Are Recent Developments in International Co-operation incompatible with Swiss Banking Secrecy?
Didier de Montmollin,* Partner, Secretan Troyanov, Geneva
This article was published in Butterworths Journal of International Banking and Financial Law - February 2001. It describes the nature of Swiss banking secrecy law, the principles governing the giving of international assistance by Switzerland to foreign authorities in criminal and administrative matters and the development of Swiss money laundering law over the last 23 years.
It shows how Switzerland has been an active participant in international initiatives to combat tax fraud, money laundering and corruption and concludes that there is no incompatibility between the maintenance of Swiss banking secrecy and the country's role in such initiatives. |
Swiss Banking Secrecy On 23 October 2000, Switzerland's Finance Minister, Kaspar Villiger, said during a press conference in Geneva that "banking secrecy for the Swiss is like an assault rifle in the cupboard of every soldier". Mr Villiger was referring to the well-known duty of all young Swiss males to mandatory military service and to their right ? and duty ? to keep their personal weapons at home when returning to civilian life!
The image may be somewhat exaggerated, but still it summarises rather well the Swiss people's fighting spirit regarding their attachment to banking secrecy. Like the rifle in the cupboard, banking secrecy is perceived as embodying the following principle: in a democratic regime, citizens must be entitled to protection of their privacy. It is one of the basic guarantees of individual liberty and it is recognised as such by the Universal Declaration of Human Rights. Thus, banking secrecy is nothing more than compliance with the right to privacy in the financial sphere for transactions effected in relation to private and business activity.
Banking secrecy has a long tradition in Switzerland, which began much earlier than 1935 when the Federal Banking Law came into force, making any breach of banking secrecy a criminal offence punishable by imprisonment for up to six months, by fines up to CHF50,000 or both. As Professor Niklaus Blattner, CEO of the Swiss Bankers Association, said in his speech to the Cambridge International Symposium on Economic Crime on 10 September 2000:
"Swiss financial privacy is certainly not an instrument designed to attract rich foreigners unfairly; it is a characteristic of the relationship of the Swiss citizens towards their administration, tax authorities and banks".
Any change in the Swiss legislative framework on banking secrecy would require approval by Parliament and possibly by the population in the event of a request for a referendum. In 1984, the people rejected (by a majority of 73 per cent of the votes) an initiative by the Socialist Party aimed at suppressing banking secrecy. In 1998, a motion presented by MP Jean Ziegler for the abolition of banking secrecy was rejected by 75 votes to 42 in Parliament. In September 2000, the Swiss Bankers Association published a survey which showed that 77 per cent of those questioned supported the current concept of financial privacy and 72 per cent of them would be opposed to the abolition of banking secrecy even if the EU demanded it. However, Swiss banking secrecy is not absolute and offers no protection to criminals. It is lifted in all criminal proceedings, crimes and misdemeanours, including money laundering, corruption, insider trading, manipulation of stock exchange rates and tax fraud (which targets acts of commission, not omission, ie forged documents ? such as false invoices, false accounts or false balance sheets ? which have been used to deceive the tax authorities). On the other hand, omitting to declare certain taxable assets such as income or capital is not a criminal offence in Switzerland. It is nevertheless dealt with administratively. Lifting of banking secrecy may also occur in divorce proceedings, inheritance matters or debt collection and bankruptcy proceedings. Banking secrecy may also be lifted in cases of international assistance in criminal and certain administrative or civil matters, provided the conditions defined by the respective Swiss laws ? including international treaties ? are met. In criminal matters, the following principles have to be complied with:
- the principle of "speciality": the confidential information given may only be used by the requesting foreign authority in the context of criminal proceedings and not for other offences such as, for example, tax (except tax fraud as covered by Swiss law) or exchange control matters;
- the principle of "double criminality": subject to a few exceptions, international assistance (concerning information or documents subject to banking secrecy) is granted by Switzerland only where the offences are punishable both in the requesting state and in Switzerland. This was formerly sometimes difficult to comply with (for example, in famous insider trading cases investigated by the US authorities at a time when Switzerland had no specific provision in the Criminal Code), but this principle no longer represents an obstacle to the granting of assistance by Switzerland. Indeed, double criminality now exists for virtually all economic crimes; and
- the principle of "reciprocity": the foreign requesting authority has to guarantee reciprocity.
