Stephen Screech and Tom Hardman examine how the Swiss banking sector has evolved to deal with international demands for tax transparency while protecting the privacy of their clients.
Swiss banks have long been synonymous with client confidentiality, enshrining the right of personal privacy for lawful clients in its legislation with the Banking Act of 1934. Recent changes adapted to comply with international standards of disclosure, particularly in relation to tax matters, have been accommodated but Switzerland’s commitment to protecting bank-client confidentiality remains.
The History of the Legislation
Over the last decade, all jurisdictions that have a reputation for managing the wealth of private clients have come under scrutiny, none more so than Switzerland.
The country famously prides itself on its discretion. The "duty of absolute silence" has been enshrined in Swiss law since the enactment of the Banking Act of 1934, but has been a tradition in the country for centuries. Article 47 of the Act establishes professional confidentiality comparable to that of doctors, lawyers or priests, and wealth managers in Switzerland take that duty just as seriously. The Banking Act strictly limits financial institutions sharing any client information with governments and tax authorities anywhere else in the world, making it a punishable offence for bankers to divulge information about their clients unless they suspect a crime has been committed in Switzerland.
This tradition of inviolate confidentiality was eroded somewhat in the 1990s following an investigation into the fate of assets moved to Switzerland before, during and immediately after World War II. By the end of the War, many of the account holders had died and because the due diligence that Swiss banks had on file was insufficient to identify their heirs, accounts were frozen and assets lay unclaimed for decades.
Following the Independent Committee of Eminent Persons (ICEP) report on the specific issue of dormant accounts, Swiss banks agreed to publish a list of accounts that had remained unclaimed since the beginning of the Second World War. The long-term knock on effect has been the abolition of so-called truly anonymous accounts; existing accounts were either closed or are now supported by background documentation comparable to other tax neutral jurisdictions.
The Impact of Internationalisation
These disclosures came at a time where growing internationalisation was already eroding the ability of Swiss banks to maintain complete client privacy.
Starting in the 1970s, the rapid growth of international financial markets proved an incentive for banks to establish themselves where their operations were taking place, giving rise to multi-nationalisation. While economically attractive, this evolution in financial structures made it all but impossible to guarantee complete secrecy due to the difficultly of enforcing privacy between different offices of the same company, let alone when dealing with other wealth advisers.
As the layers involved in private client structures became more complex, colleagues in other jurisdictions had to become involved and some of these had different compliance requirements. Over time, these requirements became more stringent, forcing the archetypal Swiss Private Banker to divulge an increasing amount of client information both to colleagues in foreign offices and their advisers.
This cultural shift undoubtedly presented challenges to the traditional Swiss private banking model but it was a challenge that was unavoidable.
Anti-Money Laundering and Terrorist Financing
The financing of international terrorism thus became a very real concern to every country and assumed even greater importance following the publication by the G20 and the OECD of a black list of countries that they claimed were effectively aiding crime by means of their secretive banking systems.
Only marginally better off were countries on the so-called grey list, and this list included Switzerland. The country was determined to act to mitigate any possible damage by association and as a consequence not just banks, but all persons and entities active in the financial services sector in Switzerland, came under a legal obligation to “know” their client. This met with some initial resistance, especially from long standing clients who perhaps objected to showing a utility bill when they had been clients for generations. However, recognising the need to change with a changing world, Swiss practitioners proceeded to patiently outline the requirements and benefits for clients to disclose some information to some authorities, although this patience was perhaps misconstrued as reticence.
The Push for Cross Border Information Exchange
Switzerland fully shoulders its share of the burden of combatting international crime by adhering closely to OECD standards and participating in what is known as “foreseeably relevant” investigations across borders.
But that is very far from being an open pond for any energetic foreign magistrate to come fishing. Take FATCA, the legislation introduced in the USA but successfully applied by it globally, as an example. To a very small minority, the legislation is seen as a foreign government seeking to enter the database of every financial practitioner in the world under the guise of the fight against international terrorism. However, the reality is probably more prosaic. The USA, like many other governments, is seeking information to tax at the very least, or maybe even repatriate, assets held by its citizens in other parts of the world. Although Switzerland has agreed to comply, it still maintains its traditional respect for confidentiality.
The Swiss government’s fundamental stance remains that Swiss financial institutions are forbidden to provide third parties with information about their clients. This remains the underlying principle. On its own, neither a bank nor any other financial institution or individual can legally lift banking secrecy. In point of fact, whistle blowers who have sold or otherwise passed client details to foreign governments and tax authorities, now find themselves subject to the full rigours of Swiss law (including custodial prison sentences) since such sales amount to theft of confidential information, whatever may be the motive for it.
Across the industry, huge steps have also been taken to prevent the unwitting or illegal disclosure of information. However, if for any reason it suits a client’s purpose to disclose private information otherwise covered by secrecy legislation it is entirely permissible to do so, of course, but only with the client’s agreement.
Moving forward, Switzerland can only countenance handling ‘declared’ financial assets in new relationships. But already with regards to certain countries, secrecy can nevertheless be rigorously upheld. In the agreements that Switzerland has signed with those countries, provision has been made for the payment of anonymous source tax. The client keeps his assets discreetly in a safe place where his confidentiality is scrupulously maintained, but the country of his tax residence collects its much needed revenue.
Lawful citizens of any country who have assets in Switzerland will continue to have their confidentiality respected and indeed preserved. Swiss financial institutions will be obliged to supply certain information on a case by case basis to a foreign tax authority in response to a specific and substantiated request related to an internationally recognised crime. For the time being, that is a playing field that all parties appear to be comfortable to play on; no doubt because Switzerland has so much more to offer than confidentiality.
The Current Status
Yes, the level of confidentiality Switzerland once offered is no longer a reality and the transition to be more transparent has been painful for the world’s leading banking jurisdiction. However, there is no doubt that Switzerland remains an optimum jurisdiction for private client advice, service and administration of assets. It is located in a convenient time zone, allowing advisers to contact their clients at most times of the day and of course in numerous languages. It is home to some of the most stable, competitive and adaptable banks in the world and they are supported by other top players in the financial markets, such as insurance companies, investment advisers, company administrators and trustees. All of these professionals are well educated, highly qualified and fully understand the standards they are expected to maintain when it comes to knowing one’s client and international law. They also understand and respect the client’s need for efficiency, promptness and international advice. In short, Switzerland is still one of the pre-eminent jurisdictions for private banking, and this is unlikely to change given its many advantages.
Stephen Screech, Senior Manager, Business Developmen, First Names Group Geneva, and Tom Hardman, Associate Director, First Names Group, Jersey