"Switzerland is a country where very few things begin, but many things end."
- F. Scott Fitzgerald
For centuries, Switzerland has basked in the radiance of its pre-eminence as a powerhouse of precision, reflected in its superlative chocolates, its world-renowned and impeccably crafted timepieces and its incomparable banking industry. Over the centuries, the Swiss have become bankers to the world's wealthiest companies and individuals, unrivalled in their resolve regarding personal privacy and their sacrosanct steadfastness for secrecy.
Long a bastion of security and safety, today's Switzerland is being challenged to live up to its reputation as a conservative, canny, clever nation whose fame and fortune were made by being discreet and cautious with its own and its clients' money. However, in recent years, so many established institutions, including Swiss banks, which previously seemed solidly entrenched, have succumbed to tectonic economic shifts, reinforcing the adage that nothing lasts forever. Therefore this week, we would like to Consider This... are the changes taking place within the Swiss banking industry precursors of a larger, looming financial earthquake and just how widespread are its aftershocks likely to be?
The perspective of history
Over more than three centuries, Swiss bankers have developed a code of secrecy regarding banking and their account holders, beginning with the kings of France who required strict secrecy, had tremendous financial needs and the ability to always repay their loans.
Bank secrecy legislation dates back to that period. In 1713, exactly 300 years ago, the Great Council of Geneva established regulations requiring bankers to maintain registers of their clients, but prohibited them from sharing the information with anyone except the client, unless the City Council agreed with the need to divulge such information. Thus began Switzerland's long reputation as a safe haven for funds for noblemen and others seeking financial asylum.
At that time, bank secrecy was regulated solely by civil law, and clients could claim damages against any bank that breached their confidentiality. However, because criminal charges could not be imposed, there was no threat of imprisonment for the banker who divulged such information.
This changed when Switzerland passed the Banking Act of 1934, in large measure because Germany and France attempted to press Swiss banks into divulging information about their depositors for the "good of the state". The federal law clearly stated that bank secrecy fell within the criminal domain; accordingly, any banker who divulged client information was punishable by imprisonment.
Under Hitler, a German law provided that any German with foreign capital could be punished by death. As a consequence, many Swiss banks were closely monitored by the Gestapo. After Germans were put to death for holding Swiss accounts, the Swiss government was even more convinced of the need for bank secrecy.
Also during Hitler's reign, many European Jews deposited their life savings in Swiss banks. However, after the war, many were not allowed to recover their assets because their documentation had been destroyed. Consequently, in recent years, Swiss banks came under fire because of these actions towards Jewish account holders after World War II and also because money was held in Swiss banks that German Nazis plundered from defeated countries and their prisoners.
By one account, it is estimated that Germany transferred gold worth around $400 million (worth $3.9 billion today) to the Swiss National Bank in Bern, much of which was stolen from the Jews and sent to Switzerland to finance the war.
Various meetings were held over the years between the United States, the United Kingdom, France and Switzerland to determine who had legitimate claims to such funds. It was not until 1962 that a Swiss Federal Decree required banks, lawyers, trustees and others to review their records in order to discover dormant accounts belonging to foreign or stateless people who were deemed victims of racist, religious or political persecution.
Some funds were paid to the victims and their successors who were legitimately identified, but vast sums of money have been retained by the Swiss banks over the years, partly contributing to the latter's enormous growth in assets.
Notwithstanding the claims over the years that Switzerland was a conduit for the lodging of questionable funds, bank secrecy remained a protection for the individual against the power of the state. Repeated efforts by various governments were unsuccessful in breaching the 300-year bank secrecy convention. Until now.
Recent developments
Recent events have accelerated the thrust by the industrialized countries, aided by the Organisation for Economic Cooperation and Development (OECD), to successfully penetrate Swiss bank secrecy. First under the guise of thwarting terrorist financing and then to minimize money laundering, since the turn of the 21st century, there has been a calculated, deliberate and systematic assault by the developed nations to penetrate offshore bank accounts, beginning with Switzerland.
In addition, because the industrialized nations have done such a deplorable job of managing their own economies, resulting in record high deficits and exponentially unsustainable, increasing national debt, those countries have targeted the offshore centers where they believe their citizens have spirited away billions, far from the watchful eye of insatiable tax collectors.
In recent years, pressure has mounted on Switzerland to end its long tradition of bank secrecy. In the past five years, the United States, Germany and the United Kingdom have accelerated efforts to collect revenue from undeclared assets.
In 2009, UBS AG was caught red-handed by the United States government for encouraging U.S. taxpayers to hide their assets in secret Swiss bank accounts, resulting in UBS paying a $780 million fine to the United States. In addition, the Swiss and United States governments negotiated an agreement which required UBS to transmit information concerning 4,450 American UBS clients suspected of tax evasion to the U.S. authorities.
In 2011, Credit Suisse confirmed that U.S. authorities had initiated a criminal investigation against that bank, resulting in a potential fine of $314 million for Switzerland's second largest bank.
In February 2012, the U.S. Justice Department indicted Wegelin & Co., Switzerland's oldest private bank, on charges that it enabled wealthy Americans to evade taxes on at least $1.2 billion hidden in offshore accounts. In June 2012, Swiss bank Julius Baer handed 2,500 employee names to U.S. authorities and the following November Swiss private bank Pictet confirmed it was also under investigation by the U.S. authorities. Earlier this year, Wegelin & Co. permanently closed its doors after more than 250 years, following a guilty plea to charges of helping wealthy Americans evade taxes through secret accounts. Wegelin also agreed to pay nearly $58 million in fines on top of $16.3 million in forfeitures already obtained by the authorities.
Last month, the Swiss government introduced a bill in Parliament that would allow Swiss banks to hand over internal information to U.S. authorities in the hope of avoiding threatened criminal charges - though the banks still face fines likely to total billions of dollars. By sidestepping its secrecy laws to let Swiss bankers disclose data to U.S. prosecutors, the Swiss bill aimed to save the banks from heavier punishment in the United States for helping wealthy tax cheats. On June 12, 2013, the upper house of the Swiss Parliament approved the draft law, which is awaiting approval by the lower house or National Council.
Because of these developments, legendary Swiss bank secrecy, the treasured and respected cornerstone of Swiss banking for the last 300 years, has finally been fatally assaulted and is virtually dead. Unquestionably, the United States has executed a full-court press against Swiss banks that the U.S. perceives as hiding the wealth of U.S. citizens. In addition, Europe Union countries have also launched a direct assault against Swiss banks.
Next week we will examine some of those lethal actions. We will take a good, long behind-the-scenes look at what these earth-shattering developments portend for the future of the once stable and rock solid banking industry, not only in Switzerland, but for all offshore financial centers... including our very own Bahamas.
o Philip C. Galanis is the managing partner of HLB Galanis & Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.
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