Banking in Switzerland facts for kids
Banking in Switzerland dates to the early 18th century through Switzerland's merchant trade and has, over the centuries, grown into a complex, regulated, and international industry. Banking is seen as emblematic of Switzerland. The country has a long history of banking secrecy and client confidentiality reaching back to the early 1700s. Starting as a way to protect wealthy European banking interests, Swiss banking secrecy was codified in 1934 with the passage of a landmark federal law, the Federal Act on Banks and Savings Banks. These laws, which were used to protect assets of persons being persecuted by Nazi authorities, have also been used by people and institutions seeking to illegally evade taxes, hide assets, or generally commit financial crime.
Controversial protection of foreign accounts and assets during World War II sparked a series of proposed financial regulations seeking to temper bank secrecy, but with little success. Switzerland 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 rollbacks until 2017, when Switzerland agreed to automatically share bank account information of depositors not resident in Switzerland with foreign governments and their revenue services. This de facto constituted the end of banking secrecy for depositors who were not Swiss residents. Furthermore, since Switzerland ratified the FATCA agreement with the U.S., some Swiss banks have gone so far as to close accounts held by US citizens and to ban US citizens and U.S. lawful permanent residents from opening new accounts, even if they also hold Swiss citizenship or residency, because of concerns regarding their tax liability. Unlike Switzerland, the U.S. taxes its citizens regardless of whether they are resident in their home country or not.
Banking secrecy remains in force for all residing in and taxable in Switzerland only.
Disclosing client information has been considered a criminal offence since the early 1900s. Employees working in Switzerland and abroad at Swiss banks "have long adhered to an unwritten code similar to that observed by doctors or priests". Since 1934, banking secrecy laws have been violated at least by four people: Christoph Meili (1997), Bradley Birkenfeld (2007), Rudolf Elmer (2011), and Hervé Falciani (2014). As stated, banking secrecy has been de facto abolished for non-Swiss residents holding bank accounts since Swiss banks began practicing the automatic exchange of information (AEOI) with foreign governments and revenue services since 2017.
The Swiss Bankers Association (SBA) 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 currently ranks number two behind the United States and on par with Singapore in the Financial Secrecy Index. The banks are regulated by the Swiss Financial Market Supervisory Authority (FINMA) and the Swiss National Bank (SNB) 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 and society. According to the Organization for Economic Cooperation and Development (OECD), total banking assets amount to 467% of total gross domestic product. Banking in Switzerland has been portrayed, with varying degrees of accuracy, in overall popular culture and television shows.
In 2023, Switzerland lost credibility as a banking system after the collapse of Credit Suisse, acquired by the Swiss competitor UBS, and the way the affair was handled by the Swiss National Bank.
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History
Bank secrecy in the Swiss region can be traced to the Great Council of Geneva, which outlawed the disclosure of information about the European upper class in 1713. During the 1780s, Swiss bank accounts began insuring deposits, which contributed to their 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, landlocked Switzerland 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 provided a natural environment in which to excavate underground vaults for storage of gold and diamonds. In the 1910s, during World War I, Swiss bankers traveled to France to advertise the country's banking secrecy. 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 Zürich.
The Federal Act on Banks and Savings Banks, colloquially known as the Banking Law of 1934, made the violation of banking secrecy a federal criminal offence. That major step beyond the prior enforcement of banking secrecy under civil law resulted from several developments of the early 1930s, including the introduction in the same legislation of an embryonic form of banking supervision, which Swiss bankers argued could endanger secrecy; evolving jurisprudence of the Federal Supreme Court; and a 1932 campaign against tax evasion in France led by Édouard Herriot's government. Alleged wealthy French tax evaders included military generals, and Catholic bishops. An additional provision, Article 47(b), was drafted before its ratification to protect Jewish assets from the Nazi party.
During World War II, Switzerland remained diplomatically neutral but its economy and financial system served the Axis powers by storing gold and cash balances in underground vaults, buying gold from the Nazi German state, and lending to both Germany and Italy, thus supporting their aggressive endeavors. Adolf Hitler maintained an account at the Union Bank of Switzerland (UBS) estimated at 1.1 billion ℛℳ. 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 limit the amount of orphaned assets allowed to leave a bank's custody. UBS, with consent from the Swiss government, froze the account containing Hitler's assets indefinitely, 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". When Hitler announced an (aborted) invasion of Switzerland in 1940, UBS contracted the Swiss Armed Forces to blockade their retail banks and transport Jewish assets to underground military bunkers. The Swiss Bank Corporation (SBC) and Credit Suisse, did likewise.
