Switzerland, a country that's known for its picturesque landscapes, delicious chocolate,
and most importantly, its banking secrecy…
In fact, banking is seen as emblematic of Switzerland…
And it has been portrayed, with varying degrees of accuracy, in overall popular culture, books,
movies, and television shows.
For instance, American historical black comedy crime film "The Wolf of Wall Street" (2013)
shows how Belfort and his accomplices used Swiss bank accounts to hide their unlawful
activities and launder their illicit earnings.
Similarly, the final season of Breaking Bad shows the characters using a Swiss bank account
to launder their illegal earnings.
But…
Have you ever wondered how a small country like Switzerland became one of the world's
leading financial hubs?
Or why is it so infamous for its banking secrecy?
And is this secrecy truly as solid as it appears to be?
So, let’s Delve into the history of Swiss Banking system, exploring the important events
that have shaped the present system and most importantly about Swiss Banking Laws and how
the region's banking secrecy has enabled an unequal global financial system?
Well….
The Swiss banking system has a long history dating back to the Middle Ages, when wealthy
merchants and traders used banks in Geneva, Zurich, and other cities to store their money
and conduct financial transactions.
While the modern Swiss banking system began to take shape in the late 19th and early 20th
centuries, as the country's neutrality during World War I and II helped to attract foreign
capital and establish Switzerland as a safe haven for deposits.
In fact, the history actually goes back to approximately 300 years…
So, let’s start from the beginning…
From its origins as a safe haven for wealthy individuals to its modern role as a global
financial hub… Swiss bank accounts started to insure deposits
in the 1780s, which helped them earn a reputation for being financially secure.
And Switzerland's international neutrality was legally established in 1815 by the Congress
of Vienna, which brought in a lot of money.
At that time the wealthy, landlocked Switzerland saw banking secrecy as a way to build an empire
similar to that of France, Spain, and the United Kingdom.
The Swiss Federation was established in 1848 following a little civil war between the Swiss
cantons in the 1840s.
The direct democracy used to create the state helped to create the political stability required
for banking secrecy.
One important development was the creation of the Swiss National Bank in 1907, which
helped to stabilize the country's currency and establish a reputation for financial stability.
The Swiss Bank Corporation and Credit Suisse, two of Switzerland's largest banks, were also
founded during this period.
And in the 1910s, during World War I, Swiss bankers travelled to France to advertise the
country's banking secrecy.
And a rapid financial inflow into Switzerland was triggered by the war's role in causing
political and economic unrest.
Rich clients shifted their valuables into Swiss accounts to escape taxation as European
governments started to impose taxes to support the war.
Swiss Bank Corporation and Credit Suisse, two of Switzerland's largest banks, were also
founded during the early 20th century and became major players in the banking industry.
However, one of the key developments in the evolution of the Swiss banking system was
the introduction of strict bank secrecy laws in 1934, which made it difficult for foreign
governments to access information about the accounts of their citizens.
Surprisingly, the law made Switzerland a sanctuary for Nazi officials, along with the nation's
political neutrality.
Adolf Hitler and his government benefited greatly from the close cooperation of Swiss
financiers, who provided financial credit and assisted fleeing Nazis in concealing their
wealth after the Second World War.
Moreover, this helped to attract a large number of foreign depositors as Swiss banks began
aggressively selling their services to wealthy individuals as well as businesses who wished
to avoid their country's tax authorities in the early 2000s.
They were able to conceal their assets from their home countries and avoid paying taxes,
while the bulk of people were governed by their respective nation's tax rules.
As a matter of fact, foreign clients own over half of the 7.9 trillion Swiss francs (£6.3
trillion) in assets that are being managed in the nation.
It has aided in the development of an industry that contributes 10% to the Swiss GDP and
provides a similar number of jobs.
Secrecy is now the foundation of modern Swiss banking…
Tax fraud is a crime in Switzerland while tax evasion is not…
And the disclosure of client information by banks, including the disclosure of the information
to foreign authorities, is prohibited by criminal law.
In addition to secrecy, they also have a comparatively high capital adequacy ratio, which indicates
that the banks retain a higher amount of capital, guaranteeing the protection of their customers'
money even during a financial crisis.
These elements have aided Swiss banks in building trust amongst their clients on a global scale…
However, the Swiss banking sector encountered a variety of difficulties, including escalating
rivalry from other financial hubs and demand to ease bank secrecy restrictions from foreign
governments.
In response, the Swiss government and banking industry took steps to modernize the system,
including implementing stricter regulations and improving transparency.
Even more recently, it appears that Switzerland has stuck to its commitment to banking secrecy
despite the Russia-Ukraine war.
Due to the severe sanctions imposed by the EU, Swiss banks stopped managing the investment
portfolios of their Russian clients as of April 2022 and prohibited substantial deposits.
The sanctions Switzerland has imposed are significant since it owned more than $11 billion
(USD) in assets from Russian companies and people as of 2020.
And although if these measures historically belong to the neutral Switzerland, they do
not go against the financial secrecy heritage.
Therefore, even in the face of international pressure, Switzerland was able to impose sanctions
against individuals accountable for the war in Ukraine without even slightly compromising
its heritage of banking secrecy.
Now… the thing that I want to highlight here is that this Swiss banking system and
the secrecy laws might be beneficial for the region, well they actually are…
But they're having a negative effect on the overall global financial system…
For instance, due to the Swiss secrecy laws the global financial system is now severely
biased in favour of the wealthy, with a significant amount of the world's wealth being held by
a relatively small number of people and corporations.
Tax evasion affects people's lives directly and is not merely a matter of fairness or
corruption in the tax system, that is a human rights issue.
Like, when wealthy citizens of a nation are hiding millions of dollars in Swiss bank accounts,
making it impossible for them to appropriately support their children's education or when
wealthy people fail to pay taxes on both their ill-gotten and legal money, a county is unable
to adequately feed or care for its most vulnerable residents.
This is a violation of their human rights.
Not only that…
These secrecy laws also enabled illegal activities such as money laundering, corruption and other
financial crimes to go unnoticed.
It is estimated that a significant amount of global black money is held in offshore
accounts, with Switzerland being one of the most popular destinations.
The Swiss banking secrecy has also been criticized for allowing corrupt politicians and dictators
to hide their wealth and evade accountability for their actions.
In recent years, there have been efforts to crack down on black money, with various countries
and organizations pushing for greater transparency and cooperation in the fight against illegal
financial activities.
However, the Swiss banking system's historical use of bank secrecy has enabled the wealthy
to evade taxes and conceal their illegal wealth.
And it cleverly manages to avoid repercussions every time…
Let’s take an example of 1MDB case…
It was discovered in 2015 that Malaysia's state investment fund, 1MDB, had been utilised
to launder billions of dollars and support a Malaysian official's opulent lifestyle.
And Swiss banks were found to have played a key role in the scandal.
However, Switzerland was able to escape serious consequences by concentrating on a small number
of found-guilty clients rather than bringing any legal action against the relevant banks.
So…
Switzerland is fairly consistent in not breaking banking secrecy regulations, even though they
are ready to make amends for previous wrongs by agreeing to pay hefty fines and, in rare
instances, share a tiny bit of their client information.
But, it doesn't seem like the Swiss practice of banking in secret will end any time soon,
or does it?
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