The rise of Switzerland as a financial centre began about 100 years ago. However, it is only in the last five decades that its reputation has catapulted from one of relatively modest standing – the Swiss centre was earlier dwarfed by New York, London, Paris, Amsterdam, Frankfurt and Vienna – to representing the epitome of the best and the ugly in the global financial sector.

Until 1935 Switzerland did not have a national banking law and hence no banking secrecy. The genesis of institutionalised secrecy was not all with the intent of facilitating money laundering but resulted from a peculiar politico-economic situation in the interregnum of the two world wars. 

A law was passed in 1933 by the Nazi government directing Germans to declare their national assets held abroad. The same year the law for the “seizure of unpatriotic and anti-state assets”, which was a code word for the confiscation of the property of political opponents and Jewish citizens, was also passed.

Around the same time Switzerland became increasingly concerned about the rise of a German Nazi party information service as well as subversive activities by Nazi groups in Lugano, Zurich and Davos. Though there had been intermittent calls for state regulation in the banking sector, primarily to protect investors, in the aftermath of World War I when many banks had fallen into disarray, this proposal fell by the wayside in light of the larger threat looming over the country. 

Banking espionage was beginning to be an Achilles’ heels for the country. The case of the Arthur Pfau, a German spy, was important. Pfau tried to procure information about the assets of German clients from the Union Bank of Switzerland (UBS). Though he was expelled, many similar incidents ensued.

Apart from the Nazi threat, the high war taxes introduced in European countries to pay for war debts and fund reconstruction work led many to attempt avoiding these taxes by moving assets abroad. Neighbours of the country hounded Switzerland for restricting capital flight from their country.

Additionally, the belligerent nations of France, Austria-Hungary and the German Reich, owing to the unpredictable domestic situation had begun raising capital in the Alpine region. The German banks were ravaged by the division of the country while the leading French institutions were nationalised in 1945 – they were further nationalised in 1981 and 1982 – in the decades following World War II. Leaving these investors unprotected would have endangered the burgeoning business in the country.

Strong banking secrecy of 1935 was the political defence of a country surrounded by powerful neighbours. The Swiss are known to be ruthless with leakers of financial information – acts of indiscretion could cause major upheavals to their otherwise buoyant economy.
The first and the direct beneficiaries of banking secrecy were the German left when trade unions were broken up by the National Socialists on Hitler’s orders and it became possible to save some of their assets and bring them to Switzerland. They were joined by refugees from many other countries who were pursued for political and religious reasons.

In fact, one of the prominent stories in the banking folklore – a story vehemently countered by Swiss bankers – is how the financial sector gained much from the wealth of the Jews killed by Hitler who had parked their money in Swiss banks but had no claimants after them.
The stability of the Swiss financial system coupled with political neutrality of the country – it is still not a part of the European Union – entrenched its niche as a place where clients could get privacy and stability for their assets. Apart from the Chiasso affair of 1977 suffered by Credit Suisse, foreign clients had had little to worry about in contrast with the failures of some other major banks in Europe.

The international character of the Swiss banks was further buttressed by the fact that the Swiss currency was one of the few to remain fully convertible through World War II. The endurance of the Swiss franc has been remarkable given the vicissitudes suffered by many other major currencies post-1945. The fact augured well for Swiss accounts.

A tradition of blowing whistles

Herve Falciani, the French whistleblower who exposed the accounts of tax evaders across nationalities in 2006-07, and is currently assisting the Indian government in pulling up a list of black money holders, has many able predecessors.

The French, who have long been traditional investors in Switzerland, have also been traditional whistleblowers of the Swiss financial system. The French, along with private banks of Geneva, have ensured the success of asset management in Switzerland while being privy to many grey dealings, including of their own politicians.

One of the more famous cases that spilt the names of famous French personalities leading to an array of arrests in 1932 was when two of the bank’s staff met with some French who wanted to avoid France’s coupon tax.

Whistle-blowing in the Swiss political landscape has seen a constant stream of contenders challenging the impregnable fortress of the secrecy regime. Banking secrecy has assumed a veneer of sacrality in this region and is exemplified by the backlash and severe legal proceedings that whistle-blowing brings with it.

Rudolf Elmer, one of the earlier whistleblowers in recent times, was a former employee of Julius Bär – one of the largest wealth managers – who exposed the domestic and German tax evasion, has been imprisoned, once for 187 days and again for a month, both without charges. The essence of the prosecutor’s case, which has been running for 10 years now, is that Elmer broke laws that make it a criminal offence for a bank employee to reveal a client’s secrets, no matter how murky. To say that he and his family were incessantly hounded would be an understatement.

Closer in time is the case of Pierre Condamin-Gerbier, a former Geneva-based private banker, who was accused of exposing undeclared Swiss accounts to the French authorities, forcing the resignation of France’s budget minister who had a nifty sum hidden in safe Alpine havens. Gerbier in all probability will face the same harassment as Elmer for one of the cardinal sins of Swiss banking ethics.

Falciani already had an international warrant issued against him after his 2008 disclosure and has spent his prison time and will be arrested if he lands on Swiss soil.

A leaf from history

Swiss accounts, over the last year, have acquired an emotive significance in India. It has become one of the strongest measuring yards for judging the efficacy of the BJP rule. But getting information of account holders or declaring their names will be an uphill task as the American experience has shown us.

India’s reach ends where the territory of Swiss domestic laws and international treaties begin. Information on Swiss bank deposits, under the Indo-Swiss double taxation avoidance (DTA) agreement, cannot be revealed until the aggrieved party provides the names of the individuals it is investigating, the banks where they have illegal money, and the evidence of the criminality of the account holders. The Swiss have made it clear that they will not cooperate with “fishing expeditions”. These make for a tall order.

Coupled with these “requirements”, India is also bound by secrecy clauses that might jeopardise future cooperation if transgressed.

Switzerland has been at major loggerheads with the US vis-a-vis revealing tax information of clients. This fact is particularly telling when one opens an individual account in Switzerland. Though the simplicity of the information sheet will put any Indian bank to shame, however, 60 percent of the information sheet is America-related questions – whether you are a Green Card holder, whether you lived in the US, etc.

Under the Foreign Account Tax Compliance Act (FATCA), which became a US law last year, foreign financial institutions are required to automatically transfer information about Americans to the Internal Revenue Service. This has spurred serious debates in the financial centre about the costs involved in maintaining good relations with the US.

The US justice department has already fined UBS and Credit Suisse and more such indictments are expected to follow. Credit Suisse, which was fined $2.6 billion, has agreed to pay $1.8 billion to the federal authorities, $715 million to the New York state banking regulator and $100 million to the Federal Reserve. This decision met with severe criticism from the Swiss Bankers Association.

Ironically, despite the hounding by American authorities, the laws that underpin Swiss secrecy – the criminal code, the Banking Act and stock-exchange rules – not only remain strong but the din for strengthening constitutional support for financial secrecy in the Alpine region has increased. A right-wing party has already collected almost enough signatures for a referendum on the same.

Meanwhile, political parties which have chosen to underpin their success on such risky ventures do so at considerable peril.

shreerupa@governancenow.com

(The article appeared in February 16-28, 2015, issue)