Bank Secrecy and the Sphere of Financial Privacy
Anti-Money Laundering Developments
Bank Secrecy and the Sphere of Financial Privacy
On October 23 2000 Switzerland's finance minister, Mr Kaspar Villiger, said during a press conference in Geneva that: "Bank secrecy for the Swiss is like an assault rifle in the closet of every soldier". Villiger was referring to the well-known duty of all young Swiss males to render mandatory military service and to their right - and duty - to keep at home their personal weapons with some munitions when returning to civil life.
The image summarizes the Swiss people's fighting spirit regarding their attachment to Swiss bank secrecy. Bank secrecy is perceived in Switzerland as emanating from the principle whereby citizens in a democratic regime must be entitled to protection of their privacy. It is one of the basic guarantees of individual liberty and is recognized as such by the Universal Declaration of Human Rights. Thus, bank secrecy is nothing more than compliance with the right to privacy principle in the financial sphere for transactions effected in relation to private and business life activity.
Bank secrecy has a long tradition in Switzerland, in any event much older than 1935 when the Federal Banking Law came into force, making any breach of bank secrecy a criminal offence punishable by imprisonment for up to six months or by fines up to Sfr50,000, or both.
Any change of the Swiss legislative framework on bank secrecy would require approval by Parliament and possibly by the population in the event of a request for referendum. In 1984 the Swiss population rejected (73% of the voters) an initiative of the Socialist Party aimed at suppressing bank secrecy. In 1998 a motion presented by Member of Parliament Jean Ziegler for the abolition of bank secrecy was rejected by 75 votes to 42 in Parliament. In September 2000 the Swiss Bankers Association published a survey which showed that 77% of those questioned supported the current concept of financial privacy and 72% of them would be opposed to the abolition of bank secrecy, even in the case where the European Union would demand it.
However, Swiss bank secrecy is not absolute and offers no protection to criminals. It is lifted in all criminal proceedings, including cases involving money laundering, corruption, insider trading, manipulation of stock exchange rates and tax fraud (which targets acts of commission and not omission, that is, 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, the fact of 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 bank secrecy may also occur in divorce proceedings, inheritance matters, or debt collection and bankruptcy proceedings. It 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 and administrative matters the following principles must be observed:
- the principle of 'speciality', whereby the confidential information given may be used by the requesting foreign authority only in the context of criminal proceedings and not for other offences, such as for offences in tax (except tax fraud as conceived by Swiss law) or exchange control matters;
- the principle of 'double criminality', whereby - subject to few exceptions - Switzerland grants international assistance (concerning information or documents subject to bank secrecy) only where the offences are punishable both in the requesting state and in Switzerland. This was formerly sometimes difficult to comply with (eg, in famous insider trading cases investigated by the US authorities, at a time where Switzerland had no specific provision in the Criminal Code in the field of insider trading), but at present no longer represents an obstacle to the granting of assistance by Switzerland; indeed, double criminality exists now for virtually all possible economic crimes; and
- the principle of 'reciprocity', whereby the foreign requesting authority must guarantee reciprocity.
Anti-Money Laundering Developments
The main measures to combat money laundering taken in Switzerland in the last 23 years are as follows:
|July 1 1977||First version of the Agreement on the Swiss Bank's Code of Conduct with regard to the Exercise of Due Diligence, issued by the Swiss Bankers Association (SBA) and the Swiss National Bank (SNB). This codified the 'know your customer' principle in the banking sector, as well as the prohibition against actively aiding international capital flight and tax evasion.|
|October 1 1982||Second version of the Due Diligence Agreement issued by the SBA and SNB.|
|October 1 1987||Third version of the Due Diligence Agreement issued by the SBA only.|
|August 1 1990||New articles (305(2) and 305(3)) in the Swiss Criminal Code on money laundering and on failure by any financial intermediary to exercise due diligence in financial transactions.|
|May 1 1992||Federal Banking Commission (FBC) guidelines concerning the combating and prevention of money laundering.|
|October 1 1992||Fourth version of the Due Diligence Agreement issued by the SBA.|
|August 1 1994||Revised Article 305(3) 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 Article 260 of the Swiss Criminal Code on criminal organizations.