As far as the specific issue of money laundering is concerned, ie the laundering of the proceeds of crime as defined under the Swiss Criminal Code, it may be worth mentioning the main measures taken in Switzerland over the last 23 years:
| 1 July 1977: | First version of the Agreement on the Swiss Bank's Code of Conduct with regard to the Exercise of Due Diligence (the "Due Diligence Agreement") issued by the Swiss Bankers Association ("SBA") and the Swiss National Bank ("SNB"), which codified the "know your customer" principle in the banking sector, as well as the prohibition against actively aiding international capital flight and tax evasion. |
| 1 October 1982: | Second version of the Due Diligence Agreement issued by the SBA and SNB. |
| 1 October 1987: | Third version of the Due Diligence Agreement issued by SBA only. |
| 1 August 1990: | New arts (305bis and 305ter) in the Swiss Criminal Code on money laundering and on failure by any financial intermediary to exercise due diligence in financial transactions. |
| 1 May 1992: | Federal Banking Commission ("FBC") guidelines concerning the combating and prevention of money laundering. |
| 1 October 1992: | Fourth version of the Due Diligence Agreement issued by the SBA |
| 1 August 1994: | Revised art 305ter of the Swiss Criminal Code introducing the legal right (not obligation) for all financial intermediaries to inform the criminal authorities of their suspicions of money laundering;
new art 260 of the Swiss Criminal Code on criminal organisations;
new art 59, para 4 of the Swiss Criminal Code on the seizure of assets controlled by criminal organisations. |
| 1 April 1998: | New law on combating money laundering in the financial sector (banking and non-banking sector) in particular introducing an obligation to communicate any "founded suspicions" of money laundering. |
| 1 July 1998: | Fifth version of the Due Diligence Agreement issued by the SBA;
second version of the FBC guidelines on money laundering. |
| 1 May 2000: | New arts 322ter to 322octies of the Swiss Criminal Code on corruption, including corruption of public officials outside Switzerland. |
As demonstrated, Switzerland has continually reviewed and adapted its laws and regulations over the last 23 years, resulting in one of the most comprehensive legal frameworks in the world.
International initiatives against tax fraud, money laundering and corruption The dominant characteristic of the last few years has been the acceleration of globalisation of the international financial markets, stimulated by technological progress and the liberalisation in movements of capital and financial services at international level. Globalisation has resulted in accelerated internationalisation of problems requiring all countries involved to increase their efforts to work together in a spirit of co-operation. Indeed, progress in this respect leads to greater geographic mobility of capital, but also increases the opportunities for money laundering and tax fraud or evasion. Such pre-occupations account for the studies and reports recently issued, eg by the Basle Committee on consolidated banking supervision, the Financial Action Task Force on Money Laundering ("FATF"), the Financial Stability Forum ("FSF") set up by the G7 after the international financial crisis of 1997?99, the OECD and the EU.
The impact of these initiatives goes beyond the countries which are members of these institutions. Upon the initiative of the G7, various studies have recently targeted tax havens and financial off shore centres in order to oblige them to adopt and use recommended legislative frameworks conforming to the international standards set by these institutions. The international pressure directed against Liechtenstein for some time, which has been widely mentioned in the press, is an example of this. The FATF, OECD's Forum on Harmful Tax Practices and FSF continue to issue lists of the "problematic" offshore centres in order to bring international pressure to bear on them, sometimes under the threat of sanctions, and to induce them to adapt their legislation and practices accordingly.
The UN also launched an initiative on the offshore centres, complete with an international conference in the Cayman Islands on 30?31 March 2000, in order to give those offshore authorities an incentive to reinforce their efforts against money laundering. Finally, and in the context of its agenda to fight corruption, the OECD is currently examining the role played by the offshore centres and banks in that respect. Hence, there is a vast campaign directed by the industrialised powers against offshore centres, but also another crusade against "tax offences". This latter campaign is led in particular by the G7, as confirmed by the press release of the G7 in Washington on 15 April 2000. Paragraph 14 of the statement of G7 finance ministers and central bank governors is worth quoting:
"We strongly support the work being done by the OECD's Forum on Harmful Tax Practices to curb harmful tax competition through preferential tax regimes and tax havens. We welcome the report by the OECD's Committee on Fiscal Affairs on access to bank information for tax purposes and call on all countries, using the report as a starting point, to work rapidly towards a position where they can permit access to, and exchange bank information for, all tax administration purposes".
