The secret history of Swiss bank accounts

The fascinating history of bank secrecy and financial discretion in Switzerland dates back to just over three hundred years to 1713. The Grand Council of Geneva, a Cantonal Council in Switzerland, adopted a code of secrecy which prohibited banks from divulging information with anyone except the account holder, or the client. For any such information sharing, the code said, the City Council must agree with the need to do so. It was believed that these codes and regulations were facilitating tax avoidance, and indeed, tax evasion.

No wonder, then, the great French writer and philosopher Voltaire, came up with this gem in 1794 — “If you see a Swiss banker jumping out of a window, follow him, for there is sure to be a profit in it”.

So, what made Switzerland an early tax haven? The answer lies in the law. Back then, secrecy in Swiss banking was covered only by the civil and commercial codes. This effectively meant that any account holder or client could seek damages against any bank or bankers that did not maintain his/her confidentiality. Revealing information, however, was not considered a criminal offence, and hence, wasn’t punishable by law through imprisonment or otherwise.

Late in that century, some of Switzerland’s oldest banks — Lombard Odier Darier Hentsch & Cie. (1796) and Pictet Cie (1805) were founded and according to this report, became “a financial refuge for fugitives from unrest...to safeguard the riches of aristocrats fleeing the French Revolution.”

The circumstances that led to the passage of the law, make for interesting reading. In the 1930s, reeling from the effects of the First World War and the Great Depression that followed, the economies of Germany and France launched a search for tax funds that were allegedly stashed in Swiss bank accounts.

In 1932, French authorities raided the Paris office of Swiss bank Basler Handelsbank to search for clients who held accounts and avoided French taxes. Dubbed as a fraude fiscale, (tax fraud) the uncovering of these assets worth approximately one billion French francs, led to more crackdowns on the bank, with the names of account holders being revealed, and two of its employees being arrested.

Likewise in Germany, a law was passed which made keeping foreign capital (in Swiss banks) an offence punishable by no less than death. Several offenders were being put to death by Germany, with Swiss banks coming under the Gestapo’s radar. Jews were also persecuted for alleged “fiscal evasion”.

But Switzerland refused to budge, or in other words, deviate from its long-held tradition of neutrality (proclaimed in 1815), non-interference and independence, values it held firmly throughout the two World Wars. In fact, it perceived these threats and acts by France and Germany as acts of aggression on its economy, and further strengthened its bank secrecy by the passage of the law in 1934.

Also, before and during the Second World War, Swiss banks were also used by the Nazis to loot their Jewish victims. They would force their victims to sign the requisite orders and with the Swiss typically not interfering, the transfer of assets from Swiss accounts to German accounts became easier.

In 1984, Switzerland held a national referendum for a constitutional amendment, which sought to open bank records to tax authorities. But it was defeated with an overwhelming 73% of the people voting in favour of bank secrecy. However, as the nineties went on, there were several scandals, including those involving Raul Salinas and the Citibank, Zurich in 1998 that have raised questions over Swiss banks and their role in voluntary tax fraud.

More recently, in 2008, a former Union Bank of Switzerland (UBS) employee-turned-whistleblower, Bradley Birkenfeld, pleaded guilty to charges of a conspiracy to defraud the US Internal Revenue Service (IRS) by assisting US citizens to evade taxes on assets stashed in Switzerland. A year later, in 2009, UBS agreed to reveal the names of Americans who were long suspected of using their offshore bank accounts to evade taxes.

In a statement back then, it said, “UBS sincerely regrets the compliance failures in its US cross-border business that have been identified by the various government investigations in Switzerland and the US, as well as our own internal review. We accept full responsibility for these improper activities.”

Last year, Switzerland signed a landmark convention to share information with the Organization for Economic Cooperation and Development (OECD), with an agreement to exchange data with 60 countries.