World War II and beyond
After the end of World War II, Switzerland and its financial system benefited greatly from having remained unharmed while all the neighbouring economies were devastated, but had to face the reputational damage from its support to the Axis powers, which also led to threats to banking secrecy as the Allied victors sought to expropriate Nazi assets held under Swiss custody. By and large, the Swiss banking sector was able to successfully deflect the threat to its secrecy practices, not least as it supported France and the United Kingdom with significant lending. When British politician George Brown blamed "gnomes of Zurich" for a weak pound sterling in 1964, Swiss bankers began using the title as proof of their financial skill and adherence to secrecy. Throughout the 1980s and 1990s, numerous international proposals for bank secrecy rollbacks were made by foreign states with little success.
After the 2008 financial crisis, Switzerland signed the European Union Savings Directive (EUSD) which obliges Swiss banks to report to 43 European countries non-identifying annual tax statistics. On December 3, 2008, the Federal Assembly increased the prison sentence for violations of banking secrecy from a maximum of six months to five years. In late 2008, after an international, multi-state investigation into Switzerland's role in U.S. tax evasion, UBS entered into a limited, deferred prosecution agreement (DPA) with the U.S. Department of Justice. The agreement initiated the landmark Birkenfeld Disclosure of information on more than 4,000 clients.
In November 2013, the Zürcher Kantonalbank was classified as a systemically important bank in Switzerland by order of the Swiss National Bank (SNB), alongside UBS, Credit Suisse, Raiffeisen (Switzerland) and PostFinance, and must meet stricter capital requirements and prepare contingency plans for times of crisis. In another step toward loosening banking secrecy, Switzerland signed the U.S. Foreign Account Tax Compliance Act (FATCA), after rejecting it twice in parliament. The FATCA requires Swiss banks to disclose non-identifying U.S. client information annually to the Internal Revenue Service. The agreement does not guarantee the semi-automatic information transfers, which remain at the discretion of Swiss government authorities. If a client does not consent to having their information shared with the IRS, Swiss law prohibits the disclosure. If a client does consent, Swiss banks send the IRS tax-related information about the account holder but are prohibited from disclosing identities pursuant to Article 47 of the Banking Law of 1934. The 2018 Financial Secrecy Index stated: "this [does] not mean that Swiss banking secrecy was finished, as some excitable news reports suggest... the breach was a partial [dent]".
In March 2015, the Swiss government entered into bilateral "Rubik Agreements" with Germany, Austria, and the United Kingdom allowing foreign holders of Swiss bank accounts to retain their anonymity in exchange for paying predetermined back taxes. Switzerland adopted the International Convention on the Automatic Exchange of Banking Information (AEOI) in 2017, agreeing to automatically release limited financial information to certain countries for the sole purpose of tax auditing. This agreement includes the Common Reporting Standard (CRS) which obliges Swiss banks to automatically send foreign tax authorities the client's name, address, domicile, tax number, date of birth, account number, account balance at years end, and the gross investment income. The CRS does not, however, override the Swiss Banking Law of 1934, so the client's expenses (withdrawals) and investments are not disclosed. Thus tax authorities cannot "go fishing" for tax evaders, they must directly link a financial crime to the client's account. The disclosed information can only be used for tax auditing and Swiss authorities may prevent disclosure.
In December 2017, the Swiss parliament launched a standing initiative and expressed an interest in formally embedding banking secrecy within the Swiss Constitution, making it a federally-protected constitutional right. In January 2018, a U.S. district court ruled that Swiss bankers "[have] nothing to do with the choice that an American taxpayer makes to not declare offshore assets", later clarifying they should not be seen as facilitating tax evasion but rather provide a legal service that is made illegal by the client. The Swiss Justice Ministry announced in March 2018 that disclosure of client information in a pending court case involving a Swiss bank is subject to federal espionage and extortion charges in addition to charges relating to banking secrecy laws.
In 2023, Switzerland lost credibility as a banking system after the collapse of Credit Suisse, acquired by the Swiss competitor UBS, and the way the affair was handled by the Swiss National Bank.
