Amidst rising global pressure to crack down on non-cooperating tax zones, tax havens like Switzerland are starting to rethink their secrecy laws. Is the age of banking secrecy over?
Switzerland is known to the world as famous for chocolate, watches, and more importantly, confidential bank accounts. Banking secrecy is an integral part of the national banking system, where investors can hide their wealth. This is one of the key reasons behind Switzerland’s becoming the biggest offshore banking-services center in the world. However, its bank secrecy laws came under increasing scrutiny when the US government decided to take measures against tax havens all over the world. Over the years, after refusing to reveal information about their customers to foreign governments, top offshore tax havens like Switzerland, Luxembourg and Austria have bowed to international pressure and agreed to comply with the information-sharing standards established by the Organization for Economic Cooperation and Development (OECD). Often Swiss bank accounts are viewed as a tool to hide huge wealth by affluent Americans and Europeans, African dictators and Russian oligarchs.
During the recent boom period, trillions of dollars flowed into Switzerland and other tax havens in search of safety owing to the tax haven nature of their banks. At the end of 2008, around €1.47 tn in assets were deposited in Swiss banks, including about €450 bn of clandestine personal wealth that belonged to private customers. Banks in Switzerland, which employ about 3% of the total working population and contribute more than about 13% of GDP to the economy, have often come under criticism for their secrecy laws.
The Union Bank of Switzerland (UBS), the largest Swiss bank, was in the limelight recently due to a lawsuit involving US tax investigation. American tax authorities had accused many of its employees of helping American citizens to set up and conceal offshore accounts by falsifying, and destroying important information. It is being projected as a major blow and even as the beginning of the end of the fabled secrecy of the Swiss banking system.
Secrecy History
Banking secrecy in Switzerland can be traced back to early 17th century. It was extensively used as a tool to hide the wealth of many of the Europe’s rich dynasties and the Vatican, even though Switzerland had embraced Protestantism.
Nazis also used Swiss banks to hoard looted gold. Later in the 1930s, when France and Germany tried to reverse that ruling with the aim of checking capital flight, Switzerland reacted by making disclosure of banking information a crime. Strict penalties were imposed for violating bank confidentiality.
The Council of Geneva passed a regulation forbidding banks from sharing client information. The system was reasserted in 1984 when almost 75% of Swiss voters gave consent to preserve banking secrecy.
The combination of secret banking system coupled with stable governments provided Switzerland with a competitive advantage in private banking, allowing it to siphon off huge amounts of capital from overseas. At present, according to Reuters, almost one-third of the world’s total offshore assets of $7 tn, equal to $2.2 tn set aside abroad globally, is in Swiss banks, making the Alpine nation the world’s biggest offshore wealth reserve center. Swiss financiers have been facing criticism for destabilizing economies during the last 100 years. Approximately 19 Swiss banks, including Credit Suisse, were used by corrupt former Nigerian general Sani Abacha, who amassed £3 bn from his country between 1993 and 1998. An independent panel of experts found Swiss banks guilty of accepting deposits from the corrupt ruler, even though they were aware that the deposits involved theft. But the Swiss Bankers’ Association (SBA) defended the Swiss system, saying that its report divulged more banks’ identities than British regulators did in the Abacha case.
A legal affair?
There is a clear difference between ‘tax evasion’ and ‘tax fraud’ under the Swiss law. In Switzerland, tax fraud is a crime, whereas tax evasion is a civil offense. As per the principle of non-discrimination, foreigners are treated on a par with Swiss nationals. The Swiss government does not provide any judicial assistance to foreign tax authorities in case of tax evasion. Hence, if someone has evaded tax in his country he can safely park such funds in Swiss banks.
Moreover, recent capital inflows have largely come from regions such as Russia, Asia and the Middle East, where domestic taxation is nominal, denoting dodging is not those depositors’ primary motive. Above all, the Swiss banks believe they offer a credible option for overseas savers in uncertain times. The bankers claim that their traditional investment strategies and focus on longterm wealth generation have cushioned the blow to a great extent. Evidently, most of the banks have capital ratios that are the envy of rivals. Even the UBS had a capital ratio of 11.5% at the end of 2008, whereas several smaller banks boast rates of around 15%.
End of secrecy?
Reports indicate that Indian nationals have deposited a total of $1,456 bn in the vaults in Swiss banks, about 13 times larger than the nation’s foreign debt and if distributed 45 crore poor people can get Rs 1 lakh each. As a result, tax authorities across the world, including in India, are keenly monitoring the outcome of US investigation, in order to identify any of their own citizens who may be caught in the US net. However, there is little hope that Switzerland will lose its status as the world’s leading center for offshore wealth. Some observers believe that US-Swiss tax case is unlikely to reveal any secret accounts held by Indians. UBS too is trying its best to limit the number of accounts it will be forced to reveal. Swiss banks have, of late, agreed to tax offshore savings of EU citizens held in Switzerland and transfer the proceeds to the member states. Further, after sensing that the traditional offshore model will encounter rising resistance abroad, Swiss banks have begun investing extravagantly in ‘onshore’ branch networks in neighboring countries such as Germany, Italy, France and the UK.
Towards Transparency
Swiss banks are justifying it by assuring that such ‘onshore’ services will be fully transparent and subject to the laws of the host country, and their reputation will generate a valuable client base. UBS was the most active in this respect. It is involved in creating small branch networks in big cities in other European nations like Germany, Italy and the UK. Other Swiss banks such as Vontobel, Julius Baer and Sarasin too have invested heavily in Germany, Austria, Asia and the Middle East. All have invested by believing that the desire for service and performance offered by Swiss banks will stay. While the reports of the demise of Swiss private banking may be premature, one thing is very clear: after UBS’ travails and the banking system’s historic shift in policy, private banking in Switzerland is set for irreversible changes.
N Janardhan Rao, Senior Economist.
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