Banking in Switzerland is regulated by the Swiss Financial Market Supervisory Authority (FINMA), which derives its authority from a series of federal statutes. The country's tradition of bank secrecy, which dates to the Middle Ages, was first codified in the Federal Act on Banks and Savings Banks, colloquially known as the Banking Law of 1934. The regime of bank secrecy that Swiss banks are famous for coming under pressure in the wake of the UBS tax evasion scandal, and the 1934 banking law was amended in 2009 to limit tax evasion by non-Swiss bank clients.
In 2011, banks represented 59.4% of the total value added of the Swiss financial sector, totalling CHF 35.0 billion representing 6.2% of the country's GDP. UBS and Credit Suisse, the two largest banks in Switzerland, were ranked globally at #19 and #25 among banks, with assets of approximately US$1.375 trillion and US$1.090 trillion, respectively.
As of 11 October 2008, the banking industry in Switzerland has an average leverage ratio (assets/net worth) of 29 to 1, while the industry's short-term liabilities are equal to 260 percent of the Swiss GDP or 1,273 percent of the Swiss national debt.
History
Swiss mercenaries brought home funds from their contracts that helped Swiss banks begin. Banking began in the eighteenth century by way of the riches of merchants. Wegelin & Co., established in 1741, was the oldest bank in Switzerland until it restructured into a new legal entity in 2013. Hentsch & Cie and Lombard Odier were both founded in 1796 in Geneva as private banks, and The Pictet Group was established in 1805 as a merchant bank. Hentsch & Cie was a founding member of the Swiss National bank during 1852.
The Swiss banks in Geneva and Zurich have served as safe havens for the wealth of dictators and despots, mobsters and arms dealers, corrupt officials and tax cheats of all kinds.
Overview
Switzerland is a prosperous nation with a per capita gross domestic product higher than that of most Western European nations. In addition, the value of the Swiss franc (CHF) has been relatively stable compared with that of other currencies. In 2009, the financial sector comprised 11.6% of Switzerland's GDP and employed approximately 195,000 people (136,000 of whom work in the banking sector); this represents about 5.6% of the total Swiss workforce. Furthermore, Swiss banks employ an estimated 103,000 people abroad.
Swiss neutrality and national sovereignty, long recognized by foreign nations, have fostered a stable environment in which the banking sector was able to develop and thrive. Switzerland has maintained neutrality through both World Wars, is not a member of the European Union, and was not a member of the United Nations until 2002.
Currently an estimated one-third of all worldwide funds held outside their country of origin (sometimes called "offshore" funds) are kept in Switzerland. In 2001, Swiss banks managed US$2.6 trillion. The following year they handled US$400 billion less which has been attributed to both a bear market and stricter regulations on Swiss banking. By 2007 this figure has risen to roughly US$2.7 trillion, a record.
The Bank of International Settlements, an organization that facilitates cooperation among the world's central banks, is headquartered in the city of Basel. Founded in 1930, the BIS chose to locate in Switzerland because of the country's neutrality, which was important to an organization founded by countries that had been on both sides of World War I.
The Foreign Banks in Switzerland Association reported that from the start of 2012 to the end of May 2013, the number of foreign-owned private banks operating in Switzerland declined from 145 to 129 due to the roll-back of bank secrecy regulations. Over the preceding five years, the foreign banks' assets under management declined by 25% to CHF870.7 billion Swiss francs ($921 billion) due to their clients paying taxes or withdrawing their money. Foreign banks in Switzerland saw their pretax margin decline from 38 basis points in 2007 to 20 basis points in 2012.
Law and regulation
The Swiss Financial Market Supervisory Authority (FINMA) is a public law institution that supervises most banking-related activities as well as securities markets and investment funds. Regulatory authority is derived from the Swiss Financial Market Supervision Act (FINMASA) and Article 98 of the Swiss Federal Constitution.
The office of the Swiss Banking Ombudsman, founded in 1993, is sponsored by the Swiss Banking Ombudsman Foundation, which was established by the Swiss Bankers Association. The ombudsman's services, which are offered free of charge, include mediation and assistance to persons searching for dormant assets. The ombudsman handles about 1,500 complaints raised against banks yearly.
In October 2013, the Swiss government stated that it intended to sign an international agreement sponsored by the OECD that, if ratified by Parliament, will align Swiss bank practices with those of other countries and in effect end the special secrecy that clients of Swiss banks had enjoyed in the past.
