Swiss Bank (Customer) Secrecy and the International Exchange of Information

Abstract

Swiss banking secrecy dates back more than 300 years. In 1934, the Federal Act on Banks and Savings Banks made the unauthorized disclosure of confidential bank customer information a federal crime. Because bank secrecy could shield illegal financial activities, the Swiss government, Swiss banks, Swiss Bankers Association, and central bank have taken significant steps to halt tax evasion, insider trading, market and share price manipulation, money laundering, organized crime, financing terrorism, and corruption (bribery). In December 2015, the government implemented the Federal Act on the International Automatic Exchange of Information in Tax Matters (AEOIA) to assist foreign governments. Banking secrecy issues intersect with other important topics, such as whistleblower legislation and Swiss neutrality.

Introduction

The roots of Swiss banking secrecy can be traced back more than 300 years, to a time before the nation was founded, when Switzerland was just an assortment of loosely connected cantons,¹ and Geneva banks protected sizeable deposits of European aristocrats. Realizing the value of secrecy and the economic contributions of banks, in the early eighteenth century, the Great Council of Geneva imposed rules prohibiting the release of bank client information. Since then, Switzerland’s banking secrecy practices have been shaped by three major forces:

• The nation’s Constitution;

• Changes in domestic laws governing the disclosure of bank customer information; and

• A forceful international current toward transparency and the automatic exchange of information.

Switzerland’s Constitution guarantees an individual’s right to privacy, but the protection of information residing in banks is a bestowed entitlement with limits defined by Switzerland’s civil and criminal laws. On the international level, other nations have pressured Switzerland to reveal information on non-resident bank customers who are suspected of crimes, such as tax evasion and money laundering. Russia’s invasion of Ukraine in February 2022 brought new challenges to Switzerland’s neutrality policy. In a show of support for Ukraine, the Swiss government participated in internationally coordinated sanctions against Russia, both economic and financial. This decision will have interesting banking secrecy implications for the twenty-first century.

To some, Switzerland has been a brave international defender of privacy, which is a fundamental human right. To others, its defense of bank customers’ secrecy has been interpreted as an unwillingness to join the global fight against illegal financial transactions. On a spectrum ranging from no disclosure to complete transparency, it is fair to say that, during the past 90 years, Switzerland has taken significant steps (legislative and private) to become more open and accommodating to official international requests for bank-held customer information. This chapter explains Switzerland’s current banking secrecy status and its history of sharing confidential bank customer information with foreign nations.

Particular attention is paid to tax evasion because it has been one of the thorniest issues. The last significant remnant of Switzerland’s banking secrecy protection for tax evaders from developed nations was removed in 2018 when the Swiss government exchanged its first batch of bank customer information under the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters (AEOI or the “Convention”).² The Convention requires banks to identify foreign account holders, collect internationally exchangeable information on them, and automatically report their findings to competent domestic tax authorities. After that, domestic tax authorities exchange this information with their counterparts in foreign participant nations. These exchanges include only clearly defined bank customer information, and to qualify as a participant in the Convention, countries must prove that their confidentiality and data protection safeguards meet OECD standards, which many developing nations have found challenging to do. Because information exchanges are multilateral and standards are enforced, no participant nation should have a banking secrecy advantage over another, forcing financial intermediaries to compete on the quality, quantity, and cost of their services. Acceptance of automatic information exchanges brought Switzerland into the mainstream of developed nations with rules to better fight illegal financial activities, particularly concerning the assessment and collection of taxes. As of February 2023, 99 jurisdictions had committed to participate in this agreement. Unfortunately, some of the most prominent nations, such as the United States and China, had not agreed.³

This chapter puts Switzerland’s bank (customer) secrecy rights into a historical and contemporary perspective. It explains Switzerland’s main bank secrecy pillars, the limits of bank customer privacy under Swiss laws, and how these limits have evolved. The chapter goes on to discuss the Banking Act of 1934 (BA), which made the unauthorized disclosure of confidential bank customer information a federal crime. It then focuses on the international exchange of information, emphasizing on tax fraud, tax evasion, insider trading, market and price manipulation, money laundering, organized crime, financing terrorism, and corruption (bribery). The efforts and contributions of the Swiss Bankers Association, Swiss National Bank, Organization for Economic Cooperation and Development, and a host of other domestic and international groups are discussed. Appendix 1 describes Switzerland’s administrative, mutual, and judicial assistance in international tax matters. Appendix 2 explains the history behind the passage and enactment of the BA, and Appendix 3 ends the chapter by discussing Switzerland’s dormant accounts controversy from 1947 to 2022.

Putting Swiss Bank (Customer) Secrecy into Perspective

Controversy over Swiss banking secrecy is not new to the worlds of finance, law, and ethics. During the past century, this debate has evolved and matured with the advent of rules and international agreements, as global financial systems have become increasingly more integrated. For many, it is difficult to draw a clear line between the myth and reality of Swiss banking secrecy. There is an adage that “things aren’t like they used to be and never were.” For this reason, it is helpful to start with the facts, and, for this discussion, there are ten important ones to remember:

• 1. Banking secrecy rules are not unique to Switzerland. Most nations require banks to protect the confidential information of their customers. On paper, the banking secrecy laws of other countries have been as strict as or stricter than Switzerland’s. The difference has been Switzerland’s proven willingness and ability to deliver on its promises to defend customer confidentiality.

• 2. Switzerland’s Constitution guarantees an individual’s right to privacy, but it does not guarantee (and has never guaranteed) the confidentiality of all personal information residing in banks. Banking secrecy is a bestowed entitlement with roots in the nation’s civil, commercial, criminal, and banking laws. Because it is not a fundamental human right, there are (and have always been) exceptions to bank secrecy embedded in Swiss laws.

• 3. Switzerland did not pass privacy laws to protect or encourage illegal activities, such as tax evasion, money laundering, insider trading, corruption, or financing terrorism. Virtually all the significant changes in Swiss banking secrecy laws during the past 90 years have been designed specifically and intentionally to discourage and penalize criminal activities and protect potential victims.

• 4. Switzerland’s customs, practices, and laws protect the confidentiality of information belonging to bank customers. They do not protect banks. Therefore, the term “banking secrecy” is a misnomer that more accurately should be called “protecting bank-customer confidentiality.”

• 5. The confidentiality that Swiss banks owe to their customers has two essential parts. First is the legal requirement that banks and their employees keep client information confidential or risk criminal penalties, which could include fines or incarceration. The second part is who has access to the bank customer information and for what purposes.⁴ Switzerland has had strict rules on disclosure, access, and purpose.

• 6. Switzerland did not pass banking secrecy laws to inhibit the free flow of aggregated financial information. Regulating and monitoring banks and systemic financial risks can be done only if macro-level exposures are transparent and accurate, especially for multinational financial institutions. Therefore, Switzerland’s banking secrecy laws do not give individuals and businesses the right to prevent their confidential information from being aggregated and reported externally by banks. Similarly, these rules do not give banks the right to refuse the disclosure of aggregated customer information.

• 7. Swiss democracy is based on a belief that the State exists for the people; people do not exist for the State. Individuals are presumed to have exclusive rights to their personal information, and its release is permitted by banks only if authorized by law and executed using formal and approved administrative or judicial procedures. Swiss laws do not empower banks to decide what information should or should not be disclosed.

• 8. Regarding Swiss numbered accounts, all bank accounts in Switzerland are numbered, but none is anonymous. To open a Swiss bank account, a depositor must provide proof of identity. A “Swiss numbered account” is nothing more than a regular bank account for which the owner’s name is known to a restricted number of bank employees. It exists mainly to protect the privacy of high-profile, easily identifiable individuals, such as entertainers, athletes, and politicians.

• 9. The relaxation of Swiss bank (customer) secrecy rules has only affected the confidentiality of foreign residents. Swiss residents’ protections have remained largely in force.

• 10. Finally, Swiss laws provide individuals with both substantive and procedural rights to privacy. Substantive rights reflect the protective content of Switzerland’s domestic laws and international treaties regarding essential fundamentals such as ownership, family, religion, occupation, and the protection of confidential information. Procedural rights are anchored in the process of exchanging information and reflect an individual’s right to be informed, participate, and be heard, as well as object to disclosures and appeal decisions.⁵

Historic Layers of Protection for Swiss Banking Secrecy

During most of the twentieth century and into the twenty-first century, discussions about Switzerland’s banking secrecy laws have been directed mainly at federal protections, initially included in the BA. Figure 4.1 shows that this Act is just one layer of protection that Switzerland has offered individuals to defend against unwarranted disclosures of private information. At the base of the pyramid are internal bank rules and cantonal laws, which existed long before the codification of federal regulations. Moving up the pyramid, there are multiple layers of federal protection, such as Switzerland’s Constitution, Commercial Code of Obligations, Civil Code, BA, and Criminal Code. Covering this pyramid base is a blanket of legislative reforms and new acts that have affected Swiss banking secrecy practices.

Fig. 4.1

(Source Authors’ representation)

Historic layers of privacy protection for Swiss residents

Internal Bank Rules

Even without cantonal or federal rules to protect customer information, Swiss banks have always had stakes in doing so because the assurance of confidentiality is a vital product attribute in the financial industry. This feature heavily influences many customers’ bank selection. Banks in countries located near Switzerland, such as Austria, Belgium, and Luxembourg, have long promised confidentiality to their customers, but none of them matched Switzerland’s standard.

More than three centuries ago, Swiss banks had already developed a penchant for confidence and discretion when French kings used them as financiers. The spread of Swiss banks into the international arena reinforced the need to maintain customers’ privacy. Swiss banks became well known for their consistent, persistent, and aggressive defense of confidential customer information from governments looking for ways to increase their tax bases and from the curious, covetous, and prying eyes of others, particularly for politically exposed people. They took their roles seriously as trusted fiduciary agents and protectors of privacy. After decades of experience, Swiss banks earned worldwide trust and well-deserved reputations for steadfastly guarding customers’ financial records and identities. Prudent and discreet money management practices enhanced Swiss banks’ international competitive positions, combined with strident defenses of customers’ privacy. They also had salubrious macroeconomic effects, such as encouraging foreign capital inflows, which supported the international value of the Swiss franc and kept the nation’s inflation rates and interest rates relatively low.

Cantonal Laws

Switzerland was founded in 1291 when Schwyz, Uri, and Unterwalden, the three original Swiss cantons, agreed to a mutual protection pact against foreign aggression. For hundreds of years before (and after) the Confederation was created, the land regions that eventually became cantons enacted civil, commercial, and criminal laws to address social interactions. Among the civil and commercial rights written into cantonal laws were those addressing privacy. For example, the Great Council of Geneva, in 1713, required the maintenance of customer records but prohibited banks from disclosing customer information to third parties unless the Council approved its release. One problem with this system was that confidentiality rules and regulations differed by canton. As the Confederation grew in number, the resulting patchwork of privacy rules rendered the legality and enforceability of these rights problematic.

Swiss Constitution

In 1848, Switzerland placed its politically equal, autonomous cantons under a federal Constitution, which granted fundamental, inalienable rights to all individuals. Among them was the right to privacy of personal information. Article 13 (Right to Privacy) of the Swiss Constitution empowers individuals with the “right to privacy in their private and family life and in their home, and in relation to their mail and telecommunications.”⁶ It also guarantees the “right to be protected against the misuse of their personal data.”⁷ Article 27 (Economic Freedom) and Article 94 (Principles of the Economic System) guarantee additional economic rights, such as choosing a profession, engaging in private activities, and abiding by “the principle of economic freedom.”⁸

Commercial Code of Obligations

Switzerland codified its Commercial Code of Obligations (CCO) in 1881.⁹ This Code includes five major divisions, which are General Provisions, Types of Contractual Relationships, Commercial Enterprises and the Cooperative, The Commercial Register, Business Names, and Commercial Accounting, and Negotiable Securities. Each division is general, leaving room for courts and scholars to update interpretations, to stay in step with a changing economic and social environment.

When a bank acts as a proxy or agent for a customer with confidential information, Article 321a (Duty of Care and Loyalty) of the CCO states that “[f]or the duration of the employment relationship the employee must not exploit or reveal confidential information obtained while in the employer’s service, such as manufacturing or trade secrets. He or she remains bound by such duty of confidentiality even after the end of the employment relationship to the extent required to safeguard the employer’s legitimate interests.”¹⁰

Privacy rights are also embedded in Article 364 (Contractor’s Obligations: In General) and Article 398 (Faithful Performance) of the CCO, which deal with contract law and agency relationships. They require contractors and agents to use “the same duty of care as the employee in an employment relationship.”¹¹ Article 398 goes on to make agents “liable to the principal for the diligent and faithful performance of the business entrusted to him or her.”¹² Under the Swiss CCO, agency responsibilities must be conducted in person “unless authorized or compelled by circumstance to delegate it to a third party or where such delegation is deemed admissible by custom.”¹³

Swiss Civil Code

In 1907, Switzerland added another formal layer of federal bank customer protection by codifying its Civil Code,¹⁴ which deals with individual rights, associations, and family matters, such as marriage, divorce, engagement, parental rights, guardianship, inheritance,¹⁵ debt collection, bankruptcy,¹⁶ spousal rights to financial information, death, succession, and property law. Common to each of these exempt areas is the inability of an aggrieved, legitimate third party to build a credible case without access to confidential bank information. In civil proceedings, the obligation of banks to testify in court varies by canton. Some cantons prohibit banks from testifying in these proceedings; others require it, and the rest leave this decision to judges’ discretion.