This international campaign was marked by the adoption of the OECD Report on Harmful Tax Competition in April 1998, to which Switzerland abstained, as did Luxembourg, both criticising the biased and unbalanced nature of this report and its 19 recommendations which focus on the financial activities and the exchange of information rather than embracing the phenomenon of fiscal competition as a whole. The Report of the OECD Committee on Fiscal Affairs ("CFA") on the improvement of access to banking information and its work on the feasibility of a hybrid system of exchange of information and/or withholding tax come similarly within this context. Such work parallels that currently in progress within the EU on drafting a code of conduct regarding corporate taxation, taxation of savings, efforts against customs fraud, etc. But the G7 countries are also attempting to have the tax issues debated before other organisations such as the FATF. For instance, the G7 has asked the FATF and the CFA to examine the means of reinforcing the capacity of the anti-money laundering systems to include tax offences. The FATF and the CFA have, inter alia, been required to study the means of facilitating the transfer of information from anti-money laundering authorities to domestic and foreign tax authorities.
Switzerland is obviously affected by such developments, being an active partner in the international co-operation against organised crime, money laundering and corruption. It is a founding member of the FATF and has played a central role in the drafting of the OECD Convention on Combating Bribery; as mentioned earlier, it has a comprehensive arsenal of laws and regulations which correspond to the highest international standards in all these areas.
No less important than the legislative framework is Switzerland's political will to make use of it. This will is well profiled. To give but one example of Switzerland's readiness to co-operate, one may cite the Mobutu affair. To our knowledge, Switzerland was the only country among the 18 countries contacted by the government of the Republic of Congo to have frozen all known assets of the former head of state. History appears to repeat itself in the case of the former President of Nigeria, Mr Abacha.
According to the Abacha Report published by the FBC in early September 2000, the aggregate amount of Abacha funds deposited in Switzerland was $208 million. Of this, $123 million came from prominent financial institutions established in the United Kingdom, $73 million from United States institutions, $11 million from Austrian institutions and only $1 million directly from Nigeria! Switzerland was among the very first countries to freeze the accounts concerned and to grant international judicial assistance in criminal matters to Nigeria. The United Kingdom's authorities in particular have demonstrated an obvious reluctance to act in an expeditious manner in this regard. eg by granting judicial assistance to Nigeria four months following the request.
The Abacha affair accelerated the outcome of the initiative of 11 of the world's leading international private banks, led by UBS, which was undertaken two years ago and finalised in the so-called "Wolfsberg principles" on 30 October 2000. These principles represent a common international code of banking conduct on the prevention of money laundering. The Head of the FBC Secretariat, Daniel Zuberbühler, confirmed on 30 October 2000 that this code "does not represent any change in our country [Switzerland] as the principles contained therein are already incorporated in our anti-money laundering legislation, as well as in the regulations issued by the FBC and the SBA". Thus, the intent of the two Swiss members included in the 11 banking institutions, ie UBS and Credit Suisse Group, is to induce their foreign competitors to adapt and apply the same set of rules as are applied in Switzerland, thereby avoiding a major distortion in competition. The nine other banking establishments are: Citibank, ABN Amro, Barclays Bank, Banco Santander Central Hispano, Chase Manhattan Private Bank, Deutsche Bank, HSBC, JP Morgan and Société Générale.
The attitude of the FBC as Swiss banking regulator is clear, as mentioned in the Abacha Report, ie the application of similar standards must be better co-ordinated and ensured at international level. In most all respects, the FBC considers that Swiss legislation and regulations are already adequate for such internationalisation in the fight against money laundering and corruption, the main reservation cited in this context being the need for the Swiss Criminal Code to provide for criminal sanctions against legal entities. At present, fines may only be levied against Swiss banking institutions within the framework of the Due Diligence Agreement. The expected amendments to the Swiss Criminal Code are currently being discussed in Parliament.
In view of the above, it is not a surprise that Switzerland is concerned by the scale of the activities developing in certain under-regulated offshore financial centres, eg in terms of money laundering. It therefore actively supports the efforts made to fight abuses and to encourage these authorities to adopt and apply international standards. (See, in particular, the report published on 22 June 2000 by the FATF on the review to identify non-co-operative countries or territories.)
