“We’ve never had a crisis like this one,” says Paolo Bernasconi of the University of St. Gallen. “For fifty years, Swiss bankers have lived by the following rule: We strictly uphold Swiss legislation, while ignoring foreign legal norms. This has earned us a lot of money.”
Send in the cavalry
Among foreigners, Switzerland tends to be associated with an assorted number of clichés. The Swiss are a cheerful mountainous people, speaking a funny sort of language. They are obsessed with cleanliness and they like to shelter tax evaders who procured their wealth in dubious ways. In the past, the Süddeutsche Zeitung has referred to tax evasion as the raison d’état of the Swiss Confederation. On top of that, in a fit of political incorrectness, Peer Steinbrück, the current Social Democratic Party of Germany (SDP) candidate for the upcoming election to the German Chancellery, has suggested that the Swiss were like Native Americans, against whom one ought to send in the cavalry.
Yet despite the fact that both rhetorically and diplomatically speaking this was probably not a smart statement, Steinbrück’s frustration is understandable. Under a Swiss law dating back to 1934, it is a criminal offense for any bank to divulge any information relating to any of its clients. As a result, Switzerland has effectively become the world’s largest tax haven, managing up to 27% of global offshore wealth, according to the Boston Consulting Group. Britain comes in second with 24% and the United States and its territories third with 19%.
Overall, assets managed in Switzerland amount to approximately SFr. 5’300 billion, SFr. 2’700 billion of which are attributable to foreign clients, of which 80% are estimated not to have been taxed abroad. The German central bank claims that about €615 billion escape German tax authorities each year, comprising approximately 28% of foreign assets managed by Swiss banks.
The Swiss banking secrecy provision has been bent on multiple occasions. In 1962, for example, as a result of intensive pressure exerted by a number of Jewish organizations, the Swiss government ordered the circumnavigation of the banking secrecy law in search of wealth belonging to Holocaust victims. In 1996, a double tax agreement was signed with the United States of America, in effect permitting the exchange of certain types of data in an effort to prevent tax evasion.
Yet the onslaught on the Swiss banking secret that has begun in the wake of the global financial crisis of 2008 remains unprecedented. It is not limited to tactless remarks by grumpy German politicians, but among other developments, it extends to investigations against Swiss banks in the United States and to international arrest warrants against Swiss bankers.
In 2009, the United Bank of Switzerland (UBS) was forced to pay $780 million in fines to the United States (US) for the encouragement of tax fraud and as recently as this year, the US has filed criminal charges against the Swiss Bank Wegelin for allegedly having assisted American citizens in hiding over $1.2 billion in secret accounts. Further, in 2009, the G20, together with the Organization for Economic Cooperation and Development (OECD) placed Switzerland on a grey list of countries accused of not cooperating on tax matters.
“Our country is completely tied to the global banking, trading and payment systems; it can’t afford to end up on a black list,” commented Paolo Bernasconi at the time. Switzerland has indeed chosen to adopt a range of OECD standards as a consequence of the 2009 scare. Under pressure from the United States, the Swiss were also forced to hand over data on thousands of clients of Swiss banks to American authorities. Yet lastly, and perhaps most important, Switzerland has agreed to a number of bilateral tax treaties, among others with Germany, Britain and Austria. The Rubik Accords, as they are known, permit offshore bank account holders to transfer a given amount to the Swiss government in order to make up for their unpaid taxes. The Swiss government, in turn, will pass it on to the respective contracting partner state. No names will be mentioned in the process, which is set to begin in January of 2013, after having been revised to comply with the legal standards of the European Union (EU). Whether these accords will in effect come into force, however, remains uncertain, especially in the case of Germany, where the Bundesrat has recently opposed the ratification of the tax agreement with Switzerland on the grounds that it is still too protective of tax evaders.
Naturally, the goal of the EU and of its distinct members would be a complete and automatic information exchange between states’ fiscal authorities. Yet this would spell the immediate end of the Swiss banking secret.
So is this the end?
“It’s over, and it’s not a bad thing,” at least in the opinion of Luc Thevenoz of the University of Geneva. Yet in fact, quite to the contrary, enhanced regulation, growing costs and intricate tax agreements with cranky neighbours seem to indicate that the process is far from over. “There is more coming,” says Sergio Ermotti, Chief Executive Officer of UBS. This is just the beginning of the end.
Yet as conventional wisdom has it, every end has a beginning. For the fact that Switzerland has achieved its present place as one of the wealthiest countries in the world is not solely due to the banking secret, as most seem to believe. Switzerland is attractive as a market, because it stands for political stability, neutrality, low government debt and an economy that has remained resilient throughout the financial crisis and that only marginally on account of its financial sector. It ought to make a fresh start given these qualities.
On this basis, an end to Swiss banking secrecy would hopefully lead to two major developments in Switzerland. Firstly, that young people will consider career paths beyond banking and that graduates will return to other sectors of the economy. Secondly, it will mean that Swiss banks will finally have to offer value for the money and devise services that can compete with foreign banks not on account of a dubious advantage, but on the basis of competence, expertise and innovation.