Under Swiss civil law, every individual has a right to privacy concerning his or her personal records and economic background. Article 2 (Scope and Limits of Legal Relationships) of the Civil Code states that “[e]very person must act in good faith in the exercise of his or her rights and in the performance of his or her obligations,” and “[t]he manifest abuse of a right is not protected by law.” Article 7 (General Provisions of the Code of Obligations) reinforces Article 2 by asserting, “[t]he general provisions of the Code of Obligations concerning the formation, performance, and termination of contracts also apply to other civil law matters.”

Article 28 (Against Infringements) of the Swiss Civil Code goes on to state that “[a]ny person whose personal rights are unlawfully infringed may petition the court for protection against all those causing the infringement,” and “[a]n infringement is unlawful unless it is justified by the consent of the person whose rights are infringed or by an overriding private or public interest or by law.”¹⁷ Article 28a (Actions: In General) grants any person whose privacy is violated the right to seek protection through a court to “(1) prohibit a threatened infringement; (2) order that an existing infringement cease; or (3) make a declaration that an infringement is unlawful if it continues to have an offensive effect.”

Article 28b (Violence, Threats, or Harassment) reinforces these protections by addressing protection from violence, threats, and harassment. Articles 28g–28l address an individual’s privacy rights relative to the media. These confidentiality rights cover both the content of an individual’s personal information and the identities of the counterparties with whom he or she interacts (e.g., a particular individual, bank, or broker).

Federal Act on Banks and Savings Banks (Banking Act of 1934—BA)

Passage and enactment of the Federal Act on Banks and Savings Banks (i.e., Banking Act of 1934)¹⁸ was a punctuating event in Switzerland’s history because it explicitly linked violations of banking secrecy to the nation’s criminal laws. Appendix 2: History Behind the Banking Act of 1934 explains the Act’s origin and the multifaceted relationships between Switzerland’s internal and external politics. It also describes the financial, political, and economic uncertainty the nation faced due to (1) trade restrictions caused by the Great Depression, (2) turbulence in surrounding countries, (3) the overexpansion of credit by major Swiss banks to Germany, (4) efforts by European countries (particularly France) to increase their tax bases, (5) the rise of Adolf Hitler and his National Socialist Party, (6) the Basler Handelsbank Affair, and (7) Swiss Supreme Court sequestration decision.

In scope, Article 47 of the BA protects the same basic privacy and agency rights as Switzerland’s Civil Code and Commercial Code of Obligations, but it goes one step further by attaching the sanction of either imprisonment or fine to confidentiality infringements and by making breaches of the law a responsibility of the State to prosecute.¹⁹ By contrast, under civil law, the injured party must sue and prove damages, and, if the allegation is confirmed, punishment is limited to a fine.

The BA explicitly forbids bank executives, officials, employees, bank auditors, assistants to bank auditors, and employees of the Banking Commission from disclosing private information entrusted to a bank. It broadens the penalties to bankers who fail to protect confidential customer information. Violators who deliberately disclose secrets can be punished by prison terms of up to three years or fines as high as CHF 250,000. Those who enrich themselves by doing so could face as many as five years in prison.

Table 4.1 shows provisions in the most recent version of Article 47 in the BA.

Table 4.1 Article 47: Swiss Federal Act on Banks and Savings Banks (Status as of January 1, 2020)

Swiss Criminal Code (SCC)

The Swiss Criminal Code (SCC) provides another layer of protection for the privacy rights of individuals.²⁰ Approved by a national referendum in 1938 and enacted four years later, the SCC brought uniformity to Switzerland’s penal legislation by abrogating inconsistent laws. This Code incorporated banking secrecy violations as breaches of federal criminal laws.

Article 162 (Breach of Manufacturing or Trade Secrecy) of the SCC focuses on the non-bank portion of Switzerland’s financial sector. It imposes a sentence not exceeding three years or a monetary penalty on anyone “who betrays a manufacturing or trade secret that he or she is under a statutory or contractual duty contract not to reveal.” Because banks house private information, they are covered under the umbrella of Article 321 (Breach of Professional Confidentiality), putting them in the same category of confidence and trust as clergy, lawyers, notaries, doctors, dentists, pharmacists, and midwives. Violators face custodial sentences not exceeding three years or monetary penalties. There is no statute of limitations on the enforcement of the SCC, which means it extends beyond an individual’s employment contract, giving the State a right to prosecute violators after they have left their places of business or means of employment.

Inappropriate releases of confidential information could create criminal liability under the SCC. Specifically, Article 158 (Criminal Mismanagement) criminalizes the mismanagement of property and abuse of authority that cause a financial loss to a customer. Article 273 (Industrial Espionage) makes it a crime to release trade secrets to an “external official agency, a foreign organization, a private enterprise, or the agents of any of these, or, any person who makes a manufacturing or trade secret available to an official foreign agency, a foreign organization, a private enterprise, or the agents of any of these.” In this respect, the SCC draws a link between disclosure of confidential domestic information and potential harm to the interests of Switzerland as a nation.²¹

International Exchanges of Confidential Bank-Customer Information in Criminal Proceedings

Illegal activities have never been protected by Switzerland’s privacy laws, which is why banks are required to disclose customer information to authorities that are investigating suspected criminal behavior. As a result, it is not a confidentiality violation for employees of Swiss-domiciled banks to report (nationally and internationally) suspected illegal acts, but the trigger for such disclosures has been criminality under Swiss law. Misdemeanors are not prosecutable in Switzerland as criminal offenses. Money laundering and insider trading became crimes in 1990 and 1995, respectively, and in 1999, 2003, and 2012, the nation explicitly and formally criminalized bribery, financing terrorism, and tax evasion.

The significant areas of criminality that intersect with federal bank secrecy rules are tax fraud, criminal mismanagement, insider trading, bankruptcy, debt collection felonies, frauds against seizure, mismanagement, financing terrorism, unlawful association, money laundering, bribery, and corruption. When money laundering or terrorist financing, as defined under Swiss laws, is suspected, banks are required to report their suspicions to the Money Laundering Reporting Office of Switzerland (MROS),²² managed by the Federal Office of Police. “Reasonable suspicion” exists when the results of these clarifications fail to refute the suspicion that the assets are linked with a crime.²³

The MROS is charged with assessing reports of suspected money laundering, terrorist financing, criminal activities, and criminal organizations.²⁴ After making preliminary judgments about sufficiency of the evidence, the MROS forwards warranted cases to the appropriate law enforcement authorities. The MROS maintains an active database and a data processing system to combat money laundering. In addition to the MROS, the Swiss Federal Audit Office (SFAO) has a whistleblowing website for private individuals and federal employees to report suspicions of corruption within the administrative units of the Federal Administration.

The MROS is not an official police authority but rather an administrative unit with specific tasks for fighting money laundering, organized crime, and terrorist financing in Switzerland.²⁵ It helps banks identify evolving ways to combat illegal financial activities and publish annual statistics on its efforts. To foster the international exchange of information where money laundering, terrorist financing, and other financial crimes are suspected, the MROS is a member of the Egmont Group of Financial Intelligence Units, which is an international network dedicated to improving communication, sharing information, and training among financial intermediaries.²⁶

Tax Fraud

Tax fraud is the use of intentional deception (e.g., forgery or willful falsification of documents) to reduce an individual’s withholding taxes, stamp duties, or customs duties. It violates Articles 146 (Fraud) and 147 (Computer Fraud) in the SCC and is fully prosecuted by Switzerland’s federal criminal justice system. Access to bank-client information when there are suspicions of tax fraud supersedes the confidentiality protections offered by the BA.

Insider Trading

Swiss law defines “insider trading” as the disclosure of confidential information that “would significantly affect the prices of securities admitted to trading on a trading venue or DLT (distributed ledger technology) trading facility which has its registered office in Switzerland.”²⁷ Examples of information having such importance are impending mergers, acquisitions, joint ventures, management changes, unexpected financial information, and patent approvals. Individuals possessing this information can derive pecuniary rewards or avoid losses by advantageously timing their buy and sell orders for tradeable shares, bonds, bills, notes, or derivatives. This offense is punishable under Swiss law at the administrative and criminal levels.

Insider trading has a somewhat tumultuous history because, until 1995, it was not a crime under the SCC. Many foreign authorities (especially in the United States, where insider trading had been a crime only since 1988) were surprised when their information requests concerning suspected insider trading activities were met by a lack of understanding by Swiss bankers and authorities. The nation’s dual criminality requirement bound Swiss bankers to secrecy, and the US Internal Revenue Service (IRS) was committed to uncovering tax evaders.

In 1982, the United States and Switzerland signed a non-binding Memorandum of Understanding (MOU-1982), which opened the door to cooperation on this front.²⁸ MOU-1982 regulated communications, opinions, and understandings between Swiss and US judicial authorities, thereby reducing differences of opinion, assuaging differences in law enforcement, and minimizing jurisdictional conflicts. It was also significant because the United States and Switzerland agreed to fight more effectively all forms of organized crime.

MOU-1982 remained in force until 1995 when sanctions covered by Article 161^bis of the SCC were replaced by Article 46 of the Federal Act on Stock Exchanges and Securities Trading (Stock Exchange Act, SESTA), which made insider trading a crime in Switzerland.²⁹ Doing so aligned Switzerland with virtually every country in the OECD that had legislatively tried to stop these activities. By making insider trading a per se violation of its criminal law, Switzerland empowered foreign authorities seeking administrative and judicial assistance in their criminal investigations. As a result, banks could disclose their suspicions of insider trading without violating federal bank-secrecy laws.

On September 28, 2012, Article 161 was repealed (with effect from May 1, 2013), once again, when SESTA was expanded to include shares in companies with registered offices outside Switzerland and made insider trading a crime for all market participants.³⁰ Violations that earn insiders more than CHF 1 million were made felonies.

Before the 2012 repeal, insider trading laws were limited to individuals and legal entities over which FINMA exercised regulatory oversight. Afterward, and following the creation of Switzerland’s Stock Exchange Ordinance, FINMA (and its predecessor, the Swiss Federal Banking Commission) revised its circular on market conduct rules. It also extended the regulation of securities trading on Swiss trading venues to securities and derivatives in the Swiss primary-, foreign-, commodity-, foreign exchange-, interest rate-, and other benchmark-related markets.³¹ The new rules allow FINMA to act against all individuals and legal entities using insider information, engaging in market manipulation, or misusing primary markets with foreign securities or on other markets. FINMA can also request and exchange data with foreign supervisory authorities on alleged market abuses and suspected violators.

SESTA’s Articles 2 (Definitions), 33e (Exploitation of Insider Information), and 40 (Exploitation of Insider Information) clarified the definition of “insider information,” what constitutes a violation, and the penalties. Depending on the severity, violations were made punishable by imprisonment from one to five years or an appropriate fine. Article 40 also explains that the securities covered by the law only need to be admitted for trading on a Swiss Exchange rather than formally listed, and prosecution depends on violators earning pecuniary rewards.

Article 40 covers three types of potential offenders: primary insiders, secondary insiders, and tertiary insiders.³² Primary insiders are those who have access to insider information due to the nature of their activities, such as executive members of an issuer, a company that controls the issuer, or a firm controlled by the issuer. Secondary insiders obtain their information either from primary insiders or by committing a felony or misdemeanor. Finally, tertiary insiders get confidential information in other ways and use it to earn pecuniary rewards. Before SESTA’s Article 40, tertiary insiders were not considered potential offenders.

On June 19, 2015, the Swiss Federal Assembly adopted the Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives (Financial Market Infrastructure Act, FinMIA), which came into force the last day of the year.³³ Following on the heels of the US Great Recession and European debt crises, this Act was intended to reduce systemic counterparty and operational risks and help stabilize the Swiss financial system. Article 142 (Exploitation of Insider Information) and Article 154 (Exploitation of Insider Information) of the FinMIA focus on the misuse of insider information. Both articles have been amended to include DLT platforms. Penalties in Article 154 include incarceration from one to five years or an appropriate fine. One significant difference between the two is that Article 142 is an administrative violation that does not require a pecuniary reward for the information disclosure. In contrast, Article 154 is a criminal violation that imposes penalties only after such gains have occurred.

Art. 142 Exploitation of Insider Information
Any person who has insider information and who knows or should know that it is insider information or who has a recommendation that they know or should know is based on insider information shall behave inadmissibly when they:  a.64 exploit it to acquire or dispose of securities admitted to trading on a trading venue or DLT trading facility which has its registered office in Switzerland or to use derivatives of such securities;  b. disclose it to another;  c.65 exploit it to recommend to another to acquire or dispose of securities admitted to trading on a trading venue or DLT trading facility, which has its registered office in Switzerland or to use derivatives of such securities.
64Amended by No I 10 of the FA of Sept. 25, 2020, on the Adaptation of Federal Law to Developments in Distributed Ledger Technology, in force since Aug. 1, 2021 (AS 2021 33, 399; https://www.fedlex.admin.ch/eli/cc/2015/853/en). 65Amended by No I 10 of the FA of Sept. 25, 2020, on the Adaptation of Federal Law to Developments in Distributed Ledger Technology, in force since Aug. 1, 2021 (AS 2021 33, 399; https://www.fedlex.admin.ch/eli/cc/2015/853/en).