On the other hand, Switzerland is also targeted for purposes of increasing international pressure to combat tax evasion. Switzerland is an important international financial market with substantial cross-border banking transactions making it comparable to New York, London and Tokyo. However, some people in certain international bodies would like to place Switzerland in the category of an offshore financial centre in order to be able to increase this pressure. For example, in April 2000, the FSF published a list of offshore financial centres defined with respect to their compliance with international standards in the financial area, which included Switzerland; the Swiss authorities protested as, again, Switzerland is a major, sophisticated international financial centre successfully doing substantial business with non-residents, just like the United Kingdom and the United States. None of the FSF's characteristics of an offshore financial centre applies to Switzerland. Specifically:
- business and investment income is taxed at rates close to the average of the OECD countries. Indeed, direct taxation of individuals in proportion to total revenues is, according to statistics published in 1997 by the OECD: 52.8 per cent in Switzerland, 47.9 per cent in the United States, 41 per cent in Germany, 29.8 per cent in United Kingdom and 24.1 per cent in France;
- a 35 per cent withholding tax at source applies to all interest and dividend payments made by Swiss issuers or debtors, irrespective of the domicile of the recipient;
- the incorporation regime follows international standards; the minimum capital of a Swiss corporation is CHF100,000;
- the supervisory regime for financial services, including anti-money laundering laws and regulations, is in line with international standards and is even considered to be a model;
- financial institutions without a physical presence in Switzerland may not be licensed by the FBC;
- Swiss supervisory authorities have full access to all files and, as mentioned earlier, banking secrecy is no obstacle to international mutual assistance in criminal matters; and
- the volume of non-resident business does not substantially exceed the volume of domestic business.
In September 2000, the Chairman of the FSF confirmed that, based on these objective criteria, Switzerland would not qualify as an offshore financial centre. However, because some of its members consider Switzerland to be an offshore financial centre, the FSF seems to prefer to keep Switzerland on the list! This type of "interest" shown in Switzerland may be explained by the fact that according to certain estimates, over a third of the worldwide private wealth managed outside the country of residence is managed in and from Switzerland.
The EU seeks to combat tax evasion in a more effective fashion, by means of a draft directive on the taxation of savings. Switzerland's position is not always easy to understand in this regard because it supports its current system of withholding tax as a valuable means of inducing people to declare their capital and income, whereas a majority of member states of the EU are more in favour of tax information exchanges between tax authorities. In early November 2000, the Swiss government proposed to share the profit of the Swiss withholding tax with the respective states of the EU. It remains to be seen if such a proposal may lead the EU better to recognise the merits of the Swiss system, which combines the advantages of preserving the individual's right to privacy in his financial affairs and the state's avoidance of additional administrative burdens involved in systematic exchanges of personal information on citizens between states.
On 27 November 2000, EU finance ministers reached an agreement establishing the principle of information exchange, but with an interim regime for those countries, led by Luxembourg, which are reluctant to exchange information with tax authorities. The EU countries would be authorised to apply a withholding tax on savings income at a rate of 15 per cent for the first three years of the agreed seven-year transitional regime, followed by 20 per cent for the next four. But at the end of the transitional regime, ie in 2010, all EU member states will be required to apply the information exchange system.
It is obviously premature to determine to what extent the result of the negotiations among EU finance ministers on the "substantial content" of the planned directive for the taxing of income savings will materialise. The effect of the agreement of 27 November 2000 will only be seen at the end of 2002, ie when EU member states are due to vote on a broad package of tax measures, of which the savings tax directive will be just part.
Further, the goal agreed at the EU Feira summit in June 2000 of having agreements equivalent to the forthcoming savings directive between EU and non-EU financial centres (including Switzerland) will not necessarily be easy to achieve.
Conclusion The above initiatives, namely those of the OECD and the EU, cannot be separated from the fact that a weakening of Swiss banking secrecy would be welcomed by certain competing financial markets only too happy to be the recipients of assets invested in Switzerland. Moral arguments are put forward in support of the huge economic and commercial interests to be gained.
In the circumstances, the Swiss authorities are determined to defend the country's economic interests and its financial markets. The abolition of banking secrecy is not a consideration, as there is definitely no incompatibility between the maintenance of Swiss banking secrecy and the country's international co-operation. Such determination has just been reaffirmed by the Swiss finance ministry spokesman after the EU agreement on 27 November 2000: "Swiss banking secrecy is not going to be affected by the agreement concluded in Brussels".
The future will tell to which degree Switzerland will be able to adhere to its well-defined position in this respect, while continuing its active international co-operation.
* The author is an investigator appointed by the Swiss Bankers Association under the Due Diligence Agreement and a member of the Swiss Bar Association Anti-Money Laundering Authority.