New Article 59(4) of the Swiss Criminal Code on the seizure of assets controlled by criminal organizations.
|April 1 1998||New law on combating money laundering in the financial sector (banking and non-banking sector), introducing in particular an obligation to communicate to a designated office in Bern any "founded suspicions" of money laundering.|
|July 1 1998||Fifth version of the Due Diligence Agreement issued by the SBA. |
Second version of FBC guidelines on money laundering
|May 1 2000||New Articles 322(3) - 322(8) of the Swiss Criminal Code on corruption, including corruption of public officials outside Switzerland.|
Switzerland has continually reviewed and adapted its laws and regulations during this 23-year period, resulting in one of the most comprehensive legal frameworks in the matter.
The dominant characteristic of the last few years has been the acceleration of globalization of the international financial markets, stimulated by technological progress and liberalization of the movement of capital and financial services at the international level.
However, globalization has also resulted in the accelerated internationalization of problems, requiring all countries involved to increase their efforts to work together in a spirit of cooperation. Progress in this respect not only leads to greater geographic mobility of capital, but also increases the opportunities for money laundering and tax fraud or evasion. Such preoccupations 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 set up by the G-7 countries after the international financial crisis of 1997-1999, the Organization for Economic Cooperation and Development (OECD) and the European Union).
The impact of these initiatives goes beyond the countries which are members of these institutions. Upon the initiative of the G-7, various studies have recently targeted tax havens and the financial 'offshore' 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 was widely mentioned in the press, is an example of this. The FATF, the OECD Forum on Harmful Tax Practices and the Financial Stability Forum continue to issue lists of '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 United Nations also launched an initiative on the centres, complete with an international conference in the Cayman Islands on March 30-31 2000, in order to give those offshore authorities an incentive to step up their fight 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.
International tax fraud
There is a vast campaign for international tax harmonization directed by the industrialized powers - minus the United States as from May 10 2001 - against offshore centres, but also another crusade against 'tax offences' led in particular by the G-7, as confirmed by a G-7 press release on April 15 2000.
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 criticized the biased and unbalanced nature of this report and its 19 recommendations, which focus on 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 on the improvement of access to banking information and its work on the feasibility of a hybrid system, based on exchange of information and/or withholding tax, come similarly within this context. Such efforts parallel work in progress within the European Union on drafting a code of conduct regarding corporate taxation, taxation of savings, combat against customs fraud and the like.
International money laundering
The G-7 countries are also attempting to have the tax issues debated before other organizations such as the FATF. For instance, the G-7 has asked the FATF and the OECD Committee on Fiscal Affairs to examine the means of reinforcing the capacity of the anti-money laundering systems to include tax offences. The FATF and the OECD Committee on Fiscal Affairs have been required, among other things, to study the means of facilitating transfer of information from anti-money laundering authorities to domestic and foreign tax authorities.
Switzerland is obviously affected by such developments as an active partner in the international fight against organized crime, money laundering and corruption. It is a founding member of 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. One example of Switzerland's readiness to cooperate is the Mobutu affair. It appears that Switzerland was the only country among 18 contacted by the government of the Republic of Congo to have frozen all known assets of the former head of state. History appears to have repeated itself in the case of the former president of Nigeria, Mr Abacha.
According to a report published by the FBC in early September 2000 (the Abacha Report), the aggregate amount of Abacha funds deposited in Switzerland was $208 million. Of this amount, $123 million came from prominent financial institutions established in the United Kingdom, $73 million from US 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.
International banking due diligence
The Abacha affair accelerated the outcome of the initiative of 11 of the world's leading international private banks, led by United Bank of Switzerland, which was undertaken two years ago and finalized in the so-called 'Wolfsberg Principles' on October 30 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 October 30 2000 that this code:
"does not represent any change in our country, 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 founding members included in the 11 banking institutions (ie, United Bank of Switzerland 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 towards the Wolfsberg Principles is clear, as mentioned in the Abacha Report - namely, that the application of similar standards must be better coordinated and ensured at the international level. In almost all respects the FBC considers that Swiss legislation and regulations are already adequate for such internationalization 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 be rendered against Swiss banking institutions only within the framework of the Due Diligence Agreement. The expected amendments to the Swiss Criminal Code are being discussed in the Swiss 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 financial offshore centres in terms of the laundering of money of criminal origin. It therefore actively supports the efforts made to fight abuses and to encourage these authorities to adopt and apply international standards.