Statutes
In 1934, the Swiss Federal Assembly passed the Federal Act on Banks and Savings Banks (colloquially known as the Banking Law of 1934), which mainly concerned administrative matters such as bank supervision. A still widely accepted canard is that the secrecy provisions of the 1934 bill were added before its passage due to attempt by Nazi Germany to investigate the assets of Jews and "enemies of the state" held in Switzerland. This is not, however, the case. Firstly, Swiss banking secrecy was not introduced in 1934, but rather reinforced; secondly, Swiss ruling circles performed the 1934 reinforcement without humanitarian motives in mind.
Electronic payments
Swiss banks, as well as the post office (which handles some financial transactions) use an electronic payments system known as Swiss Interbank Clearing (SIC). The system is supervised by the Swiss National Bank and is operated via a joint venture. SIC handled over 250 million transactions in 2005, with a turnover value of 41 trillion Swiss francs.
Major banks
As of 2008, there are 327 authorized banks and securities dealers in Switzerland, ranging from the "Two Big Banks" down to small banks serving the needs of a single community or a few special clients.
UBS and Credit Suisse are respectively the largest and second largest Swiss banks and account for over 50% of all deposits in Switzerland; each has extensive branch networks throughout the country and most international centres.
Due to their size and complexity, UBS and Credit Suisse are subject to an extra degree of supervision from the Federal Banking Commission.
UBS
UBS came into existence in June 1998, when Union Bank of Switzerland, founded in 1862, and Swiss Bank Corporation, founded in 1872, merged. Headquartered in Zurich and Basel, it is Switzerland's largest bank. It maintains seven main offices around the world (four in the United States and one each in London, Tokyo, and Hong Kong) and branches on five continents.
Credit Suisse
Credit Suisse is the second-largest Swiss bank. Based in Zurich, it was founded in 1856; its market capitalization (as of 2007) is US$95.2 billion, and the company has about 40,000 employees. Credit Suisse Group offers private banking, investment banking and asset management services. It acquired The First Boston Corporation in 1988 and merged with the Winterthur insurance company in 1997; the latter was sold to AXA in 2006. The asset management services were sold to Aberdeen Asset Management in 2008 during the Financial crisis of 2007-2010.
Other banks
Central Bank
The Swiss National Bank (SNB) serves as the country's central bank. Founded by the Federal Act on the Swiss National Bank (16 January 1906), it began conducting business on 20 June 1907. Its shares are publicly traded, and are held by the cantons, cantonal banks, and individual investors; the federal government does not hold any shares. Although a central bank often has regulatory authority over the country's banking system, the SNB does not; regulation is solely the role of the Federal Banking Commission.
Private banks
The term private bank refers to a bank that offers private banking services and in its legal form is a partnership. The first private banks were created in St. Gallen in the mid-18th century and in Geneva in the late 18th century as partnerships, and some are still in the hands of the original families such as Hottinger and Mirabaud. In Switzerland, such private banks are called private bankers (a protected term) to distinguish them from the other private banks which are typically shared corporations. Historically in Switzerland a minimum of CHF1 million was required to open an account, however, over the last years many private banks have lowered their entry hurdles to CHF250,000 for private investors.
Cantonal banks
There are, as of 2006, 24 cantonal banks; these banks are state-guaranteed semi-governmental organizations controlled by one of Switzerland's 26 cantons that engage in all banking businesses. The largest cantonal bank, the Zurich Cantonal Bank, had a 2005 net income of CHF810 million.
Raiffeisen banks
Raiffeisen Switzerland "assumes the role of central bank" in providing treasury services, and is the third largest group consisting of 328 banks in 2011, 390 in 2012 with 1,155 branches. During February 2012, P. Vincenz was chief executive. During January, an announcement was made that the non-U.S. businesses of Wegelin & Co, the oldest Swiss bank, would be bought by the Raiffeisen group. The group has 3 million plus clients within Switzerland.
Banking privacy
The Banking Law of 1934 made it a criminal act for a Swiss bank to reveal the name of an account holder. Swiss bank secrecy protects the privacy of bank clients; the protections afforded under Swiss law are similar to confidentiality protections between doctors and patients or lawyers and their clients. The Swiss government views the right to privacy as a fundamental principle that should be protected by all democratic countries. While privacy is protected, in practice all bank accounts are linked to an identified individual. Moreover, the bank secrecy is not absolute: a prosecutor or judge may issue a "lifting order" in order to grant law enforcement access to information relevant to a criminal investigation.
In October 2013, the Swiss government stated that it intended to sign an international agreement sponsored by the OECD that, if ratified by Parliament, will align Swiss bank practices with those of other countries and in effect end the special secrecy that clients of Swiss banks had enjoyed in the past.
