Banking in Switzerland

"Banking secrecy in Switzerland, Swiss banking secrecy, Swiss Bank" redirects here. For the former bank and predecessor to UBS, see Swiss Bank Corporation.

Switzerland's banking industry is known for its banking secrecy and security. Pictured: the Mont Cervin Palace in Zermatt. A hub of tourism, many private banks service the city and maintain underground bunkers and storage facilities for gold at the foothills of the Swiss Alps.

Banking in Switzerland began in the early 18th century through merchant trade and has, over the centuries, grown into a complex, regulated, and international industry. Along with the Swiss Alps, chocolate, watchmaking and mountaineering, banking is seen as emblematic of Switzerland.

Switzerland has a long, kindred history of banking secrecy and client confidentiality reaching back to the early 1700s. Started as a way to protect wealth European banking interests, Swiss banking secrecy was codified in 1934 with the passage of the landmark statute, the Federal Act on Banks and Savings Banks. Controversial protection of German assets–both from the Nazi Party and Jewish households–during World War II sparked a series of financial regulations seeking to temper bank secrecy. Switzerland, considered the "grandfather of bank secrecy", has been one of the largest offshore financial centers and tax havens in the world since the mid-20th century. Despite an international push to meaningfully roll back banking secrecy laws in the country, Swiss social and political forces have minimized and reverted much of proposed roll backs. Disclosing client information has been considered a serious social and criminal offence since the early 1900s. 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 (for French), Lugano (for Italian), and Zürich (for German) service the different geographical markets. It consistently ranks in the top three states on the Financial Secrecy Index and was named first in many years, most recently in 2018.

The three largest banks–UBS, Credit Suisse, Julius Bär–are all regulated by the Swiss Financial Market Supervisory Authority (FINMA), and the Swiss National Bank (NSB) 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. According to the Organization for Economic Co-operation and Development (OECD), total banking assets amount to 467% of total gross domestic product.

History

Further information: Banking in Switzerland § Banking secrecy#history

During the 18th century, 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. Hy Hentsch & Co. bank 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.

Swiss economy

Main article: Economy of Switzerland

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. 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. 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.

Banking in Switzerland has historically played, and still continues to play, a dominant role in the Swiss economy. According to the Organization for Economic Co-operation and Development (OECD), total banking assets amount to 467% of total gross domestic product.

Regulation

Main article: List of Swiss financial market legislation

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.

Banking secrecy

"Banking secrecy in Switzerland, Bank secrecy in Switzerland, Bank privacy in Switzerland, Bank privacy in Switzerland, Swiss banking secrecy, Swiss banking secrecy," redirects here. For further information, see Bank secrecy § Switzerland.

History

The first renditions of banking secrecy in the Swiss region reaches back to the early 1700s. The Great Council of Geneva outlawed the disclosure information relating to the European upper class, mostly of French origin, in 1713. As a way of avoiding the Protestant banking system, Catholic French Kings deposited their holdings in Geneva accounts. During the 1780s, Swiss bank accounts began insuring deposits which contributed to a wide spread 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 of Switzerland, landlocked, 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:

This is what the Swiss bourgeoisie are thinking. ‘That’s our future. We will play on the contradictions between the European powers and, protected by the shield of our neutrality, our arm will be industry and finance.’

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 also provided a natural environment to store gold and diamonds underground and in mountains. During the 1910s, Swiss bankers traveled to France to advertise its banking secrecy during World War I. The war's contribution to political and economic instability, sparked a rapid capital movement into Switzerland. As European countries began to increase taxes 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 Zurich. While disclosing client information was a civil offence in Switzerland for centuries, the Swiss Federal Assembly made it a federal criminal offence in 1934 with the passage of the landmark legislation, the Federal Act on Banks and Savings Banks. Colloquially known as the "Banking Law of 1934" or the "Swiss Banking Law of 1934", it codified banking secrecy in the eyes of Swiss law. The Federal Assembly enacted the law to quell controversy over the alleged tax evasion of wealthy French businessmen, military generals, and Catholic bishops. An additional provision of the law, Article 47(b), was drafted before its ratification to protect Jewish assets against Nazi forces during World War II.

Along with protecting German Jewish assets, Swiss banks collaborated with Nazi Germany and their allies by storing their gold and cash balances in underground vaults. It is estimated that Adolf Hitler maintained an account at the Union Bank of Switzerland (UBS) worth 1.1 billion Reichsmarks. 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 places a limit on the amount of orphaned assets allowed to leave a bank's custody. UBS, with consent from the Swiss government, placed the remainder of Hitler's assets underground, indefinitely froze the account, 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". After Hitler announced his invasion of Switzerland in 1940, UBS contracted the Swiss Armed Forces to blockade their retail banks and transport Jewish assets to underground military bunkers. Other Swiss banks, namely the Swiss Bank Corporation (SBC) and Credit Suisse, did likewise and along with UBS, were fined hundreds of millions of dollars in reparations for their dealings with Nazi Germany. All throughout the 1980s and 1990s, numerous international proposals for bank secrecy rollbacks were proposed by foreign states to little success.