Art. 154 Exploitation of Insider Information
1A custodial sentence not exceeding three years or a monetary penalty shall be imposed on any person who as a body or a member of a managing or supervisory body of an issuer or of a company controlling or controlled by them, or as a person who due to their holding or activity has legitimate access to insider information, if they gain a pecuniary advantage for themselves or for another with insider information by:  a.69 exploiting it to acquire or dispose of securities admitted to trading on a trading venue or DLT trading facility which has its registered office in Switzerland or to use derivatives of such securities;  b. disclosing it to another;  c.70 exploiting it to recommend that another acquire or dispose of securities admitted to trading on a trading venue or DLT trading facility which has its registered office in Switzerland or to use derivatives of such securities. 2Any person who through an act set out in paragraph 1 gains a pecuniary advantage exceeding one million francs shall be liable to a custodial sentence not exceeding five years or a monetary penalty. 3Any person who gains a pecuniary advantage for themselves or for another by exploiting insider information or a recommendation based on insider information disclosed or given to them by a person referred to in paragraph 1 or acquired through a felony or misdemeanor in order to acquire or dispose of securities admitted to trading on a trading venue or DLT trading facility which has its registered office in Switzerland or in order to use derivatives of such securities shall be liable to a custodial sentence not exceeding one year or to a monetary penalty.71 4Any person who is not a person referred to in paragraphs 1 to 3 and yet who gains a pecuniary advantage for themselves or for another by exploiting insider information or a recommendation based on insider information in order to acquire or dispose of securities admitted to trading on a trading venue or DLT trading facility which has its registered office in Switzerland or to use derivatives of such securities shall be liable to a fine.72
69Amended by No I 10 of the FA of Sept. 25, 2020, on the Adaptation of Federal Law to Developments in Distributed Ledger Technology, in force since Aug. 1, 2021 (AS 2021 33, 399; https://www.fedlex.admin.ch/eli/cc/2015/853/en). 70Amended by No I 10 of the FA of Sept. 25, 2020, on the Adaptation of Federal Law to Developments in Distributed Ledger Technology, in force since Aug. 1, 2021 (AS 2021 33, 399; https://www.fedlex.admin.ch/eli/cc/2015/853/en). 71Amended by No I 10 of the FA of Sept. 25, 2020, on the Adaptation of Federal Law to Developments in Distributed Ledger Technology, in force since Aug. 1, 2021 (AS 2021 33, 399; https://www.fedlex.admin.ch/eli/cc/2015/853/en). 72 Amended by No I 10 of the FA of Sept. 25, 2020, on the Adaptation of Federal Law to Developments in Distributed Ledger Technology, in force since Aug. 1, 2021 (AS 2021 33, 399; https://www.fedlex.admin.ch/eli/cc/2015/853/en).

Switzerland provides several exemptions from its insider trading laws. In particular, Articles 123–128 of the Ordinance on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (FinMIO)³⁴ allow:

• The buyback of a company’s equity securities at market prices as part of a public buyback offer. See Article 123 (Buyback of Own Equity Shares) to Article 125 (Content of Buyback Notices);

• “Securities transactions which are intended to stabilize the price of a security that has been admitted to trading on a trading venue or DLT trading facility in Switzerland” (Article 126—Price Stabilization after a Public Placement);

• “Securities transactions to implement an own decision to carry out a securities transaction, in particular the purchase of securities of the target company by the potential offeror with regard to the publication of a public takeover offer, provided the decision was not taken on the basis of insider information” (Article 127—Other Permissible Securities Transactions);

• “The communication to a person who requires the insider information in order to fulfill his or her statutory or contractual obligations” (Article 128—Admissible Communication of Insider Information); and

• Securities transactions carried out in connection with public tasks and not for investment purposes by parties, such as the Confederation, cantons, Bank for International Settlements, “foreign central banks, the European Central Bank, official bodies or responsible state departments, the European Financial Stability Facility, and the European Stability Mechanism” (Article 29—Exceptions to Pre-Trade and Post-Trade Transparency).

Market and Share Price Manipulation

Market and price manipulation are criminal offenses in Switzerland, thereby releasing Swiss banks from legal restrictions on exchanging customer information upon official requests. Article 40a (Price Manipulation) of the SESTA defines market manipulation as the intention to “disseminate false or misleading information against their better knowledge,” or when someone transacts “purchases and sales of such securities directly or indirectly for the benefit of the same person or persons connected for this purpose.”³⁵ It forbids price manipulation and imposes an imprisonment penalty of up to three years or a fine on whoever “substantially influences the price of securities admitted to trading on a Swiss stock exchange or similar Swiss institution, with the intention of gaining a pecuniary advantage for himself or herself or for another.” For those earning more than one million Swiss Francs through such activities, the SESTA imposes penalties of imprisonment up to five years or a monetary fine.³⁶ The SESTA’s sanctions against market manipulation are also included in the FinMIA’s Article 143 (Market Manipulation), which also defines inadmissible and admissible conduct.

Money Laundering, Unlawful Association (Organized Crime), and Financing Terrorism

Money laundering is the act of transforming funds from an illegal source into financial assets that appear to be legitimate. Many people associate it with drug trafficking, but money laundering applies to other crimes, such as blackmail, corruption, embezzlement, extortion, human trafficking, kidnapping, and terrorism. The FINMA has found that money-laundering risks are high if (1) a bank customer communicates false or misleading information, (2) the economic purpose of an active account is unknown or suspicious, (3) large deposits are made and withdrawn quickly, (4) an inactive account suddenly becomes very active, (5) the seat or domicile of the contracting party is in a high-risk country, (6) there are frequent high-risk transactions (e.g., or regular transfers from a bank), and (7) the sources of deposits and receipts are not consistent with the company’s business or beneficial owner’s profile.³⁷

Criminalization of Money Laundering

In 1990, Switzerland criminalized money laundering and the improper care of financial transactions by enacting Article 305^bis (Money Laundering) of the SCC.³⁸ The Article defines this activity as “frustrating the identification of the origin, the tracing or the forfeiture of assets which he or she knows or must assume originate from a felony or aggravated tax misdemeanor.”³⁹ Under Swiss law, money laundering is punishable only if there is direct or conditional intent. Violations are punishable by incarceration up to three to five years or a fine, depending on the crime’s severity. Article 305^bis extends liability to situations in which the primary offense is committed abroad, but only if money laundering is a crime in the foreign location.

Article 305^bis was welcomed by the international financial and legal communities but introduced a quandary for Swiss bankers. On the one horn of their dilemma was Article 47 of the BA, which made it a crime for bank employees in Switzerland to reveal confidential customer information. On the other horn was Article 305^bis, which imposed a custodial sentence of not more than three years or monetary fine on any person aiding and abetting money-laundering activities. The open question was what would happen to bank employees who voiced money-laundering suspicions that proved to be incorrect? Could they be found guilty of violating the BA?

Passage of Article 305^ter (Insufficient Diligence in Financial Transactions and Right to Report) of the SCC helped resolve this dilemma by permitting bank employees to report suspicions of money-laundering felonies or aggravated tax misdemeanors, based on “observations that the assets in question originated from a felony or an aggravated tax misdemeanor in terms of Article 305^bis.” The Article had the meaningful effect of protecting bank employees from criminal liability resulting from a breach of professional confidentiality when they reported suspicious cases.

Criminal and Terrorist Organizations

Switzerland reinforced its Criminal Code in 1994 when it enacted Article 260^ter (Criminal or Terrorist Organization). This Article imposed a monetary penalty or custodial sentence of up to ten years on anyone who “participates in an organization which pursues the objective of committing violent felonies or securing a financial gain by criminal means, or committing violent felonies aimed at intimidating the population or coercing a State or an international organization to act or refrain from acting, or supports such an organization in its activities.” It extends liability to anyone committing an offense outside Switzerland, provided that at least a part of the criminal activities is performed in Switzerland. In 1994, Switzerland also established its Central Offices for Criminal Police Matters within the Federal Office of Police. Its mandate is to conduct investigations into narcotics trafficking and counterfeiting, coordinate inquiry procedures between Switzerland and foreign countries, and evaluate all information related to organized crime. In September 2020, the SCC was reinforced by Forfeiture of Assets of a Criminal or Terrorist Organization, which ordered the forfeiture of assets gained from activities involving organized criminal or terrorist organizations.

Background: Swiss Efforts to Prevent Money Laundering

In 1991, a year after money laundering was made illegal in Switzerland, the Swiss Federal Banking Commission (SFBC) issued its Guidelines on the Combating and Prevention of Money Laundering, which described the organizational structure banks and security traders should follow to identify, monitor, and curtail money-laundering activities.⁴⁰ These Guidelines included good management practices and employee-training procedures as well as helpful interpretations of relevant SCC sections. Prominent in the Guidelines was the obligation to report money-laundering suspicions to the appropriate authorities.

Swiss banks picked up the baton of self-regulation by making efforts to curtail money laundering. For example, in October 2000, UBS, Credit Suisse, and eleven other international banks committed themselves to the Wolfsberg Anti-Money Laundering Principles for Private Banking, which applied due diligence standards in their global operations.⁴¹ Membership was voluntary, and the self-regulatory directives of the Wolfsberg Principles did not impose penalties on banks that violated the rules. The goal of this Agreement was to apply a consistent set of standards to the global operations of some of the world’s largest financial intermediaries. In 2002, the SFBC enacted its own Anti-Money Laundering Ordinance (MLO SFBC),⁴² which raised measurably banks’ due diligence requirements and the degree of care needed to handle transactions with differing levels of legal and reputational risks.

Switzerland has cooperated on many international levels to prevent, uncover, and return assets from money laundering operations. Among the most significant initiatives have been the Stolen Assets Recovery Initiative (StAR),⁴³ started by the World Bank and United Nations Office on Drugs and Crime. Switzerland has also financially supported the Basel-based International Center for Asset Recovery (ICAR),⁴⁴ and it has been a force behind Article 57 (Return and Disposal of Assets) of the United Nations Convention against Corruption (UNCAC),⁴⁵ which mandates the return of stolen assets to countries from which they came. Switzerland has taken an active role in providing financial support to failing states (i.e., nations with the loss of one or more essential conditions, such as territorial control, governmental legitimacy, or diplomatic relations with foreign nations) and negotiating the return of stolen assets to these countries. In addition, it has fought against international money-laundering activities that finance terrorist activities.

Three Pillars of Switzerland’s Fight Against Money Laundering and Terrorist Financing

The three pillars⁴⁶ on which Switzerland bases its current fight against money laundering are the Federal Act on Combating Money Laundering and Terrorist Financing (Anti-Money Laundering Act, AMLA),⁴⁷ Ordinance on Combating Money Laundering and Terrorist Financing (AMLO),⁴⁸ and Ordinance of the Swiss Financial Market Supervisory Authority on the Prevention of Money Laundering and Terrorist Financing (FINMA Anti-Money Laundering Ordinance, AMLO-FINMA).⁴⁹

Federal Act on Combating Money Laundering and Terrorist Financing (AMLA)

Switzerland’s Anti-Money Laundering Act (AMLA) was passed in 1997 and revised in 2009 when it was renamed the Federal Act on Combating Money Laundering and Terrorist Financing (Anti-Money Laundering Act, AMLA).⁵⁰ The AMLA was designed to stop or inhibit both money laundering⁵¹ and terrorist financing,⁵² as defined by the SCC. It imposed restrictions on all financial intermediaries, including individuals who act on professional bases to hold deposits of others or to invest or transfer third-party assets of others, such as banks, fund management companies, investment companies, leasing or factoring agents, insurance companies, fiduciaries, money exchangers, investment advisors, security dealers, and casinos. In 2019, the AMLA was revised again and came into force the following year. Among its new provisions was the expansion of due diligence obligations to “advisors.” As a result, multi-family offices, trustees, and lawyers are required to check and update client data periodically and to report suspicions of money laundering to the MROS.⁵³

The AMLA requires financial intermediaries to verify the identity of all their customers (i.e., individuals and legal entities) and establish the identity of the ultimate beneficial owners of Swiss assets. A customer’s identity is required for cash transactions if the transaction has “considerable financial value,” as defined by the FINMA. The AMLA made it clear that bank employees had a “duty to report” suspicions of money laundering so long as there were “reasonable grounds to suspect that assets involved in the business relationship” were related to criminal or terrorist activities.

Reporting Requirements of Financial Intermediaries Under AMLA

Passage of the AMLA resulted in Switzerland having three slightly differing layers of reporting responsibilities. The first was AMLA, which required banks to report suspicious activities if they were based on “reasonable grounds.” The second was Article 305^ter of the SCC, which entitled bank employees to report suspicious activities, as long as they were based on “observations that indicate that assets originate from a felony or an aggravated tax misdemeanor in terms of Article 305^bis.” Finally, the BA made it a crime for banks and their employees to divulge confidential bank information.⁵⁴

To implement relatively recent recommendations of the Financial Action Task Force (FATF),⁵⁵ the Swiss Parliament adopted a new Anti-Money-Laundering Act in March 2021, which entered into force on January 1, 2023.⁵⁶ To fine-tune suspicious activity reports, the new law clarified the meaning of “reasonable grounds to suspect” money laundering and the responsibility of financial intermediaries to report their suspicions. Lawyers and notaries were intentionally left out of the revision to protect the attorney-client privilege. Time and experience will help to differentiate between “reasonable grounds” and “observations.” For now, they are different shades of gray on a spectrum between white and black, with no clearly defined border, which leaves room for legal uncertainty.

