State sovereignty, economic interdependence and US extraterritoriality: the demise of Swiss banking secrecy and the re-embedding of international finance

Abstract

This article explores the tactics of an emergent extraterritoriality in international finance by examining how the US was unilaterally able to pierce Swiss banking secrecy regulations before Switzerland was forced to make similar concessions at the multilateral level. Complementing power-based approaches that emphasise control over market access, we show that, for most of the conflict starting in early 2008, the key agents of change were the US law enforcement authorities. By relying on legal action against Swiss banks following a large tax evasion scandal, rather than engaging in a direct confrontation with the Swiss government, the US was able to avoid politicisation of the conflict, which would have raised questions of legitimacy. The US law enforcement authorities’ ability to promote institutional change in Switzerland is based on three factors: the structural economic dependence of banks on access to the US market; the corporate liability for legal transgressions of employees; and an adversarial legal system characterised by extensive prosecutorial autonomy. More generally, we show that powerful states have the capacity to re-embed international finance by extending the boundaries of their law enforcement authorities’ jurisdiction extraterritorially.

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List of interviews

  1. Interview 1: Senior Swiss bank official, Zurich, 7 March, 2014.

  2. Interview 2: Swiss investigative journalist, Zurich, 10 March, 2014.

  3. Interview 3: Senior Swiss bank official, Zurich, 24 March, 2014.

  4. Interview 4: Senior official of Swiss regulatory agency, Zurich, 7 April, 2014.

  5. Interview 5: Senior official of Swiss banking association, Zurich, 10 April, 2014.

  6. Interview 6: Senior official of Swiss regulatory agency, St. Gallen, 6 April, 2014.

  7. Interview 7: Senior Swiss bank official, Zurich, 30 April, 2014.

  8. Interview 8: Senior Swiss bank official (phone), 13 May, 2014.

  9. Interview 9: Senior official of Swiss banking association (phone), 27 May, 2014.

  10. Interview 10: Senior US bank official, New York, 7 February, 2015.

  11. Interview 11: Senior official of Swiss regulatory agency, Zurich, 7 December, 2015.

  12. Interview 12: Senior official of US regulatory agency, New York, 18 December, 2015.

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Acknowledgements

The authors would like to thank Rawi Abdelal, Marius R. Busemeyer, Pepper D. Culpepper, Klaus Dingwerth, André Mach, Giulia Mennillo and two anonymous reviewers for their excellent comments. Earlier versions of this paper have been presented at the Universities of Konstanz, Lausanne and St. Gallen. All remaining errors are the authors’ responsibility.

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Correspondence to Patrick Emmenegger.

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Emmenegger, P., Eggenberger, K. State sovereignty, economic interdependence and US extraterritoriality: the demise of Swiss banking secrecy and the re-embedding of international finance. J Int Relat Dev 21, 798–823 (2018). https://doi.org/10.1057/s41268-017-0088-y

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Keywords

  • banking secrecy
  • economic interdependence
  • extraterritoriality
  • market power
  • sovereignty
  • tax haven