Banking in Switzerland
Banking in Switzerland dates to the early 18th century through Switzerland's merchant trade and over the centuries has grown into a complex and regulated international industry. Banking is seen as very emblematic of Switzerland
and the country has been one of the largest, if not largest, offshore financial centers and tax havens in the world since the mid-20th century, with a long history of banking secrecy, security and client confidentiality reaching back to the early 1700s. Starting as a way to protect wealthy European banking interests, Swiss banking secrecy was codified in 1934 with the passage of a landmark federal law, the Federal Act on Banks and Savings Banks. These laws were used to protect assets of persons being persecuted by Nazi authorities but have also been used by people and institutions seeking to illegally evade taxes, hide assets, or to commit other financial crime.
Controversial protection of foreign accounts and assets during World War II sparked a series of proposed financial regulations seeking to limit bank secrecy, but with little resulting action. Despite various international efforts to roll back banking secrecy laws in the country which were largely minimized or reverted by Swiss social and political forces, in 2017 Switzerland agreed to "automatic exchange of information" with foreign governments and their revenue services regarding information of depositors not resident in Switzerland. This constituted de facto the end of Swiss banking secrecy for depositors who were not Swiss residents. Furthermore, after Switzerland ratified the Foreign Account Tax Compliance Act agreement with the United States, because of concerns regarding their tax liability some Swiss banks have gone so far as to close accounts held by US citizens, and to ban the opening of new accounts by US citizens and by dual US-Swiss citizens, including those deemed lawful permanent Swiss residents. Thus banking secrecy remains in force only for those residing in and solely taxable in Switzerland.
Disclosing client information has been considered by Switzerland a criminal offence since the early 1900s. Employees working in Switzerland and at Swiss banks abroad have "long adhered to an unwritten code similar to that observed by doctors or priests". Since 1934 Swiss banking secrecy laws have been violated to a major extent by only four people, namely: Christoph Meili, Bradley Birkenfeld, Rudolf Elmer and Hervé Falciani.
The Swiss Bankers Association estimated in 2018 that Swiss banks held US$6.5 trillion in assets or 25% of all global cross-border assets. Switzerland's main lingual hubs, Geneva, Lugano, and Zürich service the different geographical markets. It currently ranks number two behind the United States and on par with Singapore in the Financial Secrecy Index. The banks are regulated by the Swiss Financial Market Supervisory Authority and the Swiss National Bank which derives its authority from a series of federal statutes. Banking in Switzerland has historically played, and still continues to play, a dominant role in the Swiss economy and society. According to the Organisation for Economic Co-operation and Development, total banking assets amount to 467% of total gross domestic product. Banking in Switzerland [|has been portrayed], with varying degrees of accuracy, in overall popular culture and television shows.
Switzerland's credibility as a banking centre was hurt in 2023 after the collapse of Credit Suisse, one of the largest Swiss banks, which was subsequently acquired by its Swiss competitor UBS. However, the rapid action taken by the Federal Council, the Swiss National Bank, and FINMA helped to minimise further damage.
History
in the Swiss region can be traced to the Great Council of Geneva, which outlawed the disclosure of information about the European upper class in 1713. During the 1780s, Swiss bank accounts began insuring deposits, which contributed to their reputation for financial security. In 1815, the Congress of Vienna formally established Switzerland's international neutrality, which led to a large capital influx. The wealthy, landlocked Switzerland saw banking secrecy as a way to build an empire similar to that of France, Spain, and the United Kingdom. Swiss historian Sébastian Guex notes in The Origins of Secret Swiss Bank Accounts:After a small scale civil war in the 1840s between the Swiss cantons, the Swiss Federation was founded in 1848. The formation of the state, through a direct democracy, contributed to the political stability needed for banking secrecy. The mountainous terrain of Switzerland provided a natural environment in which to excavate [|underground vaults] for storage of gold and diamonds. In the 1910s, during World War I, Swiss bankers traveled to France to advertise the country's banking secrecy. According to Sébastien Guex, the banks printed "brochures, circulars, personalised letters, and advertising in newspapers, and sent representatives who approached their clientele in person". The war's contribution to political and economic instability sparked a rapid capital movement into Switzerland. As France and Germany introduced progressive income and inheritance taxes for the first time, taxing greater wealth at higher rates to finance the war, wealthy clients moved their holdings into Swiss accounts to avoid taxation. The French banked in Geneva, the Italians in Lugano, and the Germans in Zürich.
The Federal Act on Banks and Savings Banks, colloquially known as the Banking Law of 1934, made the violation of banking secrecy a federal criminal offence. That major step beyond the prior enforcement of banking secrecy under civil law resulted from several developments of the early 1930s, including the introduction in the same legislation of an embryonic form of banking supervision, which Swiss bankers argued could endanger secrecy; evolving jurisprudence of the Federal Supreme Court; and a 1932 campaign against tax evasion in France led by Édouard Herriot's government, following a financial scandal that erupted in France in that year, involving thousands of wealthy French citizens and the Commercial Bank of Basel. In a hotel apartment in Paris, the police discovered that the director and other officials of the aforementioned Swiss bank were providing information to important members of the French financial elite on how to transfer their money to Switzerland, in order to obtain untaxed returns. Alleged wealthy French tax evaders included military generals and Catholic bishops. An additional provision, Article 47, was drafted before its ratification to protect Jewish assets from the Nazi party.
File:Landscape Arnisee-region.JPG|left|thumb|Switzerland's mountainous terrain helps to store gold in underground bunkers.
