Banking in Switzerland
Overview
Switzerland is a financially prosperous nation with a strong economy. Its banking sector plays a significant role, accounting for about 14% of the country’s GDP and employing a substantial number of people. The stability of the Swiss franc and Switzerland’s neutrality and sovereignty have contributed to the development and success of the banking industry. Despite being located in the heart of Europe, Switzerland has maintained its independence, remaining outside the European Union and the United Nations until 2002.
Switzerland has been a preferred destination for offshore funds, with an estimated one-third of all foreign-held funds deposited in the country. However, stricter regulations and market conditions have led to a decline in the amount of private money managed by Swiss banks in recent years.
The Bank for International Settlements, headquartered in Basel, serves as a global hub for central banks’ cooperation. Switzerland’s neutral status played a role in the BIS’s decision to establish its headquarters in the country.
Foreign banks operate in Switzerland, managing significant assets. The Swiss National Bank acts as the central bank, while UBS and Credit Suisse are the largest Swiss banks, accounting for over 50% of deposits in the country.
Law and Regulation
The Swiss banking sector is regulated by the Federal Banking Commission (FBC), an independent agency of the Swiss government under the Federal Department of Finance. The FBC derives its regulatory authority from various statutes.
The Swiss Banking Ombudsman, established in 1993 and sponsored by the Swiss Bankers Association, provides mediation and assistance services to individuals with banking-related complaints. The ombudsman’s role is to ensure fair practices and help clients in search of dormant assets.
Statutes
Banking law of 1934
The Swiss Parliament passed the Banking Law of 1934, which enshrined bank secrecy rules and made violations of secrecy a criminal offense. The inclusion of secrecy provisions was a response to Nazi authorities’ attempts to access the assets of Jews and individuals deemed enemies of the state held in Switzerland.
Recent statutes
A new banking law came into effect in 1995, allowing foreign banks to establish subsidiaries, branches, or representative offices in Switzerland without FBC approval. This opportunity is based on reciprocity and requires agreements between Switzerland and foreign governments. The law also introduced requirements for banks to report share acquisitions or sales by major shareholders to the FBC and empowered the FBC to provide information to foreign law enforcement authorities in cases covered by mutual legal assistance agreements.
Electronic payments
Swiss banks and the post office use the Swiss Interbank Clearing (SIC) system for electronic payments. Supervised by the Swiss National Bank, SIC handles a significant number of transactions with high turnover value.
Major banks
Switzerland is home to numerous banks, ranging from major institutions to small banks serving local communities or specialized clients. UBS and Credit Suisse are the largest Swiss banks, accounting for more than 50% of all deposits in the country. Both banks have extensive branch networks within Switzerland and globally.
UBS, founded in 1862, is headquartered in Zurich and Basel. It operates internationally, with offices in the United States, London, Tokyo, Hong Kong, and other locations. UBS has a significant market capitalization, net profit, and a large number of employees.
Credit Suisse, established in 1856 and based in Zurich, is the second-largest Swiss bank. Its group includes private banking, investment banking, asset management, and insurance divisions. Credit Suisse acquired The First Boston Corporation in 1988 and merged with Winterthur insurance company in 1997.
The Swiss National Bank serves as the country’s central bank, and there are also cantonal banks controlled by individual cantons that engage in banking activities.
Banking privacy
Swiss bank secrecy regulations safeguard the privacy of banking information. The level of protection is similar to confidentiality privileges in relationships such as those between doctors and patients or lawyers and their clients. The Swiss government considers the right to privacy as a fundamental principle upheld by democratic countries. While bank accounts enjoy secrecy, they are linked to identified individuals, and law enforcement can access relevant information through a “lifting order” issued by a prosecutor or judge for criminal investigations.
Taxation
Swiss law differentiates between tax evasion and tax fraud. Failure to declare holdings to tax authorities constitutes tax evasion, which is considered a misdemeanor rather than a criminal offense. Unintentional failure to declare assets is not assumed to indicate criminal intent. However, tax fraud, such as forging tax declarations or providing significantly undervalued property assessments, is a criminal offense punishable under Swiss law.
The European Union and some member states have pressured Switzerland to change its privacy regulations, particularly concerning taxation. Switzerland has implemented withholding tax on interest earned in personal Swiss accounts held by European Union residents since July 1, 2005. In the past, amnesty programs were offered by Italy and Germany to repatriate funds from Swiss accounts.
European Union
The European Union has expressed concerns about its member states’ residents using Swiss banks to evade taxes in their home countries. The EU has advocated for a harmonized tax regime among its member states, but Swiss banking officials and the public have resisted such changes.
United States
In 2003, the United States Department of the Treasury announced an information-sharing agreement with Switzerland under the existing U.S.-Swiss Income Tax Convention. The agreement aims to enhance tax information exchange between the two countries, allowing improved access to necessary information for tax purposes.
Money laundering
Switzerland has implemented measures to combat money laundering. The Money Laundering Act establishes requirements for customer identification and mandates reporting of suspicious transactions to the Money Laundering Reporting Office. Switzerland’s financial center is vulnerable to money laundering due to its international significance, but the country has received praise for its cooperation in transnational financial issues. Switzerland has participated in joint task forces targeting the financing of terrorist organizations like Al-Qaeda and has assisted in locating and freezing terrorist and illicit assets.
Numbered bank accounts
Swiss banks offer numbered accounts that provide an additional layer of privacy. Information about these accounts is restricted to senior bank officers and not accessible to all bank employees. However, the process of opening a numbered account requires the same identification as an ordinary account. Fully anonymous accounts are prohibited by law, and law enforcement can access information related to a numbered account in the same manner as any other account during a criminal investigation.
Swiss banks and the Holocaust
Investigations have been conducted into the activities of Swiss banks during the Nazi regime, particularly concerning funds deposited by or stolen from Holocaust victims. Some banks prevented Holocaust survivors from accessing their funds, although the exact amounts disputed in lawsuits. The conduct of Swiss banks during the war was the subject of inquiries, and whistleblower Christoph Meili played a prominent role in exposing the existence of Holocaust-era records. Settlements were reached between Swiss banks and Holocaust victims in the 2000s, compensating for unclaimed assets and accounts.
International competition
Changes in Swiss bank secrecy regulations have led depositors seeking privacy and protection to consider other countries such as Panama and Singapore. Singapore has taken steps to make its banks more attractive, imposing stricter penalties for violating bank secrecy and modifying laws related to trusts and inheritance. Credit Suisse has established its international banking headquarters in Singapore. Panama, known for being Latin America’s largest banking center, has faced criticism for alleged non-compliance with banking regulations but remains stricter than several U.S. states and other Caribbean banking centers.
In fiction
Swiss banks have been featured in various works of fiction, including:
– “The Da Vinci Code” (book and film) with the fictional Depository Bank of Zurich.
– “The Bourne Identity” (novel and film) where the protagonist discovers a Swiss bank account number implanted in his hip.
– “Munich” (film) where Mossad agents’ operational and personal funds are deposited in a Swiss bank account.
– “Inside Man” (film) where a young American collaborates with the Nazis during World War II and establishes a banking empire, including funds deposited in a Swiss bank.