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Swiss banking secrecy – the debate rolls on

Melanie Stern is Section Editor of Families in Business magazine.

Melanie Stern talks to Urs Roth, CEO of the Swiss Bankers' Association, in a frank analysis of the arguments surrounding Swiss banking secrecy laws, surely one of the longest-running disagreements in the financial services industry and of great interest to wealthy business families

What are the basic differences between the Swiss banking secrecy laws and those commonly used elsewhere?
"I suppose one big difference is that apart from a legal obligation to report suspicions of money laundering, Swiss banks are not obliged to automatically report bank client information to the authorities. Another difference might be that Swiss law protects bank client confidentiality with criminal sanctions. But many countries provide, to a greater or lesser extent, the authority and obligation for banks to refuse to disclose client information to ordinary third parties. Customers would be unlikely to entrust their money to banks if the confidentiality of their financial affairs could not be ensured. However, you have to read the small print to find out exactly what banks can or must do with the information they have about you and your financial affairs. I think bank clients in many countries have no idea what their bank can or must do with the information they have about them. In Switzerland the position is very clear."

What are the key arguments against the secrecy laws and who are the main protagonists of these arguments?
"Discussions and reports about Swiss bank client confidentiality tend to be either very technical and legalistic in one extreme, or charged with emotion – and often, unfortunately, with ignorance – at the other. In particular, many foreign journalists call us with questions about banking secrecy, hoping to confirm all the bad things they've heard or think they know about."

Why do these parties oppose the Swiss banking secrecy laws?
"Fierce competition between the world's financial centres explains a lot. Switzerland is the world leader in asset management for private clients. It's a good and relatively safe business to be in. Private banking is certainly not as risky as investment banking. Many of our competitors would love a larger slice of the market share for private banking and cry out that Switzerland's privacy laws give our banks an unfair competitive advantage."

What is the effect of ongoing controversy and discussion of these laws upon the reputation and integrity of the Swiss banking system, and in particular its eminent private banking sector and clients? After all, the word 'secrecy' by design could attract questionable clients.
"I think there's a tendency for many people to become fixated on Swiss bank client confidentiality. Respect for privacy is only one of the attractions of the Swiss financial centre; Switzerland has long been a bastion of stability – not just political and social, but also economic, monetary, legal and fiscal stability that make Switzerland is a predictable place to do business. Clients appreciate that. Competence also has pulling power. Some of our private bankers trace their history back to the early 19th century or even earlier and have accumulated a large body of experience and professional know-how in asset management. Swiss bankers have an international outlook. They will listen to a client's needs and requirements and then seek out the best financial products appropriate for them. They are certainly not just obsessed with confidentiality, although I must say I have yet to meet someone who does not value privacy. I must emphasise that our bank client confidentiality offers no protection whatsoever to criminals. Our aim is to safeguard the privacy of honest bank clients while exposing criminals to the full force of the law. I challenge critics to name an international financial centre where banks do this better than in Switzerland."
How do current Swiss banking secrecy laws fit with wider European and rest-of-the-world laws in this field? Are there any key fungibility problems and do they lead to the possible compromising of the Swiss laws?
"Switzerland is an independent sovereign state with its own democratically-approved legal system. It's certainly not our job to enforce the laws of other countries or help their authorities carry out their own internal administrative obligations. However, when it comes to fighting international organised crime, Switzerland has proven itself to be one of the world's most efficient and reliable partners. After 11 September 2001 many Americans discovered to their surprise that Swiss bank client confidentiality was no obstacle at all to the tracking and freezing of funds linked with terrorists and their organisations. Terrorist-linked money has been found and frozen all over the world, but the US authorities have repeatedly praised Switzerland for its co-operation and efficiency in identifying and freezing such funds. On the tax front, Switzerland has never disputed the fact that international co-operation in tax matters is necessary. However, we believe that such co-operation must be subject to certain ground rules, namely mutual respect for the laws of other countries and also mutual respect for ­the democratic principle of self-determination."
How could the Swiss laws be relaxed to silence the critics – in other words, what are they asking you to do and is it ­possible?
"Through our system of direct democracy the Swiss people themselves have their hands on the legislative steering wheel, and the Swiss people themselves will decide their legislative future. On the banking front, our bank client confidentiality was not some funny instrument we dreamt up to attract foreign business. It is a principle firmly anchored in our democratic system and the vast majority of Swiss support it and have no intention of throwing the principle away. Any changes to Swiss law will be made in Switzerland and not in Brussels, London, Paris or Washington."
If you were to relax these laws, what would the consequences on the Swiss ­system be? Would it still be as attractive to the family business and other wealthy clients?
"That's a hypothetical question and any answer would just be speculation. Clients for financial services come to Switzerland for a package of reasons. They want stability, competence and discretion from their financial service providers and, in the case of Switzerland, they can round off their visit with a memorable holiday, visit world-class cultural events or simply enjoy a wonderful meal overlooking some of the most beautiful scenery in the world. Many international clients have a relationship with Switzerland that spans generations of their family and I can't put a monetary value on any one of the reasons that brings them here."
What are the expected developments and challenges in this field for 2004 and beyond?
"Switzerland has reached an agreement with the EU on the taxation of savings income. The EU acknowledges that there is more than one way to tackle tax evasion – a withholding tax is one such option. The OECD has also acknowledged that banking secrecy should not be a focus any longer and that it might be preferable to concentrate more on questions of tax policy. I expect that bank client confidentiality will be looked at with more appreciation and less political squabbling."
The maximum penalties for those who break the Swiss secrecy laws seem extremely relaxed considering these laws are so hallowed and strongly defended by the Swiss – particularly in the light of the 21st century glut of corporate and financial abuses resulting in unprecedented penalties.
"The main point is that unlike the law in other countries, Swiss law protects bank client confidentiality with criminal sanctions. That means any breach of client confidentiality is punishable as a criminal offence. Whether the maximum penalty is a prison sentence of six months or 10 years is not really decisive."
Why is tax evasion not illegal in Switzerland – even though not declaring certain funds is legal and this is the reason given for permitting tax evasion? Surely tax evasion should be separately provided for in Swiss law to show that the Swiss are against tax evasion?
"The question is based on another typical misunderstanding. Tax evasion is illegal in Switzerland, but it's classified as an 'infringement' and not as a 'crime' and is sanctioned with very stiff fines. Under Swiss law Switzerland does not extend international judicial assistance for 'infringements'. The Swiss tax enforcement system is very coherent and based on three pillars. Firstly, the principle of mutual trust and the self-declaration of income and assets. Secondly, a withholding tax to secure taxes on income, securities and bank accounts. And thirdly, a differentiated system of administrative and criminal sanctions. Swiss citizens believe this is a comprehensive and morally defensible system, applied equally to everyone irrespective of their nationality or residence."  

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