During World War II, Switzerland remained diplomatically neutral but its economy and financial system served the Axis powers by storing gold and cash balances in underground vaults, buying gold from the Nazi German state, and lending to both Germany and Italy, thus supporting their aggressive endeavors. Adolf Hitler maintained an account at the Union Bank of Switzerland estimated at. After the United States formally asked the bank to transfer the money in the 1990s, UBS wired US$400 to 700 million worth of Reichsmarks to U.S. authorities. Banking regulations in Switzerland limit the amount of orphaned assets allowed to leave a bank's custody. UBS, with consent from the Swiss government, froze the account containing Hitler's assets indefinitely, and clipped the Reichsmarks, stripping the currency of value. During World War II, UBS also maintained accounts for hundreds of German Jewish businesspeople and households. After the Banking Law of 1934 was passed, the bank aggressively protected assets of the "enemies of Nazi Germany". When Hitler announced an invasion of Switzerland in 1940, UBS contracted the Swiss Armed Forces to blockade their retail banks and transport Jewish assets to underground military bunkers. The Swiss Bank Corporation and Credit Suisse, did likewise. However, after the war, many of these account holders had been killed in the Holocaust, and their heirs often lacked the documentation required to claim the accounts. For decades, Swiss banks were accused of failing to return the money to rightful heirs, destroying records or placing excessive bureaucratic obstacles in the way of claims, and profiting from dormant accounts. This ended when the Volcker Commission reached a paltry $1.25 billion settlement with the victims.
World War II and beyond
After the end of World War II, Switzerland and its financial system benefited greatly from having remained unharmed while all the neighbouring economies were devastated, but had to face the reputational damage from its support to the Axis powers, which also led to threats to banking secrecy as the Allied victors sought to expropriate Nazi assets held under Swiss custody. By and large, the Swiss banking sector was able to successfully deflect the threat to its secrecy practices, not least as it supported France and the United Kingdom with significant lending. When British politician George Brown blamed "gnomes of Zurich" for a weak pound sterling in 1964, Swiss bankers began using the title as proof of their financial skill and adherence to secrecy. Throughout the 1980s and 1990s, numerous international proposals for bank secrecy rollbacks were made by foreign states with little success.File:Telldenkmal.jpg|thumb|International pressure to roll back banking secrecy is seen as an attack on Swiss culture and values. The Swiss parliament expressed an interest in adopting banking secrecy into their constitution in 2017.
After the 2008 financial crisis, Switzerland signed the European Union Savings Directive which obliges Swiss banks to report to 43 European countries non-identifying annual tax statistics. On December 3, 2008, the Federal Assembly increased the prison sentence for violations of banking secrecy from a maximum of six months to five years. In late 2008, after an international, multi-state investigation into Switzerland's role in U.S. tax evasion, UBS entered into a limited, deferred prosecution agreement with the U.S. Department of Justice. The agreement initiated the landmark Birkenfeld Disclosure of information on more than 4,000 clients.
In November 2013, the Zürcher Kantonalbank was classified as a systemically important bank in Switzerland by order of the Swiss National Bank, alongside UBS, Credit Suisse, Raiffeisen and PostFinance, and must meet stricter capital requirements and prepare contingency plans for times of crisis. In another step toward loosening banking secrecy, Switzerland signed the U.S. Foreign Account Tax Compliance Act, after rejecting it twice in parliament. The FATCA requires Swiss banks to disclose non-identifying U.S. client information annually to the Internal Revenue Service. The agreement does not guarantee the semi-automatic information transfers, which remain at the discretion of Swiss government authorities. If a client does not consent to having their information shared with the IRS, Swiss law prohibits the disclosure. If a client does consent, Swiss banks send the IRS tax-related information about the account holder but are prohibited from disclosing identities pursuant to Article 47 of the Banking Law of 1934. The 2018 Financial Secrecy Index stated: "this not mean that Swiss banking secrecy was finished, as some excitable news reports suggest... the breach was a partial ".
In March 2015, the Swiss government entered into bilateral "Rubik Agreements" with Germany, Austria, and the United Kingdom allowing foreign holders of Swiss bank accounts to retain their anonymity in exchange for paying predetermined back taxes. Switzerland adopted the International Convention on the Automatic Exchange of Banking Information in 2017, agreeing to automatically release limited financial information to certain countries for the sole purpose of tax auditing. This agreement includes the Common Reporting Standard which obliges Swiss banks to automatically send foreign tax authorities the client's name, address, domicile, tax number, date of birth, account number, account balance at years end, and the gross investment income. The CRS does not, however, override the Swiss Banking Law of 1934, so the client's expenses and investments are not disclosed. Thus tax authorities cannot "go fishing" for tax evaders, they must directly link a financial crime to the client's account. The disclosed information can only be used for tax auditing and Swiss authorities may prevent disclosure.
In December 2017, the Swiss parliament launched a standing initiative and expressed an interest in formally embedding banking secrecy within the Swiss Constitution, making it a federally-protected constitutional right. In January 2018, a U.S. district court ruled that Swiss bankers " nothing to do with the choice that an American taxpayer makes to not declare offshore assets", later clarifying they should not be seen as facilitating tax evasion but rather provide a legal service that is made illegal by the client. The Swiss Justice Ministry announced in March 2018 that disclosure of client information in a pending court case involving a Swiss bank is subject to federal espionage and extortion charges in addition to charges relating to banking secrecy laws.
After a serious crisis, on 19 March 2023, following negotiations with the Swiss government, UBS announced its intent to acquire Credit Suisse for $3.25 billion in order to prevent the bank's collapse. UBS completed the acquisition in June 2023.