In a settlement of criminal charges this week, Swiss banking giant UBS agreed to pay $780 million and reveal the names of Americans who used their accounts for tax evasion. Giddy with success (and UBS’s acknowledgment in the criminal settlement that its bankers used counter-surveillance tactics!) the IRS then filed documents seeking to force the bank to turn over records for an additional 52,000 more account holders suspected of violating tax laws. Obama no doubt has his fingers crossed that Kathleen Sebelius is not among them. IRS investigators believe that UBS purposefully attempted to conceal accounts for their wealthy clients, going so far as to have their U.S. agents keep “an irregular hotel rotation” and store a “generic UBS PowerPoint presentation to show U.S. authorities in the event of a border search.” (Microsoft marketing team, take note: Your new ad campaign = fine. PowerPoint used for elaborate international financial schemes = sexy. You’re welcome.)
The Swiss media is in an uproar over the future of bank secrecy – a practice in Switzerland that has been protected in private law for over 300 years. Financial privacy is seen as a fundamental right under the country’s system of democracy. Swiss citizens can directly determine financial policy and practice by initiating a referendum with 50,000 signatures – only 0.7% of the population. In 1934, bank confidentiality was codified in a law that makes bank employees criminally liable for divulging client information. Wikipedia might lead one to believe that bank secrecy was legislated to safeguard Jewish assets from the Nazis. Certainly, the Nazi government imposed capital punishment on Germans (especially German Jews) who kept secret overseas accounts. In response, some Swiss banks implemented more layers of security for their clients. That being said, Swiss historians and journalists have claimed that secrecy was a consequence of the law, not its purpose and that the motive of protecting Jews was a myth created by Swiss banks themselves in the late ’50s.
The probable reasons behind the law are a bit more unflattering to the Swiss banking industry. In 1933, the Basler Handelbank affair had the European banking sector all atwitter (@FrenchAuthorities: lay off! about 4 hours ago from web). The president and vice president of Swiss institution Basler Handelbank were pulled over by the French gendarmerie with a list of 2,000 French clients in the trunk of their car. High society types, politicians, generals and bishops were among the citizens trying to shield their assets from French taxes. Basler Handelbank refused to cooperate with the authorities, the Swiss Federal Court backed them up and Swiss banks lowered their veil of secrecy even further. Also in the ’30s, the Swiss banking industry was hit with bankruptcies not too different from today’s and the federal government called for greater regulatory power. The banks agreed, but only under the condition that their practices of secrecy be formally legislated. This might lead one to ask what sorts of strange deals are being made in our negotiations with the auto industry… Mandated fuzzy steering wheel covers? Formalization of Yosemite Sam mud flaps?
In order to protect their clients, Swiss banks have instituted several security measures, including the numbered accounts so popular with your international espionage types. To open one, you must appear in-person in Switzerland and they generally require an initial deposit of at least $100,000. Only the opening contract for a numbered account indicates a client’s actual name and access to that document is severely restricted. For all other transactions and correspondence, including bank statements, the client is referred to only as a number or pseudonym. Operating under this system, customers can generally remain anonymous and it limits the chances of bank employees doing untoward things like blackmailing clients by threatening to rat them out to their governments. This used to be an even more anonymous system, but since 1977, banks have been required to keep their clients’ names on file and even a copy of some official identification.
The Swiss government has agreed to some exceptions to bank secrecy – e.g. if the customer consents, where Swiss law requires, and/or if a Swiss court orders disclosure. But Swiss law and the courts will only demand disclosure if the act alleged by the complaining party would be unlawful in Switzerland. And while tax fraud is illegal in Switzerland, tax evasion actually is not. Hence, the difficulty for foreign governments to subpoena account information.
There have been other notable occasions where bank secrecy was set aside. The first was in 1986 when Ferdinand Marcos, the corrupt former president of the Philippines, and his wife – “Steel Butterfly” Imelda Marcos – fell from power. After years of looting the Philippines’ economy of billions of dollars, the Marcos family fled to Hawaii, taking suitcases of gold bricks and trusting that some of their embezzled funds would be safe in Switzerland. Under intense international pressure, however, the Swiss governments froze the accounts and Imelda no longer had a slush fund for her huaraches.
In 1996 and 1997, more international finger-wagging, including class action suits filed in the U.S., led the Swiss to reveal information about accounts belonging to Holocaust survivors and their descendants. The Swiss Bankers Association (SBA) along with the World Jewish Congress and the World Jewish Restitution Organization established a commission run by – wait for it – chairman of Obama’s Economic Recovery Advisory Board, Paul Volcker to audit the banks for evidence that they had willfully concealed deposits of Holocaust victims. Although it revealed no evidence of the systematic looting of Nazi gold, it must have made for long hours and vending machine dinners for the banks’ PR departments. In 1999, the banks ponied up $1.25 billion as a final settlement with the Holocaust claimants.
While the Swiss still take pride in their practice of secrecy, recent anti-money laundering legislation and cooperation agreements with other governments may have lessened their appeal to the criminal elements of the world. But fear not third world dictators and mafia goons! Singapore is on the rise in the international financial world and eager to stash your funds. In addition to chewing gum-free streets, you can enjoy tax-free interest income and financial secrecy. Best enjoy it before the IRS calls you out.
(Sources: David Chaikin – Policy and Fiscal Effects of Swiss Bank Secrecy, Der Spiegel, Fortune, Guardian, Swiss Bankers Association, Time)