It's a story of greed, recklessness, bullying and treachery
By recently signing an
international agreement on fighting tax evasion Switzerland effectively ended
its long tradition of banking secrecy. The OECD Multilateral convention
on cross-border tax assistance organizes the sharing of information
about taxpayers between each country’s tax authorities on request or
automatically. Eventually the goal of the OECD led by the G20 nations is to
set up a system of automatic exchange of information. This is all part of the
fight against tax evasion spearheaded by the
biggest western countries whose financial positions are in dire straits
since the 2008 financial crisis and subsequent bailouts. Their governments are
of course in need of new revenues. In Switzerland the strong opposition to any
kind of automatic exchange of information since the onslaught by foreign
governments against banking secrecy started in 2009 has now turned into
resignation. How did we get to that point ? It all starts and ends with
Switzerland’s big financial institutions.
Like many
regulatory reforms, greed then government heavy hand are at the root of this
sea change in the alpine nation. Bank
secrecy originated in the 1930’s to cement the nascent offshore business of the
Swiss banks and in response to the then financial repression (devaluations,
clampdown on tax evasion, gold confiscation in the US, sounds familiar ?) and
quickly became the selling point of the Swiss banks giving rise to a
flourishing financial sector and economy. In Switzerland hiding assets from the
tax authorities and evading taxes is not a crime and is only subject to (heavy)
fines provided no fraud is committed (this may change amid a push by the left
to reform, read increase, taxes). Bank secrecy although rather irrelevant for
Swiss citizens from a tax perspective(they are required to list all their
accounts and assets when filing taxes) was a pact of trust between citizens and
the government and a safeguard against unwarranted intrusions in private life.
For individuals outside Switzerland, bank secrecy
meant the alpine nation also known for its political stability was a unique
haven in times of repression by government and war. A Swiss bank account was
like an insurance policy against worst possible scenarios. Of course there was more than a dark side to
bank secrecy : greed led bankers to turn a blind eye to suspicious funds and
Swiss bank accounts were used for money laundering as well as by dictators. In
an effort to appease the international community as criticism mounted over
Swiss banks’ poor money laundering controls, Switzerland passed tough
anti-money laundering laws in 1997. Bankers and financial intermediaries have
since been required to follow a set of rules when accepting funds such as “know
your customer”.
How big banks sealed the fate of the business model of secrecy
Toward the end of the
century, in order to become global powerhouses in the wealth management
business, some of the larger Swiss banks took the secrecy business model to a
new level, venturing in new markets and actively soliciting wealthy clients
wherever they may be but particularly in the leading economies of the developed
world. This strategy turned into utter recklessness when it went as far as
illegally courting high net worth individuals on US soil and aiding and
abetting tax evasion of billions of
dollars with ad hoc vehicles offered to clients if they moved assets offshore.
It was greed that led the number one Swiss bank (product of a merger in 1998 amid a race for international
growth) to pursue a strategy of
expansion in the North American offshore market. Private bankers often pride
themselves as being students of history and forecasters of the future, but they
didn’t see what was coming at them. The full weight of the wrath of the United
States of America, that is. As we have learned over the past decades, the most
powerful country in the world with the world reserve currency can do just about
anything it wants. Including shutting banks’ access to the financial system
World tyranny requires there be no bank secrecy
We know
what happened next. The banks involved in the US tax fraud cases, many of which are still under investigation, were faced
with a stark choice : either comply with US demands and reveal their
US customers’ names - and then pay huge fines of up to 50% of the aggregate value of the clients' accounts - or face criminal prosecution in the US, lose their banking license in the US and
eventually go out of business. The US has also indicted a number of Swiss bankers who specialized in helping Americans cheat the IRS. But now European governments too were getting on
the tax fraud suit bandwagon in order to recoup years of unpaid taxes by some
of their wealthy residents . Since the prosecution of UBS, pressure had been mounting from the US and the OECD
countries to obtain Switzerland’s assistance in pursuing not only outright
fraud but also concealment by taxpayers. Switzerland did what looked like the
