, which have eagerly banked massive tax revenues from the banking sector. Politicians therefore weren’t interested in asking too many questions,” Vogler underlined.

Straumann added: “what is surprising is that politicians, once the attacks became stronger, just threw in the towel and Swiss legislation no longer seemed to offer any refuge”.

“The politicians have had enough of always getting the banks out of a tight spot,” he said.

Passive governments

Swiss banks also benefited from the long-standing passivity of foreign governments. “For decades it was a given that other countries’ laws weren’t respected and that the authorities in these countries didn’t get involved. The US law forbidding banks to consort with tax evaders dates from the 1930s, but until now there haven’t been any consequences,” Straumann said.

“The same thing happened in Europe. When Austria and Luxembourg strengthened their banking secrecy based on the Swiss model in 1979 and 1981 respectively, there was no reaction from other European countries. Perhaps because tax evasion had reached the upper political and economic echelons.”

Until the economic crisis, there had only been isolated attacks on banking secrecy. The European Union, the US and the Organisation for Economic Co-operation and Development (OECD) have now launched a concerted action against the practice.

Big Swiss banks Credit Suisse and UBS have been in the Americans’ sights since 2008.

Grey area

The big banks have underestimated the strength of the US fight against tax evasion, Straumann said.

“Some bosses realised what was happening but didn’t adopt the necessary extraordinary measures. They asked their employees to adapt to the new American regulations, but at the same time continued to reward the acquisition of new assets.”

UBS and CS have had to abandon their practices. Many US customers were instead taken on by Wegelin and other Swiss banks – which are now under US scrutiny.

“Perhaps they told themselves: there is a new regulation, but if we are clever, we can find holes in it and be successful again. They thought that there would be another legal grey area, but even a grey area is very dangerous.”

Comprehensive accord

Swiss banks are now calling on the Swiss government to negotiate a deal with Washington.

“We need to stop accusations against other banks, which would threaten the reputation of our financial centre. Therefore we are calling for a comprehensive accord to once and for all come to terms with the past,” said Rebeca Garcia, Swiss Bankers Association spokeswoman.

But does this mean Swiss banks want an end to banking secrecy? And could the Swiss financial centre continue to be as successful without it?

Vogler is convinced it can. “It wasn’t necessarily banking secrecy that encouraged many Europeans to deposit their money in Switzerland in recent years, but fears over the weakening of their own currencies and suspicion of their own banks and states,” he said.

“Swiss banks represented above all a secure place where their savings maintained their value. And even today, in the euro crisis, the same phenomenon exists.”

Banking secrecy

Introduced in the 1930s, banking secrecy protects clients’ privacy.

But it can be lifted in cases of tax fraud – trying to defraud tax by example falsifying documents – or serious crimes committed by the account holder.

Until now the government has only granted administrative assistance in tax fraud cases but not for tax evasion – the omission, intentional or not, to declare your assets to the authorities.

In 2009 the Swiss government had for the first time to provide data of thousands of UBS clients to the US. The US authorities had threated heavy penalties against the big Swiss banks, which it accused of allegedly helping thousands of its clients avoid tax (fraud and evasion).

In January this year Washington announced that 11 Swiss banks were under investigation and Bern was requested to pass on the data of tens of thousands of Swiss bank clients in the US.

As a result of international pressure, Switzerland has signed around 30 double taxation agreements in recent years, in which administrative assistance can also be given in tax evasion cases, according to OECD standards.

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Strategy study

According to a study by consultants KPMG and St Gallen University, Swiss banks are lagging behind in the application of a oriented strategy for tax compatible assets. It found that only a quarter of Swiss banks intended to put a strategy into action this year. 80% of Swiss banks said they would do it in five years.

Competing financial centres were found to be moving faster, with two thirds of private banks in Singapore and Hong Kong and three quarters of those in Luxembourg having already adopted a tax-compatible business model.

“The need for change is not yet anchored in Swiss bankers’ brains,” said KPMG’s Daniel Senn. He says it is necessary to act now because the traditional cross-border business model has reached its limit following the tightening of international regulations and the associated higher costs.

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Impact on Swiss banks

Credit Suisse has revealed that it put aside SFr295 to cover legal costs associated with the US probe. It has also handed over client data to the Swiss government which is likely to be sent on to the US.

The Zurich cantonal bank, another of those under investigation, said on February 10 it never actively sought US customers. Between 2002 and 2010 these accounted for less than one per cent of the assets managed by the bank.

It said it had complied with all US demands that were compatible with Swiss law.

The head of the Wegelin bank, Konrad Hummler, announced on February 9 that he was stepping down temporarily from his role as chairman of the prestigious Neue Zürcher Zeitung in order to focus on the US case against the bank.

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