Taxation
Swiss law distinguishes between tax evasion (non-reporting of income) and tax fraud (active deception). International legal assistance used to be granted only with respect to tax fraud. Under pressure from the OECD and the G20, the Swiss government decided in March 2009 to abolish the distinction between tax evasion and tax fraud in dealings with foreign clients. Switzerland adheres to the international OECD standards with regard to administrative assistance in tax matters (decision to take over the OECD Model Tax Convention, in particular Article 26)
For Swiss taxpayers the distinction remains in place. Although not considered a crime and hence not prosecuted in a penal court, tax evasion is a serious offence under Swiss tax law and hefty financial penalties apply. In domestic prosecutions, banking secrecy may be lifted by court order in cases of tax fraud or particularly severe cases of tax evasion.
European Union
Pressure on Switzerland has been applied by several states and international organizations attempting to alter the Swiss privacy policy. The European Union, whose member countries geographically surround Switzerland, has complained about member states' nationals using Swiss banks to avoid taxation in their home countries. The EU has long sought a harmonized tax regime among its member states, although many Swiss banking officials (and, according to some polls, the public) are resisting any such changes.
However, Switzerland did not want to be seen as an obstacle to closer tax cooperation among EU-member states and decided to support the international efforts to adequately tax cross-border investment income. The retention tax agreed with the European Union (EU) in the taxation of savings income agreement is a suitable and efficient means of doing so. The EU is committed to eliminating existing loopholes in the system of taxation of savings income. Switzerland has expressed to the EU its willingness in principle to correspondingly adjust the taxation of savings income. Here it should be noted that Switzerland has adopted the OECD standard on administrative assistance and that the Federal Council rejects the automatic exchange of information. Since July 1, 2005, Switzerland has charged a withholding tax on all interest earned in the personal Swiss accounts of European Union residents.
Switzerland is not a member of the European Union but, since December 2008, is a part of the Schengen agreement.
United States
Swiss bank accounts cannot be opened without the holder signing a legal document asserting that they have no outstanding financial obligations to the IRS. Despite this, Swiss banks often shield tax evaders.
In January 2003, the United States Department of Treasury announced a new information-sharing agreement under the already extant U.S.-Swiss Income Tax Convention; the agreement was intended to facilitate more effective tax information exchange between the two countries. However, Swiss policy has continued to come under international criticism, and in March 2009 Switzerland agreed to renegotiate more effective tax cooperation with the United States and other countries.
In 2013, the Swiss Parliament approved a law that allows Swiss banks to cooperate with United States tax authorities as specified in the FATCA.
Numbered bank accounts
Some bank accounts are afforded an extra degree of privacy. Information concerning such accounts, known as numbered accounts, is restricted to senior bank officers, rather than being accessible to all the employees of a bank. However, the information required to open such an account is no different from that of an ordinary account; completely anonymous accounts are not allowed by law. Should a criminal investigation take place, law enforcement has access to information related to a numbered account in the same way it has access to information about any other account.
ArrayMoney laundering
There are several measures in place to counter money laundering. The Money Laundering Act sets forth requirements of account holders' identification, and requires reporting of any suspicious transactions to the Money Laundering Reporting Office.
According to the CIA World Factbook, Switzerland is "a major international financial center vulnerable to the layering and integration stages of money laundering; despite significant legislation and reporting requirements, secrecy rules persist and nonresidents are permitted to conduct business through offshore entities and various intermediaries..." However, Switzerland's cooperation in transnational financial issues has been praised by several major U.S. officials. A Federal Bureau of Investigation anti-terrorism official noted that Switzerland was one of several countries to participate in joint task forces targeting financing of Al-Qaeda terrorist cells; a former Assistant Secretary of the Treasury praised Swiss cooperation and the country's assistance in the finding and freezing of terrorist and Iraqi assets.
Bradley Birkenfeld whistleblowing case
Swiss bank secrecy was dealt a severe setback by the revelations made by ex-UBS banker Bradley Birkenfeld, who blew the whistle on UBS providing Americans with vehicles to hide up US$20 billion in assets to avoid taxes. Birkenfeld's revelations to the U.S. government concerning UBS's practices led to a massive fraud investigation against the Swiss bank UBS. In response, UBS announced that it would cease providing cross-border private banking services to US-domiciled clients through its non-US regulated units as of July 2008.
In November 2008, a U.S. federal grand jury indicted Birkenfeld's former boss, Raoul Weil, as the result of the investigation of UBS' U.S. cross-border business. Weil served as the chief executive officer of UBS's Global Wealth Management & Business Banking unit and was a member of UBS' Group Executive Board. UBS would eventually cut ties to Weil in May 2009 and he would continue to face charges after UBS had settled its criminal case with the U.S. government.