sensible thing and yielded to these demands in 2009. In 2011, the US had its
convention with Switzerland amended so that the IRS could inquire about all US
account holders at a Swiss bank instead of going through a process of single
individual inquiries. Banking secrecy has been on its deathbed ever since. The
Swiss banking industry had high hopes for a series of bilateral agreements
called “Rubik” which would maintain secrecy while organizing the payment
of taxes, (including back taxes) to the
respective states, but when Rubik failed to be approved by the German
Parliament, these hopes vanished. The idea of a new policy of “clean money”
even gained traction in Swiss banking circles, under such provision, bank
customers would have to state in writing that they were in compliance with
their country’s tax code, if they weren’t able to offer such assurances their
funds would no longer be welcome. But
the big spending politicians in the EU (many of whom pay very little taxes,
read here or watch here!) needed all the money they could get and did not want to settle for
a half-baked solution or bilateral agreements. In many european nations due to
the extremely high level of taxes, tax evasion is a national sport, the end objective of the EU authorities thus
was and had always been automatic exchange of information to ensure lockdown on
their taxpayers. Yet the EU lacked
leverage on Switzerland to effect automatic exchange of information. It’s the
ratification by Switzerland, Austria and Luxemburg of the US FATCA agreement
(Foreign Account Tax Compliance Act organizing the transmission of information
about US persons) which provided the final breach that was to trigger the
collapse of Swiss bank secrecy. How
could Switzerland deny the EU what it had accepted with the US ? Luxemburg,
being in the EU, was forced to accept automatic exchange of information and
Austria yielded on the issue as well. Switzerland then found itself isolated in
the standoff against EU heavy handed politicians. At the same time, in the
course of the negotiations with European governments another factor had entered
the equation : the issue of Swiss financial institutions’ access to the EU
market. As Switzerland was losing the competitive advantage of secrecy, access
to the large EU market for financial services became crucial if Switzerland was
to maintain its position as an important
financial center.
Access to
the EU is especially important to the largest private banks with an asset
management business and to the two Swiss banking behemoths. Unlike
the small private banks and advisors, they can easily continue to prosper
without bank secrecy but need to make up for the loss of revenues -and keep
growing- if they are to maintain their global stature and their role in the
Swiss economy. In this complex process of give and take behind closed doors,
the Swiss Federal Council, which some accuse of essentially looking after the
big banks’ interests, was then willing to go further in compromising over
transmission of information. That’s why bank secrecy ended surprisingly under a
conservative leadership and that's why automatic exchange is no longer off the table and will probably become a reality. Instead of assuming the role of a relentless defender
of a long Swiss tradition, the President of the Confederation Eveline
Widmer-Schlumpf (a former leader of the Swiss People’s Party, she founded the
Conservative Democratic Party), who led the negotiations with EU states and the
US has been viewed by many as too weak and responsible for its accelerated
demise. In the process she floated the very idea of reforming the Swiss penal code to criminalize tax evasion (an idea more popular among the left), thus ending the long standing trust beween the
government and its citizens. The secular move
by governments to gain ever more control over
their citizens’ lives - often with the help and to the benefit of big
business- continues and the Swiss people have not been unaffected.
Swiss traditions under attack
In the end
Swiss bank secrecy will disappear, not because of some of its arguably
deleterious aspects such as the fact it often facilitated theft of national
wealth by corrupt elites in the Third World and developing economies, but
because of wealthy - and sometimes also rather ordinary- taxpayers wanting to
evade what they considered
institutionalized theft by their big spending government.
Switzerland has long been a country of traditions :
bank secrecy, neutrality, the finest watches and chocolate, every man a
rifleman, clean streets and polite inhabitants, pro-business policies. For a
long time Switzerland ‘s currency was also backed by gold ( the 2000 reform of
the constitution scrapped the gold standard altogether and much of the gold was
sold and quickly spent by states years ago). Most of these traditions are at
the roots of the country's prosperity and stability, yet as links to the EU and
its influence are growing ever stronger, some traditions are going the way of
the dinosaurs. Bank secrecy has been the most recent casualty but probably not
the last.