Under the SCC, an offense is deemed “serious” if it involves an organized crime member or a participant in an organized money-laundering scheme or results in substantial gains. In such cases, prison sentences of up to five years and fines may be imposed for non-disclosure. By contrast, negligence, such as carelessly accepting assets, is not considered a crime but rather a violation of Swiss laws that require banks to have competent and reliable management systems and practices. Therefore, a bank employee who fails to investigate a customer who is depositing bank notes or precious metals worth more than CHF 100,000 signals to Swiss regulatory authorities the possibility of faulty bank management practices rather than complicity in a criminal act.

Individuals and financial institutions that report cases in good faith or freeze assets in accordance with the AMLA are not liable under Switzerland’s bank, professional, or trade secrecy laws, which means they cannot be sued for breach of confidentiality contracts. Intentional failures to report violations are subject to fines up to CHF 500,000, and offenses caused by negligence are punishable by fines as high as CHF 150,000. A minimum CHF 10,000 penalty must be assessed for transgressions repeated within five years.

Politically Exposed Person (PEP)

The AMLA introduced the term “politically exposed person” (PEP) to the financial community. The acronym PEP describes an individual with an important public profile or ties to well-known people, such as heads of government, national politicians, individuals with senior judicial positions, high-ranking military officials, and executives of state-owned enterprises, all of whom have abilities to leverage their positions for private gain. The controversy surrounding the disclosure of information on a PEP grew mainly from the “Abacha Affair” during the late 1990s and early 2000s, when the Nigerian dictator, Sani Abacha, engineered the massive theft of assets (estimated as high as $2.2 billion) from the Nigerian treasury and deposited the funds in Swiss and other nations’ banks.

The AMLA gave Swiss authorities the ability to freeze assets of other infamous individuals, such as Philippines President Ferdinand Marcos, Peruvian Intelligence Head Vladimiro Ilyich Montesinos Torres, Mexican President Carlos Salinas de Gortari, and his brother, Raúl Salinas de Gortari,⁵⁷ as well as Tunisian President Zine al-Abidine Ben Ali, Ivory Coast President Laurent Gbagbo, Egyptian President Hosni Mubarak, and Moammar Gadhafi, Leader and Guide of the Revolution in Libya.

Anti-Money Laundering Ordinance (AMLO)

Switzerland’s Anti-Money-Laundering Ordinance (AMLO) was enacted on June 3, 2015, based on the Anti-Money Laundering Act of 1997.⁵⁸ It defines responsibilities for a wide range of Swiss financial intermediaries to fight money laundering and terrorist financing. Among the regulated financial institutions are banks, securities dealers, fund management companies, insurance companies, investment companies under the Convention Implementing the Schengen Agreement (CISA), and asset managers under CISA.

Since their enactment, the AMLO guidelines have been strengthened and extended to include terrorist activities. The AMLO clarifies:

• The scope of its regulatory authority;

• Financial intermediaries’ responsibilities to identify contractual parties, controlling persons, and beneficial owners;

• The obligation to refuse funds originating from criminal activities and terrorist organizations (It also gives banks discretionary powers to terminate business relationships);

• The responsibilities of global financial intermediaries to develop criteria for recording, limiting, and supervising, domestically and globally, their legal and reputational risks related to money laundering and terrorist financing;

• The need for financial intermediaries to apply the same level of due diligence for international affiliates (i.e., branches and subsidiaries) as they use in Switzerland;

• Why financial intermediaries must develop internal directives and assign individuals specific responsibilities concerning the prevention of money laundering and communicate these directives to clients;

• The need for top management to approve commercial relationships with politically exposed persons;

• The meaning of “prohibited assets,” “prohibited business relationships,” and the possible consequence of provision breaches;

• Due diligence procedures that financial intermediaries should follow, ranging from low-risk to high-risk situations and how to monitor these business relationships and transactions;

• Obligations to document transactions and retain records;

• Governance measures for estimating, mitigating, and supervising the risks associated with money laundering and financing terrorism;

• Quality control measures for outsourced work, such as customer and beneficial owner identification;

• Permission to report customers when a financial intermediary perceives actions that might be associated with a “crime, qualified tax offense, or terrorist financing” (These reports are allowed even if the financial intermediary does not have a justified suspicion of money laundering or terrorist financing); and

• Responsibilities concerning foreign correspondent banks.

The AMLO requires FINMA-regulated financial institutions to identify risk categories for money laundering and devote greater care to transactions that fall into the high-risk group(s). For example, customers from countries known to be corruption-prone or politically unstable are candidates for a high-risk rating.

Due diligence obligations under the AMLO require all Swiss financial intermediaries to verify the identity of the contracting party, controlling person, beneficial owner of the assets, or persons entering into the business relationship on behalf of a legal entity. Any due-diligence breach could be enough reason for a financial institution to fail the “fit and proper requirement.”

On January 1, 2020, the SBA’s Agreement on the Swiss Banks’ Code of Conduct with Regard to the Exercise of Due Diligence (CDB 20) came into force. FINMA approved this self-regulatory agreement. Many of its provisions were identical to the FINMA Anti-Money Laundering Ordinance (AMLO-FINMA), which is discussed in the next section.⁵⁹

Business relationships with foreign-resident PEPs took on particular interest because Switzerland’s AMLO was enacted, in part, to thwart foreign leaders who stole funds from their countries and tried to hide them abroad. Today, Swiss banks are required to monitor and track high-risk relationships, focusing on preventing transfers rather than treating problems after they occur. The Swiss Federal Department of Foreign Affairs has been charged with freezing, confiscating, and returning illicitly gained funds to their rightful owners, but Switzerland’s policy is to cooperate only with foreign governments that can reciprocate in the exchange of financial information.⁶⁰

The AMLO addresses many high-risk acts, such as assets derived from criminal activities, corruption, misuse of public funds, and suspected links to terrorist organizations. Violations of AMLO’s standards can result in criminal charges by the AMLO, the FINMA, or the Federal Justice and Police Department. If violations are flagrant enough, banks could lose their FINMA licenses to operate.

FINMA Anti-Money Laundering Ordinance (AMLO-FINMA)

On June 3, 2015, the FINMA published its Ordinance of the Swiss Financial Market Supervisory Authority on the Combating of Money Laundering and Financing Terrorist Activities (FINMA Anti-Money Laundering Ordinance, AMLO-FINMA),⁶¹ which defined how financial intermediaries should implement their duties to combat money laundering and the financing of terrorist activities. The AMLO-FINMA has served as a guide to the FINMA when it approves rules and regulations of self-regulating organizations. It imposes strict self-regulatory requirements to fight money laundering and terrorist financing. Among its many provisions are:

• Lowering the threshold-reporting limit for cash transactions from CHF 25,000 to CHF 15,000;

• Giving a 30-day deadline to close new accounts lacking complete documentation on the controlling person and beneficial owner;

• Incorporating the FINMA’s circular on video and online identification into the CDB; and

• Updating the rules for abbreviated processes.⁶²

The AMLO-FINMA covered a vast territory. In “Title 1: General Provisions” were objectives, definitions of important terms, the scope of application, rules regarding branch offices or affiliated group companies abroad, global monitoring of legal and reputational risks, prohibited assets, forbidden business relationships, breaches of provisions, general provisions on due diligence, high-risk business relationships and transactions, the means, timing, and monitoring of investigations, duty to document and retain records, and governance. Titles 2–5 made special provisions for

• banks and securities firms,

• fund management companies,

• investment companies,

• asset managers under the Convention Implementing the Schengen Agreement (CISA), and

• insurance companies.

Financial Institutions Act

The Federal Act on Financial Institutions (Financial Institutions Act, FinIA, June 15, 2018) entered into force in January 2020, subject to a two-year phase-in period. It was implemented to protect financial institutions’ customers by:

• Regulating the license requirements for financial institutions in virtually every area;

• Governing the organization and operation of Switzerland’s financial market infrastructures;

• Supervising the conduct of participants in securities and derivatives markets;

• Substantially changing regulatory oversight on independent asset managers (IAMs); and

• Standardizing the rules for financial institutions engaged in asset and collective asset management.

Federal Act on Financial Services

The Federal Act on Financial Services (Financial Market Services Act, FinSA—June 15, 2018) entered into force in January 2020, casting a wide regulatory net over client advisers, financial service providers, and financial service products offered by Swiss financial intermediaries.⁶³ The FinSA was implemented to harmonize authorization rules for financial service providers other than banks. It imposed licensing and prudential supervision requirements on asset managers (trustees) and independent wealth managers. Among its provisions are:

• Consolidation of regulatory authority;

• New reporting requirements and tests to increase financial openness and reduce abuses;

• Reduced barriers obstructing customers’ legal claims against financial service providers;

• Rules of conduct that apply to all financial service providers; and

• Requirements for information sufficiency, assessment and adequacy tests, documentation requirements, accountability, transparency, and due diligence.

There Is Still Room for Improvement

Switzerland’s parliament has taken significant steps to liberalize the international exchange of information that might inhibit or prevent money laundering, tax fraud, tax evasion, and financing terrorism. Nevertheless, repeated violations by Swiss bankers of bilateral and multilateral treaties have blemished the nation’s reputation, which is particularly hazardous for a small country with a sizeable financial imprint that relies on big global customers to accept its independence. A good example involved 1MDB (1Malaysia Development Berhad), a Malaysian government-run strategic development company, which was the center of a scandal that embroiled then-Prime Minister Najib Razak. In 2017, the FINMA found JPMorgan’s Swiss subsidiary guilty of money-laundering conduct in its business relationships with 1MDB. In 2019, two Coutts bankers were fined for their roles in helping 1MDB, and the following year (2020), a former Coutts banker was convicted for failing to report a $700 million transfer into a Swiss account by 1MDB. Altogether, Coutts was charged with processing more than $2.4 billion in illegal transactions.⁶⁴ In January 2019, Swiss officials spotted money-laundering operations involving embezzled Venezuelan funds worth about $10 billion (CHF 9 billion), which were deposited in hundreds of Swiss accounts at about 30 Swiss banks.⁶⁵

In its most recent report (2019), FATF took Switzerland off the list of countries with strategic anti-money-laundering deficiencies because there were no sanctions in force against the nation, and its anti-bribery and corruption index was excellent.⁶⁶ Nevertheless, fresh episodes of money-laundering activities have called into question the effectiveness of Switzerland’s anti-money laundering monitoring system and the willingness of Swiss banks to follow the FINMA guidelines. The Venezuela affair reinforced views that some Swiss financial institutions operating under Swiss laws have followed a “zebra strategy,” demanding clean money from developed nations, for which information sharing has become automatic, but being less diligent in identifying and reporting black-money deals with customers from developing countries.

The COVID-19 pandemic, which began in 2020, caused a spike in Swiss money laundering and fraud reports.⁶⁷ The MROS reported a 25% increase during the first year, with many of these cases involving “COVID credits” (i.e., grants by the Swiss government to businesses that were (presumably) financially handicapped by the worldwide virus). COVID-19 created new opportunities for criminals to exercise their money-laundering skills.

Corruption

Relatively recently, Switzerland has turned its attention to cases involving suspected corruption. To this end, the nation has incorporated into its Criminal Code punishments for offering or receiving preferential treatment by Swiss or foreign officials.⁶⁸ The goal is to fight corruption at all levels, from prevention, recognition, examination, inspection, and criminalization to repatriation.

Switzerland has made concerted efforts to prevent and criminalize corruption and provide both technical and asset-recovery assistance.⁶⁹ The nation adheres to the rules and regulations of the OECD, United Nations, and Council of Europe (Group of States against Corruption, GRECO). It also participates in these organizations’ assessment, monitoring, and authentication efforts.⁷⁰ Periodic mutual evaluations are made to determine Switzerland’s conformance to OECD standards, and recommendations are made for improvements. Switzerland works closely with the OECD’s Working Group on Bribery. In December 2008, the Swiss Federal Council established an interdepartmental anti-corruption working group under the Department of Foreign Affairs to harmonize the nation’s federal, cantonal, and private anti-corruption policies.

Articles 322^ter (Bribery of Swiss Public Officials) to 322^novies (Accepting Bribes) of the SCC criminalize both the granting and accepting of bribes and advantages. Articles 322^ter to 322^sexies (Acceptance of an Advantage) address this issue for Swiss public officials, such as judicial or other authorities, public officials, officially appointed experts, translators or interpreters, arbitrators, or armed forces members. Article 322^septies (Bribery of Foreign Public Officials) focuses on foreign public officials, and Articles 322^octies (Bribery of Private Individuals) and 322^noviese (Accepting Bribes) deal with bribes and advantages for private individuals.

Tax Evasion

Switzerland’s democratic background and self-declaration tax system also clashed with the views and value systems of European countries that, historically, had autocratic regimes. For decades, Switzerland has made a clear difference between tax fraud and tax evasion and, therefore, refused to exchange bank customers’ information with other countries. Whereas tax fraud was a crime by Swiss law, tax evasion was a civil offense. Tax fraud is the intentional use of deception (e.g., employing forgery, willful falsification of documents, and counterfeiting) to reduce an individual’s withholding taxes, stamp duties, or customs duties. By contrast, until it was repealed in 2012, tax evasion (e.g., breaches of procedural tax responsibilities and non-disclosure or nonpayment of taxes on earned income) was a misdemeanor that violated Switzerland’s tax laws. Therefore, it carried financial (not criminal) penalties.

