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Mainstream, VOL XLIX, No 22, May 21, 2011

Swiss Bank Secrecy

Tuesday 24 May 2011, by Latika Nath

To possess a Swiss bank account was at one time a matter of prestige, and signified status and position in society. Swiss neutrality and national sovereignty created an environment conducive to develop its banking institutions, which contributed to its economy.

The banking laws of the country were codified by the Swiss Federal Banking Act of 1934, bringing into being the rule of secrecy. Banks were not under any duty or obligation to provide details of customer accounts to tax authorities, third parties, foreign governments and Swiss authorities themselves. A violation of the same would invoke provisions of criminal law. Under article 47 any violation of bank customer privacy was dealt with imprisonment or fine. However, because of the Nazi regime and the queries as to the deposit of the assets of the Jews and others considered as enemies of state Article 47(b) was incorporated assuring secrecy from such information being provided. In order to protect the customer and his deposit, Swiss bankers are prohibited from testifying in a foreign court.

The UBS and the Credit Suisse are the largest banks operating in Switzerland and in the world. Banking secrecy is well entrenched in these financial institutions. The governmeent considers it a fundamental principle of customer services. From absolute privacy in the past, presently some provisions have been made for judicial review in case of fraud or otherwise, by the law enforcement agencies. It is to be noted that a distinction is made between tax fraud and tax evasion. This is a contentious issue in Switzerland and neighbouring countries. Some governments are of the view that their nationals open Swiss bank accounts either to avoid taxation or deposit ill-gotten wealth. These questionable sources of finance find their way into offshore accounts.

In the present context many issues have been raised relating to money laundering and drug money including money from dictators. Money is stashed in such offshore accounts away from the reach of the law. Swiss banks have been concerned about finance, funds and investment rather than the source of the funds, whether they are from military juntas, arms dealers or from sale of ‘blood diamonds’. Numbered accounts provide greater secrecy than do the ordinary ones. Other banks have also followed such practices. Swiss banking secrecy came to the forefront when processing claims of Nazi gold allegedly belonging to the holocaust victims, which were lying unclaimed for decades in Swiss banks. In 2009 the World Jewish Congress brought about legal proceedings claiming the gold.

Besides absolute secrecy and prevention of disclosure, Swiss banks provide a number of facilities to their customers in the form of wealth management services. These customer services could be used for sale of narcotic drugs, purchase of arms and weapons or taking out of the country funds invested in the purchase of diamonds and selling them elsewhere. The proceeds then would be deposited into the account. All this for a heavy retainer! Sometimes narco-dollars have been used to start a war. In a variety of methods money reaches offshore accounts. The system was perfected by constant use over a period of time. These wealth management services are appreciated by grateful clients. Nearly one-third of investments in Swiss banks comes from off-shore accounts. In the hope of attracting customers and nationals, the Bank of Abu Dhabi and the Bank of China have opened branches in Switzerland.

IN recent times with charges of money laundering and loot of dictators being stashed in Swiss bank accounts some governments have managed to get back the stolen money of the nation. The Philippines was able to get some of the money deposited by Marcos stating that the stolen wealth should be returned to the nation. The Philippine Government recovered $ 300 million allegedly deposited by Marcos. It was felt that the Swiss authorities should not protect assets obtained by human rights abuse, or by other unlawful means. Victims of human rights abuses could successfully claim a share.

Seeking to investigate the source of funds and verify the nature of deposits of some of its nationals, the US Government filed a case against the UBS in America, threatening to move against its 22,000 employees. The UBS was left with no option but to reach a settlement with the US authorities for $ 780 million in exchange for deferred legal action. The enforcement authorities were of the opinion that approximately $ 20 billion of American money had been deposited in Swiss banks. Pursuant to a settlement about 4450 names were provided to the authorities. Tax evasion is not a penal offence in Switzerland; therefore tax evasion is not a sufficient ground to set aside the secrecy provisions of a bank. It can only be set aside by the order of a Swiss judge if a crime has been committed under the Swiss Penal Code. It has been voiced by many that deposits and ill gotten gains, black money, narco-dollars and deposits of dictators should not be entertained by Swiss banks. Recent claims include the deposit of millions by an ousted Haitian leader and the gold said to be deposited by Marcos (claimed to be Yamashita’s gold).

Accusations have been made that services provided by Swiss banks such as wealth manage-ment, estate planning, asset protection etc. are terms used to cover irregular activities which include tax evasion and money laundering. Some officers of the UBS, Julius Baer and LGT (Liech-tenstein) were of the view that some clients evade payment of billions of dollars in tax.

In petitions filed before the European Court of Human Rights, Elmer and others have complained about the irregular activities of Swiss banks. With details from the bank itself, they have brought to light various deposits, account holders and professional services offered to dictators, politicians and industrialists. Such disclosures have focused on the functioning of banks and their offshore accounts. More than one-third of such offshore accounts is with the Swiss banks; however, some have discreetly moved their assets elsewhere to safe havens. The governments need to take action where there have been disclosures and also such information about the same. Delays would hamper investi-gation and efforts would be counter-productive. During the next few months the Swiss parliament is likely to discuss the banking system and secrecy provisions.

The supremacy and importance of the Swiss banking services is likely to recede in the changed global scenario. Other financial institutions have used the Swiss model for their customers. At a time black money being stashed in foreign banks is being discussed internationally, the Wikileaks disclosures assume significance. It is incumbent on various governments to take a stand on offshore deposits and the black money stashed there. As these matters should be in the public domain, transparency in this regard will assure all that justice is served.

Dr Lathika Nath is an Associate Professor, Department of Law, Bangalore University.

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