Global Financial Integrity

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Why Swiss Banks Can’t Be as Secretive in 2014 as 1934


UBS is a Swiss bank that was fined for banking secrecy crimes

Swiss banks can’t be as secretive today as they were many years ago. The World Won’t Let Them.

For years, secrecy jurisdictions such as Switzerland helped U.S. depositors use their own secrecy laws to avoid U.S. income taxes. Banking secrecy was firmly established in Switzerland in 1934 when it became a criminal offense to reveal a client’s identity. As a result, Swiss banks have helped hide around $2.1 trillion in offshore accounts. Today this is an increasingly unacceptable amount of money to hide away.

Since the 2008 financial crisis, banks in secrecy jurisdictions have faced increasing international pressures to make banking information more transparent. Such banks have been urged to take on the automatic exchange of information on bank accounts.

The Foreign Account Tax Compliance Act (FATCA) is a U.S. law enacted in March of 2010 requires banks outside the U.S. to report information on its American depositors to the IRS. This would allow easy access to information on transactions and financial flows thus enable law enforcement and tax authorities to track illegal activities. Such a law puts a a great deal of pressure on institutions within banking secrecy jurisdictions. FATCA is instrumental in eliminating banking secrecy amongst G20 nations thus far.

As a result of recent policy changes, the U.S. Department of Justice has been prosecuting many organizations including Swiss banks for alleged criminal conspiracy and has reclaimed large sums. More than a dozen Swiss banks have been investigated by the DOJ. Credit Suisse was fined $2.6 billion last month for fraudulent practices. Similarly, UBS was fined $780 million for aiding tax evasion. The DOJ is also investigating other banks in Switzerland, India, Israel and many other locations.

Clearly, the punishment of Switzerland’s oldest and most powerful banks has scared other banks into being cooperative. Several private banks have signed up for a program through which they acknowledge they may have “unwittingly helped U.S. citizens dodge taxes” and agree to pay large fines to avoid criminal prosecution. The fear tactic seems to have made many banks realize that their position in the financial world may not be as immutable as previously believed to be. Better to confess now than to wait for harsher punishment later.

Christophe Gloor, the head of the Association of Swiss Private Banks, notes that Swiss banks can no longer “hang onto an idealized but now re-evaluated past,” and must cooperate with a world that is becoming less tolerant of banking secrecy.

Large international banks around the world will unlikely easily give up their rights to banking secrecy without some kind of fight. Yet the world is undoubtedly changing and international pressure is mounting. Banks within secrecy jurisdictions cannot simply maintain old notions. Now is a time for change. In the upcoming years, we will see if Swiss banks follow suit to end banking secrecy.

Image: Flickr / Some Rights Reserved by Martin Abbeglen