Tax fraud is fully prosecutable under Switzerland’s criminal justice system. Consequently, Swiss banks are (and have been) required to share confidential client information for tax fraud cases. These requests supersede the confidentiality protections offered by the BA.

Until 2012, tax evasion was enforced by tax authorities, who had limited investigative powers due to the BA.⁷¹ Swiss rules in this area were founded on the principle of “self-declaration,” which means that tax payments should be direct and exclusive matters between the State, which collects taxes, and individuals who declare taxable income. Until it was repealed, Swiss tax law placed enforcement responsibilities squarely on the cantonal and federal tax authorities (not the criminal justice system) to prove tax evasion and penalize (usually with substantial fines) those found guilty.

Swiss banks were prohibited by law from aiding and abetting tax evaders, but at the same time, they were not the legal agents of domestic or foreign tax authorities. Therefore, the same laws that required Swiss banks to report suspicions of tax fraud to domestic authorities, such as the MROS, also prohibited them from directly contacting domestic or foreign tax authorities. The reasoning used was that confidential information should flow from banks to customers and, only after that, to domestic or foreign tax authorities, which is why cantonal and federal governments have no legal power to demand customer information from banks.

The distinction between tax fraud and tax evasion applied only to individuals and not to legal entities. Swiss law requires all legal entities to report accurate and timely financial statements, such as balance sheets and income statements. Anything less constitutes tax fraud, which is a crime.

On occasion, the fuzzy line between tax evasion and tax fraud placed Swiss banks under the magnifying glasses of domestic and international critics who accused them of violating the letter of foreign laws, where tax evasion was a crime, and the spirit of Swiss laws by agnostically executing financial transactions for suspected tax evaders. As time passed, this controversy abated somewhat because foreign authorities learned to “game the system.” For example, rather than requesting information from Swiss banks on the grounds of “tax evasion,” they requested it using “tax fraud” as the pretense. Similarly, experience gave foreign nations comfort with the gradations, working definitions, and differences between tax evasion and tax fraud in Switzerland.

The turning point for Switzerland came in 2009. Under pressure from the G-20 countries and the OECD, Switzerland accepted Article 26 (Exchange of Information) of the OECD’s Model Tax Convention on Income and Capital.⁷² Swiss authorities also agreed to cooperate with other nations in their tax-evasion investigations.⁷³ Six months later, an agreement was reached with the United States to deepen and expand information exchanges on suspected tax evaders.⁷⁴

Once Article 26 (Exchange of Information) of the OECD’s Model Tax Convention on Income and Capital was enacted, there was no longer a meaningful difference between tax evasion and qualified tax fraud for purposes of international information exchanges in tax matters. In 2012, tax evasion became an official crime in Switzerland’s Criminal Code and entered into force on January 1, 2016. The new rules also made severe cases of tax evasion (i.e., exceeding CHF 300,000) a “predicate offense” to money laundering.⁷⁵

Tax Evasion Issues Between Switzerland and the EU

European Union (EU) countries have expressed particular concern over, what they perceived to be, Switzerland’s foot-dragging in matters of international cooperation on tax fraud and tax-evasion investigations. To get an idea of the magnitudes involved, in 2001, Italian Finance Minister Giulio Tremonti granted a tax and penalty amnesty on funds repatriated from Switzerland to Italy, which reportedly triggered the recovery of €30 billion to €35 billion in unpaid taxes.⁷⁶

EU officials openly bemoaned their inability to curtail tax evasion due to Switzerland’s unwillingness to alter its banking secrecy laws. For example, at the end of 2002, an automatic information-sharing agreement among EU members collapsed when Austria, Belgium, and Luxembourg refused to participate unless Switzerland agreed to the same terms. These nations feared substantial capital outflows because Swiss financial institutions administered about one-third of the world’s offshore wealth. Unilateral rule changes could have put these EU nations at a competitive disadvantage.

In 2003, the European Union Savings Directive (EUSD) was enacted, which allowed Austria, Belgium, and Luxembourg to temporarily keep their banking secrecy rules in place so long as Switzerland made no changes in its laws.⁷⁷ The quid pro quo for leniency was an agreement by these three countries to impose a 15% withholding tax on the earnings of “secret” accounts. This tax rose to 20% on July 1, 2008, and 35% after July 1, 2011. The EUSD also gave individual beneficial owners the choice of voluntarily disclosing interest payments to avoid the withholding tax.

The EU Directive on Taxation of Savings Income in the Form of Interest Payment was approved in 2003 and implemented in 2005.⁷⁸ Similar in structure to the EUSD, it tried to prevent or inhibit tax evasion by requiring the automatic exchange of information on interest earned by foreign residents of participating EU nations. Switzerland became a willing member before implementation on October 26, 2004. Under the Agreement, if bank customers of European countries chose not to reveal their identities, Swiss banks withheld taxes on the interest earned and paid the amount, in bulk, to the customers’ resident countries. Of the taxes collected, Swiss tax authorities transferred 75% to the EU and retained 25% to pay its administrative expenses, with 15% going to the Swiss Confederation, and 10% to the Cantons.⁷⁹ The tax started at 15% in 2005 and reached its maximum 35% rate in 2011. A significant benefit of this tax agreement was its focus on maintaining bank confidentiality by paying taxes in bulk, thereby keeping customers’ identities anonymous. This arrangement was criticized for not being an effective defense against tax evasion.

In October 2004, Switzerland and the EU signed the Bilateral Agreements II, which covered nine economic, political, and security concerns.⁸⁰ Switzerland’s Parliament approved the Agreement in December. Regarding taxation, they enhanced the level of cooperation in indirect taxation cases dealing with tax fraud and tax evasion (e.g., value-added taxes), but there was no mutual understanding on matters dealing with direct taxation. Under the Agreement, if an alleged offense had sufficient size, EU authorities were given the same access to documents in Switzerland as Swiss authorities had to them.

In 2012, Switzerland entered into bilateral tax and information-sharing agreements with Austria and the United Kingdom.⁸¹ The agreements came into force on January 1, 2013, and ended in 2017. Generically, they were called the “Swiss Rubik Agreements” because a Rubik cube is composed of many interrelated blocks, no one of which is essential to the others’ functioning. To “regularize” their Swiss banking relationships, natural persons domiciled in Austria and the UK were given the option of voluntarily disclosing their Swiss bank accounts⁸² or automatically paying a withholding tax anonymously at a rate equivalent to their countries of residence. For the UK, the rate varied between 21 and 41%, depending on the duration of the banking relationship and variance of the initial and ending balances. For Austria, the rate varied between 15 and 38%. These withholding taxes were on existing assets, interest, and investment income. Under the Agreements, Swiss banks collected taxes and forwarded them directly to the partner countries without revealing any customer information.⁸³ Individuals who refused both alternatives were not permitted to open new Swiss bank accounts, and existing ones needed to be closed.

The anonymous tax solution was costly for Swiss paying agents to implement. Still, it helped to balance Switzerland’s banking secrecy rules with foreign governments’ right to tax its residents’ offshore accounts. A guideline worth mentioning in this context is that Switzerland relies on its major (especially European) customers’ goodwill to remain a viable global competitor. One major problem was that the Rubik model did nothing to identify and punish tax evaders, which is why countries such as France refused to join. The Swiss Rubik Agreements provided a financial windfall for Austria and the United Kingdom, but an open question was whether they violated European Union laws. On January 1, 2017, these Agreements were abolished when Switzerland enacted the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters (AEOI), which provided for the automatic exchange of financial information among participating nations.⁸⁴

Efforts by Switzerland and the EU to thwart tax evasion were just the tip of a slippery iceberg. They also wanted to inhibit smuggling and money laundering and ways to extend their reach to other financial areas in Switzerland, such as life insurance and structured products. Regardless, the overall goal was clear. Switzerland wanted to end or moderate its reputation as a haven for tax evaders without sacrificing Swiss constitutional rights to privacy. EU dissatisfaction continued into 2008 and culminated in German Finance Minister Peer Steinbrueck’s call for EU members to place Switzerland’s name on the OECD’s blacklist of uncooperative tax havens.

Tax Evasion Issues Between Switzerland and the United States

It is legal for US taxpayers to own offshore accounts, but it is illegal to hide undeclared income in them. Depending on the violation’s degree, a US taxpayer’s failure to disclose foreign accounts, report related income, and pay required taxes are potential felonies or misdemeanors for filing false tax returns, which could result in significant time in jail.⁸⁵

Double Tax Treaties

US efforts to pry tax information from Swiss banks have had their ebbs and flows. Early efforts were made using bilateral agreements. In 1951, Switzerland entered into a tax treaty with the United States under which Switzerland agreed to exchange information only to the extent that it involved “tax fraud or the like,” which was a criminal offense in both Switzerland and the United States.⁸⁶ What constituted a “criminal offense” was at the discretion of Swiss authorities. This Treaty was revised in 1996 by the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income (Double-Tax Treaty of 1996), which became effective in 1998. Under it, information exchanges were still limited to the essentials.⁸⁷ While the meaning of “tax fraud” was broadened, it was still narrow enough to restrict the flow of international information.

The process of revising and replacing the Double-Tax Treaty of 1996 took a step forward on September 23, 2009, when Switzerland and the United States agreed to a Protocol, bringing Switzerland into closer conformity with US tax policy.⁸⁸ The new Treaty broadened the definition of “tax fraud” to include tax evasion using accounts in foreign countries and provided a means to make “group requests” for information.⁸⁹ The Protocol allowed for the exchange of information “necessary for the prevention of tax fraud or the like in relation to the taxes which are the subject of the Convention.”⁹⁰ The Agreement’s terms reinforced both countries’ intentions to support tax administration and enforcement efforts. They also clarified the meaning of “tax fraud or the like” and allowed requests to be made when they were based on “reasonable suspicions.” This Protocol was signed in Washington on September 23, 2009, and corrected by an exchange of notes on November 16, 2010.⁹¹ Switzerland’s Parliament accepted the conditions in 2010, but it was not until July 17, 2019, almost a decade later, that the US Senate approved the Agreement.⁹²

Articles 1 and 2 of the 2009 Protocol expanded existing provisions concerning cross-border dividend payments, mutual agreement procedures, and information exchanges between Swiss and US tax authorities. Particular focus was on clarifying tax obligations for pension plans and individual retirement savings plans (e.g., Paragraph 3 of Article 1). Article 3 replaced Article 26 (Exchange of Information Article) in the 1996 Treaty with one that aligned more closely with US transparency standards, the Foreign Account Tax Compliance Act (FATCA), and filing requirements under the Foreign Bank and Financial Accounts (FBAR). Article 4 focused on how the revised Article 26 (Exchange of Information) would be applied, and Article 5 contained rules for bringing the Protocol into force and activating its provisions.

Qualified Intermediary Program

In 2001, the US IRS’s Qualified Intermediary Program (QIP)⁹³ entered into force. It required participant foreign (non-US) banks to identify and report customers’ US-sourced income (e.g., dividends, interest, rents, royalties, and other fixed or determinable income). Among the significant benefits of becoming a Qualified Intermediary (QI) and agreeing to obey specific US documentation and withholding obligations were simplified reporting procedures for foreign account holders and an ability to protect customers’ identities. By using QIP’s collective refund procedures, Swiss bank customers were relieved of any responsibility to submit independent US tax refund claims.⁹⁴

Banks that refused to accept or violated the QIP rules could be denied access to the US financial markets and were subject to a 30% withholding tax on dividends, interest payments, and capital gains on the sale of US securities.⁹⁵ Furthermore, QI status was required by the United States if a Swiss bank wanted to hold US securities for customers reporting income to the US Internal Revenue Service (IRS).

In contrast to other Swiss agreements, QIP was not between the Swiss and US governments but between particular QI Swiss banks and the US government. QIP was a compromise, of sorts, that tried to balance Swiss banks’ legal obligation to protect confidential customer information and the US desire to collect tax revenues. Under the Agreement, Swiss financial institutions withheld taxes on the investment returns of US residents and namelessly paid them to the IRS, thereby maintaining client confidentiality.

In 2010, QIP rules were strengthened by requiring foreign banks to take active steps to investigate, determine, and report to the IRS all US investors (e.g., partnerships, trusts, family foundations, and corporations) who were account holders. Previously, their efforts were relatively passive. To enforce these changes, periodic (nameless) audits by the IRS and external auditors were made.

The original QI Agreement expired on December 31, 2016, and was replaced by a new one, which was published with the Revenue Procedure 2017–15 and entered into force on January 1, 2017.⁹⁶ A noteworthy change in the new QI Agreement was the obligation for QIs to abide by compliance programs that defined and managed internal rules and to submit their findings to independent (internal or external) reviews.

US Investigations of Tax Evasion, Tax Fraud, and Conspiracy

In 2007, the US IRS investigated Swiss banks suspected of using undeclared, offshore, private-banking services to help American tax evaders. The value of US assets in Swiss banks was estimated at $20 billion, and unpaid taxes were valued at approximately $300 million a year. This investigation was part of a concerted US effort to conduct stricter oversight of particular Swiss banks, such as UBS, Credit Suisse, and Basler Kantonalbank, which were suspected of encouraging and fostering US tax evasion.

