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Swiss banks on the scrap heap

A few days ago the American Inland Revenue office paid out 104 million dollars reward to Bradley Birkenfeld – a Swiss banker, who provided the office with data of thousands of American citizens hiding their money in the Swiss UBS bank. This incident may be regarded as a symbolic end of the Swiss banking. No reasonable person can expect that the bankers will be loyal to their clients when facing the choice between prison and a hundred million dollars reward.


This seems like an appropriate time and place to summarize the history of the Swiss banking with a short epitaph.

Switzerland as a state is remarkably stable, both politically and economically. Apart from some occasional conflicts between its cantons, for last five hundred years the Swiss army has not taken part in any war (some mean comments exist claiming that this is certainly why it specializes in the production of the Swiss Army knives which are known worldwide). Switzerland has never experienced galloping inflation, high rate of unemployment, nationalization of private assets nor any rule of political extremists. Even the extreme and radical religious views of Jean Calvin, who managed the powerful (Europe - wide) protestant parish in Geneva in the XVI century, had, as a matter of fact, fostered the development of cantons as stable democratic communities governed by wealthy citizens, who simply adopted a conservative political approach and who regarded hard work and entrepreneurship as moral excellence.

Above all, Switzerland used to be a state of law and order. As once purportedly described by James Joyce, the famous Irish writer: Bahnhofstrasse in Zurich was so clean that one could drink minestrone soup off it. In XIX and XX century this place was one of a kind, even Lenin could count on being treated fairly there (i.e. he would be equal under the law and would be treated independently of any political circumstances) - Lenin was staying in Geneva in exile; as well as Jews hiding their savings from Nazis on bank accounts in Switzerland or Nazis themselves, concealing the gold stolen in occupied Europe in Swiss safes.

For all these reasons, depositing funds in Switzerland provided wealthy foreigners with rational grounds for hope, that no crisis can ever disturb the entrusted money.

In the 30s of the XX century another factor appeared - the Swiss banks secrecy, based on rigorous and strictly followed rules of the Banking Act of 1934. That is when people started thinking that Switzerland, pursuing the policy of political neutrality, will not give in to any political pressure of foreign authorities aiming to take over the bank accounts opened by Swiss banks to foreigners. The very positive predictions in this regard resulted from the attitude of the Swiss against the socialists, who overtook the government in Germany and France in the 30s. In 1932, the Swiss banks effectively resisted the French government under Herriot, who demanded that the savings of wealthy French be transferred back to France, and the following year Switzerland remained firm against the influence of the national socialist legislation in Germany, which provided for a death sentence for non-disclosure of foreign bank accounts to the government.

„Dark PR” campaign against Swiss banks

The subsequent decades brought further stable development of Swiss banks specializing in wealthy persons’ assets management.

As a consequence, the Swiss banking even made its durable appearance in mass media – the black characters and spies in movies and sensational novels can always be recognized by the fact that they hold their accounts in Swiss banks. In Frederick Forsyth’s ‘The Day of the Jackal’ the hit man hired to assassinate gen. Charles de Gaulle requests that the half a million dollars owned to him for the job be transferred to an account in a Swiss bank. In ‘The Girl with the Dragon Tattoo’ Lisbeth Salander, claiming to be the business partner of Hans Erik Wennerström who is investigated by the financial supervisory authorities, has no problem withdrawing two billion dollars in securities from an account in Zurich, which has just been wired to the account from the Kroenenfeld bank in the Cayman Islands. That is also where money is held by Auric Goldfinger, James Bond’s enemy in the third one of 007 movies, who reportedly deposited 20 million pounds in gold bars ‘in Zurich, Nassau and Panama’. An ‘evil’ Swiss banker also appeared in ‘World is Not Enough’, a movie from the Bond’s series; the accounts in Swiss banks are obviously also held by other spies – for instance James Bourne (‘Bourne Identity’).

Some of the opinions on Swiss banks shaped with the tools described above can in some way be related to facts, but some are completely inapplicable. In many cases these harming views on Swiss banks are so far from reality that one may wonder, if they are not part of a wilful ‘dark PR’ action.

Without doubt, in the 60s or 70s, depositing funds in Switzerland with the use of fake identity cards was relatively easy, but that is how it was all around the world. Therefore if Switzerland was mentioned in this regard particularly often and eagerly, this was solely due to the fact that it was an exceptionally attractive place for such investments, and not because the Swiss supported such activities.

It is also true that many of the ‘old’ assets deposited in Swiss banks in the previous century were not declared by the taxpayers in their domestic countries. The account owners were certain that the bank secrecy in Switzerland would constitute a successful obstacle for the tax authorities. The operation of Swiss bankers in terms of support for such practices cannot be defined otherwise than extremely reckless and short-sighted. For this exactly, a very high price was to be paid by the whole Swiss banking system in the future.

On the other hand, the procedures of opening bank account in Switzerland depicted in popular movies are completely inaccurate and unreal. Many customers from Poland may be surprised by the number of questions asked by the bank during the procedure and afterwards, also in connection with any larger financial transactions on the accounts. When the relationship with the client is being established, every bank aims to understand exactly what the business activity of the client is and what the sources of his funds are in order to verify, whether the conducted activity is not used for money laundering purposes. We can even expect questions about any political capacity and activities of our grandparents, or about negative publicity from years before.