As a result of the information Birkenfeld gave U.S. authorities, the Department of Justice announced it had reached a deferred prosecution agreement (DPA) with UBS that resulted in a $780 million fine and the release of previously privileged information on American tax evaders. Weil, whose employment with UBS was terminated by UBS after he was indicted by the U.S. Justice Department, subsequently was hired as a consultant by the Swiss private bank Reuss Private Group in 2010, rising to become the firm's CEO in early 2013. He was arrested on an international warrant while visiting Italy in October 2013 and was extradited to the United States to face charges stemming from Birkenfeld's revelations.
On 11 September 2012, the U.S. IRS Whistleblower Office paid Birkenfeld a $104 million award for acting as a corporate whistleblower. The Swiss media credit Birkenfeld's act with affecting a sea change in Swiss banking. After Birkenfeld's award, the Swiss newspaper Blick claimed, "Birkenfeld was a blessing for the Swiss financial industry," in that his revelations helped accelerate the industry's transition away from its reliance on "dirty" money by dooming the bank secrecy laws that enabled tax evasion.
Birkenfeld has compared the Swiss banking industry with gangsters. "In essence, bank secrecy is analogous to criminal racketeering -- and the Swiss government, along with every Swiss private banker, is a co-conspirator."
Allegations of black money
Swiss Banks are alleged to stash black money (money not reported to the government for tax purposes); Editor-in-chief for WikiLeaks, Julian Assange, noted that, as per documents of bank accounts by a former banker and whistleblower Rudolf Elmer, the "names in the documents came from 'US, Britain, Germany, Austria and Asia' - from all over".
Swiss banks and World War II
Several inquiries have been made into the conduct of Swiss banks during the Nazi Germany period (1933-1945), especially regarding funds deposited by or allegedly stolen from victims of the Holocaust. The campaign causing the highest outlays (US$1.25 billion in 1999) on the part of the Swiss banking industry as of 2009 was the World Jewish Congress lawsuit against Swiss banks launched by Edgar Bronfman, president of the World Jewish Congress, in concert with US Senator Alfonse d'Amato of New York.
The audit run by the Volcker Commission which resulted from this lawsuit cost CHF300 million and gave its final report in December 1999. It determined that the 1999 book value of all dormant accounts possibly belonging to victims of Nazi persecution that were unclaimed, closed by the Nazis, or closed by unknown persons was CHF95 million. Of this total, CHF24 million were "probably" related to victims of Nazi persecution. In addition the commission found "no proof of systematic destruction of records of victim accounts, organized discrimination against the accounts of victims of Nazi persecution, or concerted efforts to divert the funds of victims of Nazi persecution to improper purposes." It also "confirmed evidence of questionable and deceitful actions by some individual banks in the handling of accounts of victims".
In response to the lawsuit, the Swiss government commissioned an independent panel of international scholars known as the Bergier Commission to study the relationship between Switzerland and the Nazi regime. It reached similar conclusions about the banks' conduct in its final report, and found that trade with Nazi Germany did not significantly prolong the war.
International competition
With recent changes in the Swiss bank secrecy regime the assets held by foreign persons in Swiss bank accounts declined according to data by the Swiss National Bank (SNB) by 28.1% between January 2008 and November 2009, increasing again in 2012 and hitting all time high in 2014. Other states, such as Singapore and Hong Kong, have attracted depositors seeking privacy and protection. Having taken steps to make its banks more attractive, Singapore strengthened penalties for violators of bank secrecy (and now imposes steeper fines and longer jail sentences for offenders), and modified its laws on trusts and inheritance. Nevertheless, this new model is being currently challenged by the OECD. Singapore is also now the location of Credit Suisse's international banking headquarters. Despite these changes, however, Switzerland still ranks at the top of the Tax Justice Network's "Financial Secrecy Index" as of 2013.
Notes and references
Bibliography
See also
- Black money
- Offshore bank
- Societe Internationale v. Rogers
- Swiss Bankers Association
- Swiss franc
- World Jewish Congress lawsuit against Swiss Banks
- List of banks in Switzerland
- List of Swiss financial market legislation
External links
- The Swiss banking law, as amended, from KPMG
- Offshore Banking, Directory resource, from OTH
- The Swiss Financial Center, from swissworld.org
- swissbanking.org
- Swiss Private Banking News
- "Échange automatique, secret bancaire : la réponse de l'ASB" (AUDIO). A l'écoute : "Forum" (in French) (Radio suisse romande). 25 January 2013. Retrieved 27 January 2013. Regarding World Economic Forum#Davos Man, January 2013, interview of Patrick Odier, President of the Swiss Bankers Association, Association suisse des banquiers (ABS).
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