Banking and the Swiss economy
Switzerland is a prosperous nation with a per capita gross domestic product higher than that of most Western European nations. The value of the Swiss franc (CHF) has been relatively stable compared with that of many others. Swiss neutrality and national sovereignty, long recognized by foreign nations, have fostered a stable environment for the banking sector to develop and thrive. Switzerland maintained neutrality through both World Wars, is not a member of the European Union or NATO, and did not join the United Nations until 2002. The Bank of International Settlements (BIS), an organization that facilitates cooperation among the world's central banks, is headquartered in Basel. Founded in 1930, the BIS chose to locate in Switzerland because of the country's neutrality, which was important to the organization founded by countries that had been enemies in World War I.
Banking has played a dominant role in the Swiss economy for two centuries. According to the Organization for Economic Co-operation and Development (OECD), total banking assets amount to 467% of total gross domestic product.
Swiss banks managed $2.4 trillion (CHF2.1 trillion) of assets belonging to wealthy foreigners in 2022, more than any other country and before Hong Kong ($2.2T) or Singapore ($1.5T) who are ranked 2nd and 3rd respectively, according to the study conducted by the Boston Consulting Group.
Origin of funds
Most of the wealth from overseas in Switzerland originates in Germany, France and Saudi Arabia (2018). According to the Swiss Bankers Association in 2022, the amount held by Russian clients in Swiss banks is between CHF150 and CHF200 billion ($160 and $214 billion).
Regulation
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. Generally speaking, lawyers will not work against the banks and regulators are "too weak" to act in case of a problem, according to the Financial Times of London.
Automatic exchange of tax information
In February 2013, the Swiss Federal Council allowed the signing of the Foreign Account Tax Compliance Act (FATCA) with the US. These agreements force all Swiss banks to inform the Internal Revenue Service of undeclared, offshore accounts. These new regulations are applicable from 2014, and in turn assure Swiss banks of continued operations within the US.
In July 2019, the US Senate approved the Double Taxation Treaty (DTA) with Switzerland, which had already been accepted by the Swiss parliament in 2010. The new agreement, applicable to accounts from September 23, 1999, onward, amends the tax treaty of 1996 and regulates requests for information on financial accounts by US authorities, as well as exemptions for retirement savings by US persons.
Starting in 2019, Switzerland began to share (with the country of origin or residence) the details of 3.1 million bank accounts held by foreigners, as part of the agreed automatic exchange of information. Swiss banks, insurance companies and trusts have a legal obligation to comply but charitable Swiss foundations are so far exempt. As of 2019, Switzerland received financial data from 75 countries and shared data with 63 (over 100 countries starting in 2023) representing 3.6 million accounts as of 2023. Around 9000 banks, insurers, trusts and other financial institutions in Switzerland provide this information to the Swiss authorities.
Loopholes
Swiss banks are obliged to reject or terminate business relationships if there are doubts about the real identity of the owner of the account. Swiss banks have a legal obligation to record the ultimate beneficial owners of all assets they handle worldwide, but doing so accurately can be tricky in jurisdictions where it is easy for third parties to mask who the owners are. Thus, loopholes exist through the use of shell companies, trust funds, and proxy directors signing the paperwork without owning the assets.
Similarly, the use of a "straw man" or a family member is a way also to hide the true beneficial ownership in some cases.
Loopholes exist also with people with multiple nationalities who only declare one citizenship to the authorities for the purpose of tax reporting.
Another loophole consists (for US citizens) in setting up shell companies abroad and registering them with the IRS as "offshore financial institutions". The IRS issues the entities unique Global Intermediary Identification Numbers, or GIINs, which relieve the banks of FATCA's requirement to investigate whether they're held by Americans. This loophole was allegedly used by billionaire Robert Brockman to avoid taxation.
The banking systems of Switzerland and Liechtenstein have close ties. Liechtenstein's trust companies are clients of Swiss banks. Liechtenstein does not require trust companies to identify people with signatory powers, and does not prosecute tax evasion or tax fraud (2000).
To improve the tracking down and freezing of assets, Swiss NGO Public Eye has called for a national task force, a register of the beneficial owners of front companies and a reporting obligation for lawyers. The Tax Justice Network (and FATF) made similar recommendations in 2018, including breaking up the Big Four accounting firms. As of 2022, the Swiss government is following-up on some of those recommendations. In addition, Transparency International is demanding that lawyers, financial advisors plus real estate and art transactions be subject to the same exacting anti-money laundering measures as banks.