In June of 2008, Switzerland became embroiled in a highly publicized tax-evasion case, when UBS private banker, Bradley Birkenfeld, pleaded guilty to conspiring with a California real estate developer, Igor Olenicoff, to evade $7.2 million in taxes by concealing assets worth $200 million in Switzerland and Liechtenstein.⁹⁷ In 2009, Birkenfeld was sentenced to serve 40 months in prison for his actions. Because of his tax-evasion services for American customers, UBS was found guilty of violating its obligations under QIP.

Birkenfeld indicated in his court testimony that US taxpayers held approximately $20 billion in undeclared UBS accounts. These allegations inspired hearings during July 2008 by the US Senate Permanent Subcommittee on Investigations into tax haven banks and how banking secrecy laws facilitate tax-evasion services. The Committee’s six-month investigation of Swiss-based UBS and Lichtenstein-based LGT Bank produced a lengthy report entitled Tax Haven Banks and US Tax Compliance.⁹⁸ It alleged the United States lost an estimated $100 billion in annual tax revenues from offshore tax abuses. The report claimed that 19,000 US customers had accounts at UBS worth an estimated $18 billion.⁹⁹ From the IRS inquiry, charges were eventually filed against UBS for not withholding taxes on foreign shell companies that had US beneficial owners. In February 2009, the bank agreed to a $780 million settlement payment.

Events followed quickly after that. The IRS had been concerned, for some time, about the financial activities of UBS and, in February 2009, issued a “John Doe Summons,” requiring UBS to disclose the account information of clients suspected of tax evasion who exhibited certain “patterns of facts” that conformed to “tax fraud or the like.”¹⁰⁰ The summons requested account information on 52,000 UBS customers, who were thought to have undisclosed UBS accounts worth $14.8 billion. These charges were based on numerous intercepted messages sent by UBS executives in 2004, which referred to Bahamas-based tax havens for sheltering (i.e., hiding) the incomes of wealthy American citizens. From UBS’s point of view, the summons could not have been more ill-timed, as it came just a day after the bank had agreed to resolve the IRS’s 2007 investigation by paying $780 million in fines and promising to disclose an undetermined number of customer names. Of the 52,000 US customers believed to have UBS accounts, the bank released, in 2009, about 4,450 names.¹⁰¹

The blanket summons had far-reaching implications for Swiss banking secrecy laws, in general, and costly ramifications for UBS, in particular. Due to the gravity of the IRS’s requests and its implications for Swiss banking secrecy, an agreement was concluded, in 2009, between the Swiss Confederation and IRS.¹⁰² The Agreement was based on Article 26 (Exchange of Information) of the Double-Tax Treaty of 1996, which allowed the exchange of information, as necessary, to prevent “tax fraud or the like.”¹⁰³ Responsibility for ensuring UBS’s compliance was given to the Swiss Federal Office of Justice (SFOJ) and the FINMA. The Swiss Federal Tax Administration (SFTA) was chosen to make final decisions on the IRS’s requests.

The Swiss-IRS Agreement in 2009 was challenged immediately, leading to a January 2010 ruling by the Swiss Federal Administrative Court (SFAC) that UBS could not (and should not) disclose the requested information.¹⁰⁴ Shortly after that, the Court ruled that the FINMA had violated Swiss law in 2009 by ordering UBS to disclose the names of approximately 4,450 US customers.¹⁰⁵ In the end, the controversy was resolved in 2010 when the Swiss Parliament reaffirmed its August 2009 Agreement with the IRS, and the SFAC ruled that the Agreement was binding.¹⁰⁶ A byproduct of this ruling was that it sealed the fate of about 100 other appeals by UBS customers who opposed the transfer of information to the IRS.

In 2008, Hervé Falciani exposed 130,000 organizations and individuals who used Swiss-based HSBC Private Bank (Suisse) Geneva to launder money and evade taxes from 2006 to 2007.¹⁰⁷ The disclosures were called “SwissLeaks” and, at the time, were reputed to be the biggest release of its sort in Swiss banking history. That same year, Rudolf Elmer disclosed confidential documents to WikiLeaks on the tax-evasion activities of Julius Bär.¹⁰⁸

Under normal circumstances, the March and September 2009 tax-evasion agreements would have been welcomed warmly by the international financial community, but Switzerland continued to be battered by bad news. Just a month before the agreement was signed, an executive manager at Neue Zuercher Bank and a Swiss lawyer were indicted by US federal court on charges of aiding and abetting US tax evaders by falsifying documents and setting up fraudulent investment accounts to conceal assets from the IRS.¹⁰⁹

In December 2010, yet-another private banker, who had worked at UBS from 1999 to 2008, pleaded guilty in Miami’s Federal District Court to charges of helping a US citizen evade federal income taxes by not disclosing the creation of a hidden, offshore account at Basler Kantonalbank.¹¹⁰ Though the amount was relatively small, this case gained notoriety because IRS recordings exposed the Swiss banker from a secret hotel meeting in Miami. Many felt that this investigatory tactic would send chills down the spines of both US tax evaders and their accomplices.

The situation did not improve during the coming year. In January 2011, another UBS employee was charged in Federal Court (Fort Lauderdale, Florida) with helping between 100 and 150 US clients evade US taxes worth between $400 million and $500 million. The following month, four Credit Suisse private bankers were accused in US Federal Court (Alexandria, Virginia) of conspiracy and fraud in their efforts to foster US tax evasion. On the same day, the offices and homes of five other Credit Suisse employees were raided in Germany for suspicions of criminal fraud in helping German residents evade domestic income taxes.¹¹¹

Collectively, the multiple charges against Switzerland’s private bankers gave the nation’s financial system a black eye at precisely the time it seemed to be liberalizing its banking secrecy rules. Some analysts wondered if the exposed crimes might dampen further liberalization efforts. Skeptics were convinced that the only reason Switzerland agreed to liberalize its banking secrecy laws was to heal the reputational setback it suffered in banking circles and curtail the relentless media coverage.

Enmity was not one-sided. Due to the turmoil and rising tide of globally intrusive US rules and regulations, some Swiss banks retreated from the US market. For example, in 2009, Wegelin and Co., a Swiss private bank, announced that it would stop doing business with US customers. Other banks followed suit by increasing fees and making it much more difficult for Americans to establish and maintain Swiss bank accounts. In March 2009, UBS closed more than 14,000 accounts held by US citizens.

In July 2011, Credit Suisse AG became the target of a US Justice Department criminal probe into cross-border private-banking services for US customers. Seven Credit Suisse bankers were indicted on charges of conspiring to help clients evade US taxes. US tax authorities offered limited amnesty to taxpayers who agreed to help build criminal cases against foreign bankers and advisors. Between 2009 and 2012, approximately 30,000 US taxpayers avoided prosecution by taking this offer.¹¹²

In February 2012, the US Justice Department leveled charges of tax fraud and conspiracy on St. Gallen-based Wegelin & Co., the oldest (founded in 1741) of Switzerland’s “pure” private banks.¹¹³ The indictment cited Wegelin for purportedly funneling an estimated $1.2 billion into offshore accounts for US citizens to avoid paying personal income taxes.¹¹⁴ Tax fraud and conspiracy violated Swiss law and, therefore, foreclosed the usual secrecy and confidentiality protections afforded to Swiss bank customers under the BA.

Wegelin had no US branches, which seemed to provide a firewall between it and US tax authorities. Still, the US Justice Department circumvented this problem by freezing about $16 million of Wegelin’s correspondent accounts at UBS AG in Stamford, Connecticut. The case carried some historical significance because it was the first time the US Justice Department had indicted a purely offshore bank on charges of enabling tax fraud. Wegelin was accused of opening accounts between 2002 and 2011 for US citizens with passports from other countries and booking them as non-US accounts. It was also accused of comingling funds and moving large amounts internationally by separating them into transfers under $10,000, which is the threshold for US reporting.

Wegelin senior executives and representatives failed to appear at New York City court hearing in February 2012, which made the bank a “fugitive” in the eyes of the US justice system.¹¹⁵ Wegelin’s lawyers and management explained that its absence was in deference to the bank’s commitment to obey Swiss banking secrecy laws.¹¹⁶ In January 2013, Wegelin pleaded guilty to helping Americans evade taxes and permanently shut its doors, after more than 270 years in business.¹¹⁷

In 2014, Credit Suisse pled guilty to helping wealthy Americans hide billions of dollars from US tax collectors and agreed to a $2.6 billion fine, but the settlement allowed the bank to keep its customers’ names confidential.¹¹⁸ Prosecutors accused Credit Suisse of helping US residents circumvent US reporting requirements by cleverly structuring transactions and supplying customers with credit cards linked to unreported Swiss accounts. This practice had been going on for decades until regulators caught onto the practice.

In 2016, the “Panama Papers” were published (i.e., leaked), revealing 11.5 million documents (i.e., 2.6 terabytes of data).¹¹⁹ The information revealed detailed financial attorney-client information on more than 214,488 offshore entities, wealthy individuals, and public officials, who used Mossack Fonseca, a Panamanian offshore law firm and corporate service provider. The documents revealed how Mossack Fonseca set up shell companies engaged in illegal activities, such as tax fraud, tax evasion, and circumventing international sanctions. The leak identified 12 world leaders, 128 other public officials and politicians, celebrities, businesspersons, and wealthy individuals from more than 200 countries.

The Panama Papers provided a new stimulus for the Swiss federal government to tighten its money laundering and tax-evasion controls. This encouragement was strengthened in November 2017 with the publication of the “Paradise Papers,” which disclosed 13.4 million confidential electronic documents (1.4 terabytes of data) relating to offshore investments for 120,000 people and companies. These documents originated from Appleby, a legal firm that provided corporate services for Estera and Asiaciti Trust. The disclosures revealed information on tax havens worth trillions of dollars in offshore accounts held by residents across the globe, prompting the intergovernmental Financial Action Task Force (FATF) to the Swiss government to improve its money-laundering controls.

In February 2019, Julius Baer, a Swiss private bank, settled a US tax-evasion case by paying fines amounting to $547 million. Later that year, UBS was fined €4.5 billion ($5.4 billion) for assisting affluent French residents evade taxes.¹²⁰ Two years later (in 2021), the “Pandora Papers” were released by the International Consortium of Investigative Journalists (ICIJ). Their release exposed 11.9 million documents on tax havens representing more than 29,000 offshore bank accounts, some of which were owned by political leaders and other prominent individuals. Among the revelations were the names of 90 Swiss financial advisors who created obscure financial structures for wealthy clients. In one case, approximately 7,000 shell companies were set up by a Swiss consultancy over about 20 years. Publication of the Pandora Papers renewed the impetus for Swiss banks to report suspicious transactions. For years, the nation has been criticized for not extending its anti-money-laundering provisions to lawyers and consultants, who have been at the heart of the scandals and the focus of outrage associated with the relatively recent leaks.¹²¹

Fresh disclosures have pressured Switzerland to require advisors, trusts, and lawyers to conduct due diligence measures on clients to identify money-laundering risks and report suspicious financial activities to authorities. Advisors escape these requirements if they do not manage their clients’ money. Switzerland has reacted by imposing such rules on these advisors.

Swiss insurance companies have also come into the crosshairs of concern. In May 2021, Swiss Life was fined $25.3 million, ordered to pay $52.1 million in restitution and forfeiture, and entered into a deferred prosecution agreement with the United States for its role in concealing $1.45 billion in offshore insurance policies that helped American customers evade taxes.¹²²

The US “Swiss Bank Program”

In August 2013, the United States announced its Swiss Bank Program, which provided Swiss banks with a way to resolve their potential US criminal liabilities, without prosecution, by advising the US IRS of why they may have committed tax-related criminal offenses in connection with undeclared US-related accounts. Swiss bankers agreed to pay fines equal to:

• 20% of the maximum aggregate dollar value of US-related accounts as of August 1, 2008;

• 30% of the maximum aggregate dollar value on US-related accounts opened between August 1, 2008, and February 28, 2009; and

• 50% of the maximum aggregate value on US-related accounts opened after February 28, 2009.¹²³

Banks and individuals already under criminal investigation for their Swiss banking activities were not eligible for the program.¹²⁴

In particular, cooperating Swiss banks were required to:

• Disclose all their cross-border activities;

• Provide detailed account-by-account information on cases in which US taxpayers had direct or indirect interests;

• Cooperate with authorities’ requests for account information;

• Provide detailed information on banks that transferred funds into secret accounts or that accepted funds when these accounts were closed;

• Close accounts of individuals who do not comply with US reporting obligations, and

• Pay appropriate penalties.