That is why Lisbeth Salander would never be able to withdraw two billion dollars from an account in Zurich under the circumstances presented in ‘The Girl with the Dragon Tattoo’. In reality, such transaction would have to be preceded by weeks of hard work on documentation determining the legality of the funds deposited in the Cayman Islands. Without such documents a Swiss bank would never accept two billion dollars, nor would it allow for it to be drawn out from the bank. Should the beneficiary turn out to be the subject of criminal investigation, presumably the bank would have withdrawn from the transaction either way, even if the documents were in order.

It is particularly absurd how the operating rules of the fictional Depository Bank of Zurich are presented in Dan Brown’s sensational novel "Da Vinci Code", sold in over 80 million copies. In Brown’s vision, the bank offered ‘a full modern array of anonymous services’ ‘in the tradition of Swiss numbered account’ – ‘maintaining offices in Zurich, Kuala Lampur, New York, Paris. The bank had expanded its services in recent years to offer anonymous computer source code escrow services and faceless digitized backup. The bread and butter of its operation was by far its oldest and simplest offering – the anonyme Lager – blind drop services, otherwise known as anonymous safe-deposit boxes. Clients wishing to store anything from stock certificates to valuable paintings could deposit their belongings anonymously, through a series of high-tech veils of privacy, withdrawing items at any time, also in total anonymity’. 

In reality, it is precisely to prevent such situation that bank safes are always assigned to individual bank accounts, and the account opening is preceded by a procedure which determines the ultimate beneficiary of the account.

Beginnings of international
pressure on Swiss banks

Since the mid 90s the Swiss banks found themselves under a growing pressure of so-called ‘international community’, i.e., in practice, the socialist parties rulling most of EU member states and the American democrats. The spin doctors of this marketing campaign handled ‘statistics’ and ‘reports’, whose scientific outcomes were that precisely as a result of the existence of Swiss banks, in Third World countries cows no longer provide milk, old people starve and widows cry after their husbands; because tax heavens receive billions of dollars whose owners should be obliged, for some reason, to keep their funds elsewhere. It would be best if they held them in countries with highest rates of taxes and highly developed social benefits systems, which would allow for this money to be taken away from them and transferred to the ‘poor’, i.e. to the state administration of countries sponsoring the whole action.

Currently, the Tax Justice Network, an organization of ‘concerned activists’, linked, among others, to anti-globalization movement, liberation theology, the green parties, etc., is still the one leading in publishing this kind of analyses.

In reality, this ‘scientific’ analysis of the effects of Swiss banking was as ridiculous as its image in media, because it it based on an assumption, that funds booked on the bank accounts in Switzerland vanish from the originating countries’ economies. Actually the Swiss bankers usually recommend to their clients reinvestment of their funds in government and corporate bonds and securities, or they pay them back to originating countries in the form of Lombard credit. Therefore the money booked on the accounts in Switzerland is available for investments and consumption expenditures under the same conditions as money held in local banks and the whole methodology, on which this kinds of calculations are based, is wrong in its entirety.

The involvement of secret services
in the fight against Swiss banking

Along the revolving recession in developed countries, the so-called ‘international community’ switched from oral aggression to actions directed specifically in individual Swiss banks. Between 2008 and 2012, a number of confrontations took place between secret services of states with high taxes and banks from Switzerland and Liechtenstein, lost miserably by the latter.

In 2008 Heinrich Kieber, employee of LGT bank in Liechtenstein, sold data of 5,800 clients to German secret services. The recipients not only paid him almost 4 million Euro for this information, but also the Federal Intelligence Service helped him gain a new identity, under which he currently hides from Lichtenstein authorities, who have designated a reward in the amount of 10 million dollars for bringing him in front of the local court. This event was, in a way, a breakthrough. This was the first time that a government of a large European state ostentatiously paid a bank employee for breaking the law and helped him hide from the judicature. The Banks were completely unprepared to withstand such aggressive operations of secret services of larger and stronger neighbouring states.

In 2008 Rudolf Elmer, an employee of the Swiss Julius Baer bank, transferred information on a number of bank accounts to Julian Assange, the founder of Wikileaks. Assange published the materials online, thereby disclosing the internal correspondence of bank employees concerning the bank’s clients, which also indirectly indicates personal data of account holders and the history of their operations. Another, a more detailed set of information, was published on Wikileaks by Elmer and Assagne in 2011.

In December 2008, the directors of a Swiss bank from the HSBC group found out about data which have been stolen by Herve Falciani, an employee of IT department. In the end it turned out that the leak concerned data of 24,000 clients, whereas Falciani himself fled to France, where he transferred the stolen data to local secret services, who have in turn transferred the data to other states. The UK itself received from France information on 6,000 clients using the services of HSBC Private Bank (Suisse).