After the 2008 financial crisis, Switzerland signed the European Union Savings Tax Directive (EUSTD) which obliges Swiss banks to report to 43 European countries annual tax statistics. In 2008, after an international, multi-state investigation into Switzerland's role in U.S. tax evasion, the Swiss government entered into a limited, Deferred Prosecution Agreement (DPA) with the U.S. Department of Justice. The agreement saw to the release of information on more than 4,000 clients, a landmark disclosure. In 2013, Switzerland entered into another limited agreement with the United States allowing select banks to pay penalties instead of face international prosecution. The 14 largest banks in Switzerland, however, were exempt from the agreement rendering it relatively inconsequential. In another step toward loosening banking secrecy, Switzerland signed the U.S. Foreign Account Tax Compliance Act (FATCA), which requires Swiss banks to disclose non-identifying U.S. client information to the Internal Revenue Service, annually. These agreements, however, are limiting and applicable to only U.S. tax payers.

Switzerland is set to implement the Organization for Economic Co-operation and Development (OECD)'s Common Reporting Standard (CRS) in late 2018. This agreement only applies to developed countries and does not limit banking secrecy but rather limits the legal action that can be taken if or when Swiss bank secrecy leads to a financial crime. Wealthy politicians, businessmen, and public figures, among others, from developing countries are not subject to the same limitations. Clients from "Mexico, Brazil, Turkey, Russia, Israel, and Saudi Arabia" are afforded increased banking secrecy.

Modern secrecy

Switzerland, considered the "grandfather of bank secrecy", has been one of the largest offshore financial centers and tax havens in the world since the mid-20th century. Despite an international push to meaningfully roll back banking secrecy laws in the country, Swiss social and political forces have minimized and reverted much of proposed roll backs. Disclosing client information has been considered a serious social and criminal offence since the early 1900s. Whistleblowers, despite legal protections, have been treated with hostility both from the public and often face professional set backs in Switzerland. 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 (for French), Lugano (for Italian), and Zürich (for German) service the different geographical markets. It consistently ranks in the top three states on the Financial Secrecy Index and was named first in many years, most recently in 2018.

Bank vaults and bunkers

UBS and Credit Suisse branches next to each other on the Paradeplatz in Zurich

A handful of larger Swiss banks operate undisclosed or otherwise secretive bank vaults, storage facilities or underground bunkers for gold bars, diamonds, cash, or other valuable physical assets.

Numbered bank accounts

Main article: Numbered bank account

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.

Taxation evasion

"Taxation in Switzerland § Tax evasion" redirects here. For the redirecting section, see Taxation in Switzerland § Tax evasion.

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

Swiss Capital Market in billion CHF, Data from a Helvea Study

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 May 2018, is a part of the Schengen agreement.

United States

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.

Major banks

The largest bank in Switzerland: UBS

The second largest bank in Switzerland: Credit Suisse

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. The largest and second largest Swiss banks are UBS and Credit Suisse, respectively. They account for over 50% of all deposits in Switzerland; each has extensive branch networks throughout the country and most international centers. Due to their size and complexity, UBS and Credit Suisse are subject to an extra degree of supervision from the Federal Banking Commission.

UBS

Main article: UBS

UBS Group AG 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

Main article: Credit Suisse

Credit Suisse Group is the second-largest Swiss bank. Based in Zurich and founded in 1856, Credit Suisse 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 during the 2008 financial crisis.

Other banks

Central Bank

Main article: Swiss National Bank

The central bank of Switzerland, the Swiss National Bank (SNB) is headquartered in Bern.

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.

Raiffeisen Banks "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.

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.

See also

• List of Swiss financial market regulation
• List of banks in Switzerland

Bibliography

• "Financial Secrecy Index: Narrative Report on Switzerland" (PDF). Financial Secrecy Index: 1–10. May 2018 – via Tax Justice Network.
• Guex, Sébastien (2000). "The Origins of the Swiss Banking Secrecy Law and Its Repercussions for Swiss Federal Policy". Business History Review. 74 (2): 237–266. doi:10.2307/3116693. JSTOR 3116693. {{cite journal}}: Invalid |ref=harv (help)
• Mueller, Kurt (1969). "The Swiss Banking Secret: From a Legal View". International and Comparative Law Quarterly. 18 (2): 360–377. doi:10.1093/iclqaj/18.2.360. JSTOR 757529. {{cite journal}}: Invalid |ref=harv (help)

External links

• The Swiss Financial Center, from swissworld.org