Enabling industry
The "enabling industry" refers to lawyers, fiduciaries, notaries, and real estate agents who assist the criminals in investing or hiding their ill-gotten wealth. Their activity is not covered by the Swiss Anti-Money Laundering Act as long as they are only advising clients to place money in a particular financial institution or country. Besides, lawyers in Switzerland can refuse to disclose almost anything to the authorities about their clients.
Under the Swiss Anti-Money Laundering Act, banks must report suspicious clients and transactions to the authorities. Lawyers and other advisors have no such obligation if they simply create trusts and other constructs rather than handle assets.
According to the Money Laundering Reporting Office Switzerland in 2017, official "suspicious activity reports" reached nearly 4,700 (worth $16.2 billion) up from 2,909 reported cases in 2016.
The Swiss Financial Services Act of 2020 (FinSA) requires financial advisers to obtain a licence (950 firms advising on nearly $200 billion have been approved by FINMA). The law also requires any "retrocession" paid by the bank to the advisor to be disclosed publicly.
Assets seizure
Under current rules, banking institutions and cantonal authorities can only report what is in their registers; looking into the origins of assets or connections between individuals is not permitted. For example, in 2022, a Russian oligarch reportedly handed his Swiss company over to his wife to avoid the sanctions against Russia.
Swiss authorities can freeze assets if the law requires them to. However, seizing assets is only permitted in cases involving crime or for destituted potentates.
At least a dozen destitute autocrats have had their assets frozen or seized by the Swiss government over the years. The amounts can be counted in billions of dollars. According to the Swiss media, some of the amounts have not yet been restituted to the people of the countries of origin to whom it properly belongs.
Protections
Breaches of banking secrecy laws in Switzerland are automatically processed pursuant to Article 47 of the Banking Law of 1934: those who disclose client information are subject to a maximum of five years imprisonment and 250,000 francs (€215,000 or US$250,000) in fines. Whistleblowers and leakers of client information often face hostility from the public and sustain professional setbacks. Denounced as a criminal in Switzerland, a federal arrest warrant has been in place for Bradley Birkenfeld since 2008, after he disclosed UBS client information to the U.S. Internal Revenue Service in 2007. After the 2008 financial crisis, the Swiss Parliament initiated a series of international tax treaties that rolled back banking secrecy protections for foreign clients in response to pressure from the European Union, United States, and United Kingdom.
Major banks
As of 2018[update], there are more than 400 securities dealers and banking institutions 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 Group AG and Credit Suisse Group AG, 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.
As of 2023[update] only one in five Swiss people banks with either UBS or Credit Suisse, but most Swiss prefer one or the other. Credit Suisse was historically the bank of Protestant Zürich; UBS originated in Catholic Basel, near France.
Swiss National Bank
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. According to the bank in 2012 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.
UBS
Capital ownership of UBS by country of origin as of 2014 Switzerland (19.5%) United States (10.6%) United Kingdom (16.8%) Asia-Pacific-Singapore (9.7%) Germany (0.7%) Others (42.7%)
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 Zürich 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. UBS has been at the center of various tax evasion investigations and other criminal investigations since its founding. UBS was fined $100 million by the Federal Reserve in 2004 for trading in dollars with Iran and other sanctioned countries.
Credit Suisse
Credit Suisse Group was the second-largest Swiss bank. Based in Zürich 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. Credit Suisse has been at the center of various tax evasion investigations or money laundering activities since its founding. Credit Suisse collapsed in 2023 and it was acquired by UBS the same year.
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" (in the local languages, 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. Together the cantonal banks account for about 30% of the banking sector in Switzerland, with a network of over 800 branches and 16 000 employees in Switzerland. In 2014 consolidated total assets of all cantonal banks accounted around 500 bln CHF, which is comparable with those of one the "Big Banks", UBS and Credit Suisse. The largest cantonal bank, the Zurich Cantonal Bank, has approximately 5 000 employees had a 2005 net income of CHF810 million.
See also
- List of Swiss financial market regulation
- List of banks in Switzerland
- Commodities trading in Switzerland