All these matters affected the reputation of Swiss banks dreadfully negatively and destroyed some kind of taboo related to the quality of protection of data by Swiss banks. The issue of Elmer is still particularly embarrassing, since he remains free by using legal tricks to avoid responsibility for disclosure of banking secrecy (on the basis that, inter alia, the clients’ data concerned the bank’s subsidiary in the Cayman Islands, therefore it is doubtful whether Swiss courts have jurisdiction in this case at all).

These events were only a prelude to a direct financial attack on Swiss banks, which also resulted in their complete defeat.

An open war between
the USA and Swiss banks

On the 18 February 2009, the Swiss UBS bank concluded an agreement with the American Inland Revenue authorities, under which it undertook to pay a fine in the amount of USD 780 millions for participation in conspiracy against the US government, i.e. for hiding the funds of American taxpayers. Then UBS committed to transfer to the IRS the data of its American clients. Considering that many of these customers were actively encouraged to commit crimes against IRS by their bankers, and not trying to justify the clients themselves, it must be admitted that the acts of the UBS bank should be regarded as exceptionally despicable for a public institution.

In the same year, a second large Swiss bank - Credit Suisse – was forced to conclude a settlement agreement with the American authorities, under which it undertook to pay a fine in the amount of USD 536 millions to conclude an investigation into illegal transactions, supposedly carried out between Credit Suisse and customers in Cuba, Iran, and other sanctioned states.

In August 2012, the Swiss HSBC bank transferred to US federal authorities data of its bankers which means that the bank started acting not only against its clients but also against its employees. HSBC, Credit Suisse and Julius Baer altogether transferred to the US bodies data of 10,000 of their employees. It is hard to imagine a more embarrassing humiliation, which must have influenced the morale of banks’ employees.

The only bank which resisted the requests of US administration was Wegelin & Co. Privatbankiers, established in 1741 – the oldest Swiss private bank. However, as a result of the pressure, the bank owners transferred their operations to a company under the name Notenstein Private Bank, which they have sold to the Raiffeisen group. Wegelin has virtually stopped its activity, and in a case brought by the IRS and tried by a court in Manhattan, judge Jed Rakoff declared the whole Wegelin bank as a ‘fugitive’, accused it of ‘lack of respect for the US government’ and suggested that the bank’s partners be arrested (as a traditional private bank, Wegelin was a limited liability partnership, whose partners bear personal liability for claims against the bank). The end of a three hundred long history of the Wegelin bank sent a clear message to the market, that any bank which dares to resist the IRS will be exterminated, even if such bank does not seem to be linked to the American market.

Under growing international pressure, Swiss banks accepted the supremacy of the US political authority and in key situations they carry out instructions coming from Washington DC. It is significant how the Swiss banks reacted to the ‘Arab spring’ and the issue of assets of the overthrown leaders of the Arab countries. In May 2011, the head of the Swiss Ministry of Foreign Affairs, Micheline Calmy-Rey, spoke about the freezing of billion dollar assets of the overthrown leaders of Egypt, Tunisia and Libya. The history of wealth of the Gaddafi family proves that the Swiss banks accepted the primacy of political interests over the rule of law. By this I do not claim that the assets of Gaddafi’s family were gathered in a legal way, but that no one examined their legality and the decision to freeze the assets, and then to transfer them to the Transitional National Council, did not follow any examination process which would have required long, tiring auditing. To be perfectly honest, it is hard not to link the timing of this decision with the situation on political stage. Why didn’t the Swiss banks doubt the legality of the funds’ sources throughout the long decades when they were being deposited, yet they were questioned the moment Gaddafi’s armies started to lose? There is a drastic contrast between such attitude and the resistance of Swiss bankers against the aggressive demands of the Nazi Germany and socialistic France in the 30s of the XX century, which built up the reputation of reliable Swiss banking.

The weakness shown by Swiss banks against the American authorities encouraged other countries to undertake similar actions. In July 2012, the French police conducted searches in the offices of UBS in Lyon, Bordeaux and Strasbourg as well as in houses of some of the bank’s employees, whereas the German police knocked on the doors of many Credit Suisse customers. The subsequent month, German investigators conducted searches in houses of the clients of Julius Baer bank. Regardless of what the bank’s spokesman say, this constitutes an actual hunt for the customers of Swiss Banks, which is accompanied by a symbolic resistance of the banks and the Swiss authorities themselves.

The future of private banking

The current situation of the clients of Swiss banks, who have, upon advice of their bankers, illegally concealed their income is dramatic and all seems to point to an end of traditional model of Swiss banking.

However, this does not result in the end of bank privacy. The clients demanding extensive secrecy from their bankers turn their attention to European ‘tax heavens’, which have acted more reasonably than the Swiss bankers – for instance to Liechtenstein and Andorra – but most of all, the vast majority of clients decides to turn to Hong Kong, Singapore and the Cayman Islands. Nevertheless, each of these jurisdictions requires a careful examination of the legality of the funds’ sources. This should not be surprising: the consequences borne by the Swiss banks and their customers also prove long term supremacy of the legal forms of international tax planning over illegal tax evasion.

[September 21st, 2012] Law Firm Skarbiec

Author: Legal Counsel Robert Nogacki

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