International financial stability
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, Frankfurt and Tokyo. However, some people in certain international bodies would like to classify Switzerland as an offshore centre in order to be able to increase this pressure. For example, in April 2000 the Financial Stability Forum (FSF) published a list of offshore financial centres defined with respect to their compliance with international financial standards, which included Switzerland. The Swiss authorities protested as 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 apply to Switzerland:
- Business and investment income is taxed at rates close to the average of OECD countries. Indeed, direct taxation of individuals in proportion to total revenues is, according to statistics published in 1997 by OECD: 52.8% in Switzerland, 47.9% in the United States, 41.0% in Germany, 29.8% in United Kingdom and 24.1% in France;
- A 35% 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 and the minimum capital of a Swiss corporation is Sfr100,000;
- The supervisory regime for financial services, including anti-money laundering laws and regulations, is in line with international standards and is even considered a model;
- Financial institutions without physical presence in Switzerland may not be licensed by the FBC;
- Swiss supervisory authorities have full access to all files and bank 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 chairperson of the FSF confirmed that based on these objective criteria Switzerland would not qualify as an offshore centre. However, because some FSF members consider Switzerland to be an offshore centre the FSF prefers to keep Switzerland on the list.
This type of 'interest' shown in Switzerland may be explained, for example, by the fact that as per certain estimates, over one-third of the worldwide private wealth that is managed outside the country of residence is managed in and from Switzerland.
International tax harmonization
The European Union 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 in this regard, as it views its current system of withholding tax as a valuable means of inducing people to declare their capital and income. In contrast, a majority of EU member states are more in favour of tax information exchanges between the 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 European Union. It remains to be seen if this proposal may help the European Union to recognize 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 as between states.
On November 27 2000 the 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 among tax authorities. The latter EU countries would be authorized to apply a withholding tax on saving income at a rate of 15% for the first three years of the agreed seven-year transitional regime, followed by 20% for the next four. But at the end of the transitional regime (ie, in 2010) all EU member states should apply the information exchange system.
It would be premature to speculate how the negotiations among EU finance ministers on the 'substantial content' of the planned directive for the taxing of income savings will result. The effect of the agreement of November 27 2000 will only be seen at the end of 2002 - that is, when EU member states are due to vote unanimously on a broad package of tax measures, of which the savings tax directive will be just one part.
Further, the goal agreed at the EU Feira summit in June 2000 of EU agreements equivalent to the forthcoming savings directive with non-EU financial centres (including Switzerland) will not necessarily be easy to achieve.On June 5 2001 Austria announced at the Luxembourg meeting of EU finance ministers that as long as Switzerland was not prepared to accept the EU system of exchange of tax information under this equivalent agreement to be negotiated, Austria would not abandon its withholding tax regime (thereby permitting it to preserve its bank secrecy), which it would otherwise be required to abandon in 2010 at the end of the transitional period. The Swiss finance minister, Villiger, had informed the European Union's Swedish president that Switzerland was not ready to commence negotiations which would lead at term to its participation in an EU-wide tax information exchange system. As such, Austria emphasized that it would only agree to an EU solution assuring equal treatment between EU and non-EU members in this respect. At the same time, Luxembourg insisted that it too would undertake no steps detrimental to its banking regime that were not likewise taken by its competitors, namely Switzerland. It thus appears that if the European Union cannot reach an equivalent agreement with Switzerland, Luxembourg intends to require the European Union to accept the continued co-existence of the withholding tax regime advocated by it and Austria and the tax information exchange regime advocated by other EU member states. Given these positions, the EU finance ministers decided to create a high-level working group mandated to impove coordination of EU work on the revision of its tax systems. In addition, the European Union stated its intention to adopt a mandate for the negotiation of equivalent agreements with principal non-EU financial centres, including Switzerland, by October 2001.
The above initiatives, and in particular those of the OECD and the European Union, cannot be separated from the fact that a weakening of Swiss bank secrecy would be welcomed by certain competing financial markets, only too happy to be the recipients of assets invested in Switzerland.
In the circumstances the Swiss authorities are determined to defend the country's economic interests and its financial markets, and abolition of bank secrecy is not a consideration, as there is definitely no incompatibility between the maintenance of Swiss bank secrecy and Switzerland's international cooperation. This determination has been reaffirmed by the Swiss Finance Ministry's spokesperson after the EU November 27 2000 agreement, who stated that: "Swiss banking secrecy is not going to be affected by the agreement concluded in Brussels."
The future will reveal the degree to which Switzerland will be able to adhere in the long term to its well-defined position in this respect, while continuing its active international cooperation.
For further information on this topic please contact Didier de Montmollin at Secretan Troyanov by telephone (+41 22 789 70 00) or by fax (+41 22 789 70 70) or by e-mail ([email protected]).
An earlier version of this article appeared in Butterworths Journal of International Banking and Financial Law Volume 16 #2, February 2001.
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