94. Swiss Banking Industry - How it Works.....!!

Updated: May 31, 2021

What is Swiss Banking Industry ?


Banking in Switzerland dates to the early eighteenth 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, along with the Swiss Alps, Swiss chocolate, watchmaking and mountaineering. Switzerland has a long, kindred 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 the 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 to 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 roll backs. Although disclosing criminal activities by banks, who do not enjoy a good reputation even in Switzerland, is generally well seen by the Swiss public, 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 by four people: Christoph Meili (1997), Bradley Birkenfeld (2007), Rudolf Elmer (2011), and Hervé Falciani (2014).


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 consistently ranks in the top three states on the Financial Secrecy Index and was named first many times, most recently in 2018. The two large banks–UBS and Credit Suisse are regulated by the Swiss Financial Market Supervisory Authority (FINMA), and the Swiss National Bank (NSB) 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, to varying degrees of accuracy, in overall popular culture, books, movies, and television shows.


I. Banking Secrecy


History

Swiss banking secrecy was born in Geneva during the 1700s.


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. As a way of avoiding the Protestant banking system, Catholic French Kings deposited their holdings in Geneva accounts. 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 to excavate underground vaults for storage of gold and diamonds. During the 1910s, Swiss bankers traveled to France to advertise its banking secrecy during World War I. The war's contribution to political and economic instability, sparked a rapid capital movement into Switzerland.


Pic : Switzerland's mountainous terrain helps to store gold in underground bunkers.


Private wealth is best kept in private hands. The state should not be able to dispossess private citizens of their savings.


The Swiss believe in this principle. The rest of the world does not. That is why each and every of the 26 cantons of the Swiss confederation comes with different tax rates.


II. Swiss Banking Law of 1934 - Legalised Secrecy


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 Zurich. While disclosing client information was a civil offence in Switzerland for centuries, the Swiss Federal Assembly made it a federal criminal offence in 1934 with the passage of the landmark legislation, the Federal Act on Banks and Savings Banks. Colloquially known as the Banking Law of 1934 or the Swiss Banking Law of 1934, it codified banking secrecy.


The Federal Assembly enacted the law to quell controversy over the alleged tax evasion of wealthy French businessmen, military generals, and Catholic bishops.An additional provision, Article 47(b), was drafted before its ratification to protect Jewish assets from the Nazi party.


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.

If there is anything the Swiss take more seriously than the precision of their watches or the quality of their chocolate, it's the secrecy of their banks.

— Steve Kroft, host of Banking: A Crack In the Swiss Vault


Pic : International pressure to roll back banking secrecy is seen as an attack on Swiss culture and values. The Swiss parliament expressed an interest in adopting banking secrecy into their constitution in 2017.


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 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.


III. An Overview of Two Major Private Banks


1. Credit Suisse at Glance


It all began with Swiss railroads in 1856. When the country needed to finance the expansion of its rail network, the forerunner to Credit Suisse was founded. We have since turned into an integrated bank operating in more than 50 countries around the world.


Credit Suisse's story stretches back to July 5, 1856, when the prominent politician, business leader, and pioneer Alfred Escher founded "Schweizerische Kreditanstalt."

The original purpose of the new bank known as SKA was to finance the expansion of the railroad network as well as the further industrialization of Switzerland. Fourteen years later, the bank's first foreign representative office opened up in New York. In 1905, the bank's first branch outside Zurich opened in Basel following the acquisition of Oberrheinische Bank.


Pic : Alfred Escher ( 1819-1882 )


What started off as a Swiss investment bank turned into a success story spanning over the next century and a half, with Credit Suisse gradually evolving into a leading global provider of financial services.

This development has been achieved through strong organic growth, supplemented by a series of significant mergers and acquisitions such as that of the US investment bank CS First Boston in 1990, the Swiss private bank Leu in 1990, Switzerland's fourth largest bank – Volksbank – in 1993, the Brazilian wealth manager Hedging-​Griffo in 2007, and Morgan Stanley's wealth management businesses in Europe, Middle East, and Africa in 2013 to cite a few of the more recent deals.