Between March 2015 and October 2020, 84 Swiss banks participated in the Swiss Bank Program.¹²⁵

US Foreign Account Tax Compliance Act of 2010

Early in the twenty-first century, the US government enacted the QIP in an effort to reduce tax evasion using offshore accounts. In light of the tax-evasion scandals since then (e.g., UBS/Bradley Birkenfeld, Hervé Falciani/HSBC Private Bank (Suisse), and Rudolf Elmer/Julius Bär), and to further reduce offshore tax evasion, in March 2010, the United States enacted the Foreign Account Tax Compliance Act (FATCA). The FATCA required all foreign (non-US) financial institutions and foreign non-financial institutions to report annually to the US Treasury and IRS the identities, assets, and income of US residents, US citizens, and US green card holders who were the direct or indirect owners of foreign bank accounts.¹²⁶ Those financial intermediaries refusing to comply were subject to a 30% withholding tax on all US-sourced income (e.g., dividends, interest, and capital gains on dividend-earning or interest-earning investments).¹²⁷

In February 2013, Switzerland signed an intergovernmental agreement (IGA) with the United States, which converted the unilateral FATCA into a bilateral international agreement. This IGA was unusual because it established a direct reporting relationship between participant Swiss banks and the US IRS (i.e., a Model II agreement). Individual Swiss financial institutions needed to register with the US IRS and file annual reports. In the beginning, the reporting threshold was for customers with balances above $50,000.¹²⁸

Before information was sent to the US IRS, Swiss account holders had the opportunity to view and either consent or object to its release. For customers who consented, Swiss banks sent the tax-related information directly to the IRS but without disclosing the account holders’ identity or information (as per Article 47 of the BA). If a customer objected to disclosure, the Swiss banks reported to the IRS the number and total value of all these accounts’ undeclared assets. After that, the IRS could send a “request for administrative assistance” to the Swiss government for information on the entire group of “Recalcitrant Account Holders.” Once a US information request was made, Switzerland’s Federal Tax Authority was required to reply within eight months.¹²⁹ The exchange of information under the FATCA was one-sided, with the IRS having no responsibility to provide Switzerland with information on Swiss residents having US bank accounts. One reason was that Switzerland did not ask for reciprocity.

The “Model II” agreement solved a significant potential problem. Article 271 (Unlawful Activities on Behalf of a Foreign State) of the SCC makes it a crime “to carry out activities on behalf of a foreign state on Swiss territory without lawful authority.” Therefore, Swiss banks that divulged individual customers’ information could be violating the SCC, but those that refused to provide information could be breaking the FATCA rules. The Model II agreement solved this dilemma.

Switzerland implemented the FATCA on July 1, 2014. Reporting requirements included Swiss banks and other financial intermediaries, such as fiduciaries, trust companies, life insurance companies, and asset managers. Participating Swiss financial institutions were required to perform due-diligence inspections of their accounts, identify US customers,¹³⁰ and withhold 30% of US-sourced income paid to those who refused to identify themselves. Reports to the IRS on US-owned accounts were to be made annually.¹³¹ Sanctions were imposed on “uncooperative” banks that refused the FATCA registration, starting with a 30% withholding tax on all US-sourced dividends, interest, and other investment revenue.

The FATCA was reinforced on January 1, 2017 by US Section 871(m) of the US Internal Revenue Code, which sought to tax and report US-source income from derivatives and structured instruments, such as options, forwards, futures, swaps, equity security lending, and repurchase agreements.¹³² Under Section 871(m), a structured product issued by a Swiss bank that referenced a US financial asset (e.g., equity) could be liable to pay US income tax, regardless of whether the beneficiary was a US or foreign resident. Despite efforts to reduce the reporting impact, Section 871(m)’s implementation was slow, with full implementation not expected until the end of 2022.

In autumn of 2020, US tax authorities used the FATCA group request to apply for administrative assistance to get information on non-consenting US account holders. These accounts were reported in aggregate as part of the FATCA annual report rather than individually, and disclosures were made under the terms of Switzerland’s FATCA. Switzerland’s Federal Tax Administration notified the account holders affected by notice in the Federal Gazette.

OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters

In October 2013, Switzerland became the 58th nation to sign the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters (AEOI),¹³³ and the government ratified it in September 2016.¹³⁴ The AEOI’s goal was to improve international cooperation in the assessment and collection of taxes. It moved Switzerland soundly in the direction of deterring tax fraud and tax evasion, which was a step recommended in June 2011 by the Peer Review of the Global Forum on Transparency and Exchange of Information.¹³⁵ This Convention covers both Common Reporting Standards (CRS) and Country-by-Country (CbC) Reports.¹³⁶ CbC is part of the OECD’s Inclusive Framework on BEPS (i.e., Base Erosion and Profit Shifting Project). Since 2018, Switzerland has required multinational companies and large branches or subsidiaries to prepare country-by-country reports, which Switzerland exchanges with its partner nations.¹³⁷

The AEOI included the exchange of tax examinations and assistance in tax collection. It was ratified in September 2016, introduced on January 1, 2017, and the actual information exchange began in 2018. For some, the automatic exchange of information signaled the end of Swiss banking secrecy and forewarned future losses Switzerland could suffer in its competition with rising Asian financial centers, such as Hong Kong and Singapore.¹³⁸ According to AEOI’s common reporting standards, financial institutions are required, on an annual basis, to collect specified account holder information and report it to their local tax authorities, which automatically exchange that information with the tax authorities where the account holders are resident. Important to note is that this OECD Convention had no effect on Switzerland’s banking secrecy protections for domestic residents. Furthermore, while opening new responsibilities for outbound information on foreign residents with Swiss bank accounts, the Convention created opportunities for Swiss tax authorities to gain information on Swiss residents with foreign bank accounts.

Automatic Exchange of Information Act (AEOIA)

The AEOI’s applicability to Swiss financial institutions and tax authorities required the government to repeal and enact national laws and regulations. On December 18, 2015, the government implemented the Federal Act on the International Automatic Exchange of Information in Tax Matters (AEOIA),¹³⁹ which was followed in 2016 by the adoption of the Ordinance on the International Automatic Exchange of Information in Tax Matters (AEOI Ordinance).¹⁴⁰

The AEOIA required disclosure of the account owner’s name, address, country of residence, tax identification number, reporting institution, account balance, and capital income. In effect, it gave foreign tax authorities the information needed to check the accuracy of taxpayers’ declarations of foreign financial accounts. The new legislation was reinforced when Switzerland updated its Federal Tax Authority guidelines, which explained the information technology requirements of the AEOI. The government also updated the Federal Tax Administration’s (FTA) AEOI Guidelines, detailing how Swiss financial institutions must implement AEOI.

The AEOIA and AEOI Ordinance were amended in 2020 and put into force on January 1, 2021. Among their measures were requirements for Swiss condominium associations to disclose information on apartment owners. They also obliged Swiss financial institutions to retain documents that could be useful for tax investigations and required that amounts be stated in US dollars instead of Swiss francs.¹⁴¹

Information exchanges under the AEOI take place annually. Switzerland’s first exchange of information was in September 2018 with the EU and nine other countries. It was based on activity in 2017 and involved about two million accounts.

The second exchange took place in October 2019, when Switzerland’s Federal Tax Authority shared details with 63 partner countries on 3.1 million bank accounts held by foreigners. At the same time, the Swiss FTA received information on approximately 2.4 million accounts held by Swiss citizens/residents in 75 partner countries. The largest exchange of information was with Germany. Switzerland did not reciprocate with 12 nations due to their inability to meet data security and confidentiality requirements or these countries’ choice not to receive the information.¹⁴²

The third exchange of information under the AEOI took place with 66 partner countries in October 2020. Details on approximately 3.1 million foreign-held bank accounts were disclosed to respective foreign tax authorities, involving about 8,500 Swiss financial intermediaries. In exchange, Switzerland’s FTA received information on approximately 815,000 Swiss-owned accounts in 86 partner countries.¹⁴³

In 2021, Switzerland increased to 96 the number of countries with which it automatically exchanged bank customer information, sending out approximately 3.3 million financial accounts and receiving about 2.1 million in return.¹⁴⁴ There were 26 OECD countries from which Switzerland received information but did not reciprocate because they did not meet confidentiality and data security requirements.¹⁴⁵ The Swiss government proposed its intention, in 2021, to increase by 12 the number of countries with which it wishes to automatically exchange information.¹⁴⁶ If approved, the actual information exchange will start in 2023.

In October 2022, Switzerland’s FTA reported more than 3.4 million financial accounts with 101 countries under the AEOI. Five new countries were added to the 2021 list of 96.¹⁴⁷

Swiss Bankers’ Association and SNB Efforts to Improve Customer Identification

In 1977, the Swiss Bankers Association (SBA) and the SNB took active steps to improve customer identification by authoring the Agreement on the Observance of Care in Accepting Funds and Practice of Banking Secrecy.¹⁴⁸ The Agreement was a private understanding between Swiss banks and the SBA, which set minimum standards for the care that banks should take in determining their customers’ identities for accounts, passbooks, security accounts, fiduciary transactions, and safe-deposit boxes. In doing so, it tried to stop or, at least, discourage accepting funds from criminal sources, assisting capital flight, and aiding tax fraud. Since then, the “know-your-customer” (KYC) principle has played an important role in Swiss efforts to crack down on illegal financial transactions.

The Observance of Care Agreement’s timing was important because it came in the aftermath of the highly publicized financial affair, in which a manager at Credit Suisse’s Chiasso branch funneled approximately $900 million of Italian customers’ deposits into highly speculative investments through Texon Finanzanstalt, a concealed, Liechtenstein-based holding company. The Chiasso Affair tarnished Switzerland’s financial reputation, which made this Agreement an essential first step toward avoiding misuse.

Since its inception, the Observance of Care Agreement has been updated and revised many times to clarify guidelines on KYC, tax evasion, and capital flight. The newest revision came into force on January 1, 2020, imposing stricter self-regulatory standards for due diligence in money laundering and terrorist financing cases. Among the many changes that have occurred during these years have been the agreement’s name, which is now the Agreement on the Swiss Banks’ Code of Conduct with Regard to the Exercise of Due Diligence (commonly abbreviated CDB) and its use of the KYC principle as a central component.¹⁴⁹

In particular, the CDB requires Swiss-domiciled banks to:

• Verify the identity of the contracting party (e.g., clients who wish to open accounts or rent safes);

• Establish the identity of the beneficial owner(s) of operating legal entities and partnerships;

• Establish the identity of assets’ beneficial owner(s);

• Prohibit active assistance of capital flight; and

• Prohibit active assistance of tax evasion and similar acts.

Some CDB guidelines are voluntary, while others are mandatory. In addition to required procedures for identifying customers, they provide methods for retaining and inspecting information banks must keep on file. Furthermore, the CDB requires the FINMA to conduct statutory audits of Swiss-domiciled banks to monitor and evaluate their conformity to the guidelines. A supervisory board of at least five individuals is charged with investigating suspected violators and then acting when suspicions are verified. Signatory banks that do not comply with CDB standards may be fined as much as CHF 10 million.

Stopping illicit financial dealings is difficult because criminals keep finding new and better ways to circumvent the rules, leaving governments in the position of constantly trying to plug newly opened holes in their financial monitoring and enforcement systems. An example was Switzerland’s focus on identifying and monitoring illicit financial transactions—rather than financial balances. The difference is significant. In 1994, Union Bank of Switzerland (UBS) was criticized for not discovering the $150 million account of an alleged Colombian drug dealer. The account was dormant from 1970 to 1995 and was exposed only when the suspected drug kingpin’s wife attempted to purchase Swiss real estate with assets from the account.¹⁵⁰

Automation enhanced government and monetary authorities’ abilities to track unlawful transactions electronically, with greater accuracy and effectiveness. For this reason, cash payments, sometimes involving millions of dollars in physical currency notes, are still in use, but they present clear disadvantages of their own. The largest US currency note is worth $100, making it heavier than cocaine of equivalent value. Consequently, transporting and safeguarding cash related to drug transactions can be as cumbersome as handling the drugs themselves.¹⁵¹ This is one reason the Euro Area abandoned the large-denomination €500 note. CHF 1,000 notes are commonly used in Switzerland, and the Swiss franc has surpassed one-to-one parity with the US dollar, making possible the unfortunate use of physical Swiss francs for illegal transactions.

Switzerland’s Whistleblower Legislation

In 2008, Bradley Birkenfeld leaked confidential customer information that implicated employees of UBS in tax evasion activities, Hervé Falciani leaked similar information on HCSB Private Bank (Suisse) Geneva, and Rudolf Elmer did the same with Julius Bär. These disclosures have raised serious questions about how to deal fairly with “whistleblowers.” Switzerland has been relatively slow in modeling laws that protect the jobs of whistleblowers who expose corruption, data abuse, and irregularities at their companies. Two parliamentary motions were introduced in Switzerland during 2003, but the Federal Council rejected both. In 2008, a draft law began to work its way through the Swiss legislature. Signs of progress appeared in 2013 when the Swiss government amended the draft whistleblower legislation, which was approved in September 2014 by the Swiss Council of States. Hope faded in 2015 when the Federal Council rejected the draft for being too ambiguous.

The Federal Council released a revised proposal in 2018, with an improved structure and three-step process to protect whistleblowing employees. Step One required employees to report irregularities to their employers and follow their companies’ internal policies and procedures. If the companies had no reporting systems or their responses were unsatisfactory, Step Two permitted employees to take their complaints to the authorities. In Step Three, employees could report to the media but only if the authorities’ responses were inadequate.¹⁵² The Swiss National Council rejected this proposal in 2019. As of February 2023, Switzerland still had no official law to protect whistleblowers, causing lawsuits to be determined by case law.

