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Swiss bank account secrecy – Is it the end of an era?

Swiss Bank Account Secrecy and Security

Swiss banks have long held a reputation for anonymity and privacy, but with new tax laws and regulations in effect, that reputation may be slipping away. Let’s explore Swiss bank account secrecy, both its history and its future.

October 5, 2018, marks the day that the Swiss Federal Tax Administration (FTA) began exchanging bank account data with tax authorities in other countries for the first time in hundreds of years.

Prior to 2021, Swiss banks maintained a high level of secrecy and privacy for their clients and they were the ultimate choice for offshore banking. You’ve likely heard of the hype surrounding Swiss bank account secrecy, be it through media depictions or news of tax evasion and other criminal activity.

With new tax laws and regulations, Swiss bank account secrecy may be floundering. How does this change the landscape of Swiss banking security?

Swiss Bank Account Secrecy

Just as Switzerland is well-known for the Swiss Alps, chocolate, watchmaking, and mountaineering, they are equally associated with banking. Banking in Switzerland began in the early eighteenth century and has largely grown into the international industry that it is today.

Swiss bank account secrecy is nothing new and can be traced back to its origins. Swiss banking secrecy laws were originally put into effect to protect the assets of those being persecuted by the Nazis in the 1930s, however, certain individuals and institutions have exploited these laws in order to evade taxes (illegally), to hide their assets, and to commit financial crime.

Let’s take a closer look at Swiss bank secrecy laws.

Swiss Bank Secrecy Laws

Swiss bank secrecy laws can be traced back as far as the 1700s, beginning with the Great Council of Geneva.

Great Council of Geneva

In 1713, the Great Council of Geneva outlawed the disclosure of information relating to the European upper class. Catholic French Kings deposited their wealth into Genevan accounts to avoid Protestant banking systems.

Congress of Vienna

About 100 years later in 1815, the Congress of Vienna established Switzerland’s international neutrality which saw a large influx of capital into Switzerland. Individuals saw Switzerland as not only a secretive place to store wealth, but also a secure place.

Swiss Federation

After a small civil war, the Swiss Federation was founded in 1848, further contributing to the political stability that would live to feed Swiss banking secrecy.

World War I

The war’s impact on political and economic instability in numerous countries led to an even more robust influx of capital into Switzerland. In fact, Swiss bankers even traveled to France in the 1910s to advertise Swiss banking secrecy and security. European countries began to increase their taxes to fuel the war efforts, inspiring wealthy citizens to move their financial holdings into Swiss banks to avoid increased taxation.

Federal Act on Banks and Savings Banks

While it was a civil offense to disclose Swiss bank client information for centuries, it became a criminal offense in 1934 with the passing of the Federal Act on Banks and Savings Banks. It’s also known as the Swiss Banking Law of 1934 or the Banking Law of 1934. While a provision was added to protect Jewish assets from the Nazi party, Switzerland maintained its neutrality by also collaborating with Nazi Germany and their allies. Hitler himself had an account at the Union Bank of Switzerland.

European Union Savings Directive

Flash forward to 2008, Switzerland signed the European Union Savings Directive (EUSD) which requires Swiss banks to disclose non-identifying annual tax statistics to 43 European countries. This was likely spurred by the 2008 financial crisis.

Deferred Prosecution Agreement (DPA) with the United States

Later in 2008, there was an in-depth international investigation into Switzerland’s role in United States tax evasion. The Union Bank of Switzerland entered into a DPA with the U.S. Department of Justice resulting in the monumental disclosure of more than 4,000 clients, called the Birkenfeld Disclosure.

United States Foreign Account Tax Compliance Act (FATCA)

Another nod towards loosening Swiss bank secrecy, Switzerland signed the FACTA, a law passed by the U.S. in 2010, which requires Swiss banks to disclose U.S. client information (non-identifying) annually to the IRS.

Rubik Agreements

In 2015, Switzerland entered the Rubik Agreements with Germany, Austria and the United Kingdom which allows Swiss bank account holders to maintain anonymity by paying predetermined back taxes.

International Convention on the Automatic Exchange of Banking Information (AEOI)

In 2017, Switzerland adopted the AEOI which meant they would now release limited financial information to certain countries for the sole purpose of tax auditing. This agreement includes the Common Reporting Standard (CRS), which means that clients’ names, addresses, tax number, birth date, account number, account balance, and gross investment income must all be disclosed but ONLY for the purpose of tax auditing.

This brings us to the present day, when in 2018, the Swiss Federal Tax Administration (FTA) began exchanging bank account data with tax authorities in other countries.

Why are Swiss banks so secret?

Although Swiss bank secrecy has taken a few hits in the last few decades, secrecy is still important to the Swiss.

Swiss historian, Sébastian Guex, wrote in The Origins of Secret Swiss Bank Account“We (the Swiss) will play on the contradictions between the European powers and, protected by the shield of our neutrality, our arm will be industry and finance.”

You’ve heard the saying, “I’m Switzerland.” When it comes to settling debates between two entities, a third party will often claim they are Switzerland, meaning they are neutral in the debate.

Switzerland’s neutrality has gained them international fame, security, and stability. This has indefinitely fueled their finance and banking industry. In order to maintain their neutrality, they have to treat both sides of a dispute with equal secrecy and protection – take Nazi Germany and Jewish assets for example. 

Their approach has been monumentally successful. According to estimations by the Swiss Bankers Association (SBA), in 2018 Swiss banks held $6.5 trillion USD in assets or 25% of all global cross-border assets.

Are Swiss bank accounts still secret?

We understand that Switzerland has a longstanding history of secrecy, but are Swiss bank accounts still secret in the year 2022?

Yes and no. Switzerland has faced significant pressure from outside entities to roll back on their secrecy laws. However, the Swiss have done their best to minimize the impact of these pressures.

It is still a serious crime to disclose client information. Bankers in Switzerland take this very seriously. They adhere to an unspoken moral code similar to that of a lawyer’s or doctor’s.

Further, Switzerland frequently scores in the top three states on the Financial Secrecy Index.

However, Switzerland has suffered some serious blows. They’ve been pressured to freeze Russian accounts belonging to individuals subject to the U.S. and E.U. sanctions. In 2019, UBS was fined $4.5 billion for helping wealthy French evade taxes. A Swiss private bank, Julius Baer, paid $547 million to settle another tax evasion case, this time in the U.S.

In recent years, Singapore is beating Switzerland in terms of banking foreign funds.

There is a caveat to Swiss banking secrecy. Swiss bankers who hold offices exclusively in Switzerland are protected from foreign lawsuits, extradition requests, and criminal charges. That is, as long as these Swiss bankers remain within the country’s legal jurisdiction.

Inside the Secretive Swiss Bank for the World’s Richest People

Pictet, the secretive 215-year-old firm for the world’s richest people, is one of the most competitive in Switzerland, and therefore the secretive Swiss bank of choice for the world’s richest people.

In its entire history, only 43 individuals have risen to the status of Pictet managing partners. All 43 of these individuals happen to be white men. These individuals oversee $662 billion in assets, often earning more than 20 million francs per year.

However, the long-standing banking firm has seen an alarming change in recent years. In 2019, a dozen long-tenured relationship managers resigned. In the same year, four leading bankers, looking after Russian clients, also resigned. Bankers for Scandinavia and Israel followed the resignation trend and billions in assets were put at stake.

Many of these resignations might have something to do with Pictet’s recent influx of new hires. The firm is indefinitely at a crossroads between adaptation and tradition.

By the end of 2020, under the new direction of Boris Collardi, Pictet’s wealth bankers swelled to 1,098, in contrast to 740 wealth bankers five years ago.

The largest challenge facing Pictet and other Swiss banks in Asia, where wealth is rapidly growing. In the long term, Collardi wants to break into the ranks of the top 10 private Asian banks.

While Swiss banking secrecy has taken quite a few hits in the 21st century, Swiss banks are still holding in there for the top states for secrecy under the Financial Secrecy Index. And they still value their client’s rights to anonymity and privacy. As the world of international banking is changing, Swiss banks are determined to adapt and maintain their reputation as the top country for offshore banking.

Read also: The Ultimate Guide to Swiss Banks