In general, the countries acquiring or receiving stolen information have been most concerned about whether it can be used in a court of law and if its use should be authorized. Countries that are the sources of confidential bank information, such as Switzerland, have been most concerned about:

• If the information was acquired legally;

• If the individual taking and leaking confidential information should receive whistleblower status;

• If the stolen evidence can be used in a court of law (i.e., “fruit of the poisonous tree” doctrine); and

• If the nation should refuse to send or agree to send requested information to the countries acquiring or receiving it.¹⁵³

The Swiss Supreme Court faced three cases between 2017 and 2019. In 2017, it ruled that French requests should not be honored if they are based on evidence provided by stolen information. In 2018, the Court relaxed its position, ruling that Indian requests for information could be honored if the transfer was passive, meaning the recipient country received the information spontaneously, perhaps as an unrelated exchange-of-information request. In the third case, the Swiss Supreme Court ruled in 2019 that information stolen from the French branch of a Swiss bank could be used because they were acquired outside Swiss territory.¹⁵⁴ Therefore, the decision seems to be that Switzerland has legal authority to refuse information requests when a theft occurs in Switzerland and violates Swiss law, but it cedes control to foreign countries when the theft occurs abroad. In short, clients of Swiss foreign subsidiaries are not covered by Article 47 of the BA. Considering the prison sentences given to Bradley Birkenfeld (40 months) and Hervé Falciani (5 years), Swiss whistleblowers appear to face stricter punishments than stated in the SCC.¹⁵⁵

Swiss Neutrality and Bank Customer Secrecy

The Swiss Confederation is based on democracy, federalism, and neutrality. Due to its diminutive size and strategic geographic location, the nation decided to maintain military neutrality at an early age. Indeed, since the Battle of Marignano in 1515, Switzerland has avoided active participation in all armed international conflicts. Its neutrality was codified in the 1815 Treaty of Vienna. Over centuries, Switzerland has earned its reputation as a “safe haven” from banking and currency instability and an effective shield against tyrannical governments. The nation has also earned the deserved reputation as a user-friendly environment for foreigners, with German-speaking customers visiting Zurich, Basel, and St. Gallen, French-speaking customers visiting Geneva and Lausanne, and Italian-speaking customers visiting Lugano. The combination of political neutrality and bank (customer) secrecy gave Switzerland a competitive international advantage in financial areas, which made it the beneficiary of significant capital inflows during turbulent times, such as during the Thirty-Years War (1618–1648), Franco-Prussian War (1870–1871), World War I (1914–1918), and World War II (1939–1946).

A new wrinkle in Switzerland’s determination to remain neutral occurred in 2022 when Russia invaded Ukraine in February. The European Union reacted by prohibiting Euroclear and Clearstream from servicing Russian customers. SWIFT did the same with Russian banks, and the United States and G7 followed quickly, imposing sanctions against Russia’s largest banks. In late February 2022, the Swiss Federal Council adopted the EU’s sanctions against Russia and formalized them with a March fourth ordinance, which (1) banned exports that might contribute to Russia’s military and technological enhancement, (2) froze more than CHF 6 billion worth of sanctioned Russian assets, (3) banned transactions with the Russian central bank, and (4) froze its overseas assets.¹⁵⁶ By April 2022, Switzerland had frozen Russian assets of approximately CHF 7.5 billion (USD 8.03 billion), including accounts and properties in four Swiss cantons.¹⁵⁷ These decisions are likely to have interesting bank-secrecy implications.

Conclusion

Since the 1970s, the international exchange of information has moved from a framework of bilateral double taxation treaties to multilateral agreements that provide for the automatic exchange of bank customer information. Switzerland has been a significant part of this one-way movement toward greater transparency.

For the past 90 years, Switzerland has changed, modified, and nuanced its banking secrecy laws to accommodate the needs of a modernizing society and changing world. The ability to adapt its regulations and prosecute an increasingly wider variety of finance-related offenses is symptomatic of the general way in which the nation has reformed its capital markets. Stiffening banking secrecy laws to reduce illegal activities has sent a clear signal that Switzerland intends to compete and must compete internationally based on technological sophistication, reasonable costs, and quality service. Protections of legitimate privacy rights are still enforced, but Switzerland has cracked down on financial abuses.

Swiss laws attempt to balance an individual’s constitutional right to privacy with the legitimate informational rights of society and third parties. The problem is that strict enforcement of bank customer secrecy can enable individuals who wish to engage in illegal financial activities. Switzerland has reacted to this challenge by changing its criminal and civil laws to fight crime and empower rightful claimants to bank customer information. Nevertheless, more needs to be done to get Swiss financial institutions back on track, particularly curbing the actions of rogue employees, who can damage good reputations that took decades to build.¹⁵⁸

Appendices

Appendix 1: Administrative, Mutual, and Judicial Assistance in International Tax Matters

Introduction

Tax authorities in one country, such as the United States, cannot order financial intermediaries in another country, such as Switzerland, to freeze suspected tax evaders’ accounts or deliver confidential information as evidence in court cases. Such actions would be considered violations of national sovereignty. For this reason, nations have developed mutual ways of cooperating, mainly by directing these requests through approved channels and having competent foreign authorities carry out the tasks using their own rules and regulations. Switzerland provides administrative, mutual, and judicial assistance to foreign nations for civil, commercial, and criminal matters, but only for well-founded requests that adhere to the defined procedures in signed multilateral or bilateral agreements. Often, the information is consolidated, so the details of a single customer’s account balance or account activity are unknown. When the release of customer-specific information is approved, Swiss authorities have an obligation to inform bank customers because these individuals have a right to appeal the ruling to the Swiss Federal Administrative Court (SFAC).

Switzerland’s multilateral and bilateral mutual assistance treaties provide for the streamlined transmission of information from one signatory nation to another without recourse to consular or diplomatic channels. They are intended to replace the past’s antiquated, indirect, and costly processes. With these agreements, administrative, mutual, and judicial assistance has become quicker, more efficient, and less susceptible to challenge.

Three Levels of Request Exchanges

Switzerland cooperates with foreign nations on three main levels for tax-related information exchanges: exchanges on request, spontaneous information exchanges, and automatic exchanges.¹⁵⁹ Exchanges on request are included in most bilateral taxation agreements. No information is exchanged without a formal request. Spontaneous exchanges occur when no formal application has been made, but the transmitting nation believes it will be useful for another country. Finally, automatic exchanges are defined by mutual agreements at pre-established regular intervals, such as under the OECD’s AEOI rules and regulations.¹⁶⁰

International Administrative and Mutual Assistance

International administrative and mutual assistance are provided under international tax treaties with foreign tax authorities. Administrative assistance is for the exchange of information between tax authorities, based on bilateral double taxation agreements (DTAs), tax information exchange agreements (TIEAs), and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.¹⁶¹

Mutual assistance is for information exchanges between judicial authorities, following the Federal Act on International Mutual Assistance in Criminal Matters, the Fraud Prevention Agreement, and the Convention Implementing the Schengen Agreement (CISA).¹⁶² If an information appeal involves an offense that is punishable in Switzerland, executing a mutual assistance request could involve coercive measures, such as a search of the premises or seizure of evidence. Foreign requests for mutual assistance can be denied for many reasons, such as based on an individual’s political views, opinions, race, gender, nationality, religion, sexuality, or membership in a social or professional group.

For years, Switzerland’s international administrative assistance was restricted to cases involving suspected tax fraud, but passage of the Switzerland-United States Double Taxation Treaty¹⁶³ in 1996 expanded its scope by permitting exchanges for purposes of preventing “tax fraud and the like” with respect to income taxes that were covered by the agreement.

In 2003, Switzerland and the United States provided practical guidance on the definition of “tax fraud and the like,” and Switzerland committed its administrative assistance to exposing acts that might be categorized in the United States differently but have the same degree of illegality as tax fraud in Switzerland. A further step was taken in January 2004 when Switzerland and the Organization for Economic Cooperation and Development (OECD) agreed to exchange information on Swiss holding companies, which had been a contentious area for years and threatened to blacklist Switzerland as a “country that supports potentially harmful tax practices.”¹⁶⁴

Administrative assistance limits were expanded in 2009 when Switzerland adopted the OECD’s standards for information transfers. In March of the same year, the Swiss Federal Council took an important step when it adopted Article 26 of the OECD’s Model Tax Convention, which commits members to provide administrative assistance in well-founded tax cases, on explicit and warranted requests, “concerning taxes of every kind.”¹⁶⁵

Switzerland uses its Service for the Exchange of Information in Tax Matters (SEI) for administrative and mutual assistance, which is part of Switzerland’s Federal Tax Administration. The SEI is responsible for information exchanges connected to double tax agreements, spontaneous exchanges of information, tax office assistance under the FATCA, and international withholding tax agreements.¹⁶⁶ It is also responsible for judicial information exchanges, but enforcement is the responsibility of Switzerland’s criminal justice system.

Article 42 (Administrative Assistance) of the Federal Act on Swiss Financial Market Supervisory Authority (Financial Market Supervision Act, FINMASA) gives FINMA the ability to ask foreign market supervisory authorities for information and may transmit information to these authorities.¹⁶⁷ This information must be used exclusively to implement financial market law, and foreign authorities are bound by official or professional secrecy.

International Judicial Assistance

International judicial assistance is the exchange of information between judicial authorities based on the Federal Act on International Mutual Assistance in Criminal Matters (IMAC).¹⁶⁸ These exchanges are for pending criminal cases for which a foreign judicial authority seeks information and evidence.¹⁶⁹ International judicial assistance is also given in civil matters to deal with questions relating to the international competence of the courts and those relating to the recognition and execution of judgments. It includes the service of judicial and extra-judicial documents,¹⁷⁰ the recognition and execution of judgments, and obtaining evidence, such as through local inspections, expert opinions, and taking statements from witnesses. Switzerland follows the rules in bilateral double taxation agreements (DTAs) and the OECD’s international standards for tax-related exchanges. To deal with nations that have no treaties or established practices for exchanging information, Switzerland adheres to provisions in the 1954 Hague Convention.¹⁷¹

On October 26, 2004, Switzerland entered into the Schengen/Dublin Agreement, which committed the nation to closer cooperation in many areas with the EU, not the least of which was a reduction in border controls.¹⁷² In the banking area, the Agreement committed Switzerland to a higher level of cooperation in cases requiring judicial assistance. Only in the area of legal assistance for direct-tax cases did the Agreement give Switzerland the authority to “opt-out.” This Agreement was followed by a bevy of other bilateral treaties with the EU focusing on areas, such as the taxation of savings and pensions, reduction of fraud, statistical cooperation, trade liberalization, and Swiss participation in EU’s Eurodac system (i.e., fingerprint database system for identifying asylum seekers and unusual border crossings).

Specificity, Proportionality, Reciprocity, and Dual Criminality

Swiss compliance with foreign requests for administrative assistance is contingent on the foreign authority meeting three criteria: specificity, proportionality, and reciprocity. For judicial assistance, a fourth criterion, dual criminality, is added. These conditions are mainly in place to prevent unauthorized disclosures of confidential information and to inhibit information “fishing expeditions” by foreign authorities.

Specificity requires foreign authorities to make well-founded, substantiated requests for information, use it solely for the purpose(s) requested, and refrain from any unauthorized dissemination of the disclosed information. Not only must the targeted individual(s) be specified,¹⁷³ but there must also be (1) a clear description of the information sought, (2) a bank in which it is believed to be held, and (3) relevance to the proceedings. Proportionality prohibits the release of confidential information when allegations are either petty or threaten more substantial interests of a third party. Reciprocity means the foreign nation must reciprocate by granting Switzerland similar rights, and penalties must be similar in their degree of severity. Finally, dual criminality requires the alleged act(s) to be illegal in both the foreign (information-requesting) nation and Switzerland.

Switzerland’s 2009 acceptance of Article 26 of the OECD’s Model Tax Convention’s tax-evasion rules was given partly under duress because earlier in the year (April), the nation had been put on the OECD’s gray list of tax haven countries (i.e., nations that had accepted OEDC standards but had not fully implemented them). By September 2009, just six months after its assent, Switzerland had already renegotiated 12 double-tax treaties and was removed from the OECD’s list.¹⁷⁴

In October 2013, Switzerland signed the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters (i.e., the “Convention” or AEOI). The Convention included the exchange of tax examinations and assistance in tax collection. It was ratified in September 2016, introduced on January 1, 2017, and the automatic exchange of information began in 2018.

International Agreements

Switzerland has signed numerous international assistance agreements that mandate administrative and judicial assistance in transferring confidential bank information to competent foreign authorities but only for specified areas of civil, commercial, and criminal law. Transmission is permitted only according to a signed international treaty with clearly defined procedural rules and regulations. Article 271 (Unlawful Activities on Behalf of a Foreign State) of Switzerland’s Criminal Code imposes criminal charges on “any person who carries out activities on behalf of a foreign state on Swiss territory without lawful authority” (e.g., foreign attorneys who take or attempt to take depositions, serve process, or deliver legal documents, such as writs or summons). Article 299 (Violation of Foreign Territorial Sovereignty) of the SCC deems such actions violations of Switzerland’s territorial sovereignty.

Some of Switzerland’s most important multilateral agreements are the European Convention on Judicial Assistance in Criminal Matters (1959), The Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters (1965), The Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters (1970), Federal Act on International Mutual Assistance in Criminal Matters (IMAC) (1981), and European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (1993).

International Judicial Assistance Treaties

Switzerland’s judicial assistance agreements and treaties define the rules and rights of international cooperation in criminal matters dealing with extradition, support for and transfer of proceedings, punishment of offenses, and execution of foreign judgments. The Swiss government will not cooperate under any agreement if signature countries do not meet basic human rights requirements, discriminate based on social group, race, religion, or nationality, or deny defendants the freedoms of speech and association. Swiss authorities also refuse to cooperate with foreign nations in double jeopardy cases.

Administrative Assistance Under Double Tax Treaties

Switzerland has double-tax treaties with more than 80 countries. Of them, more than 30 are based on the OECD’s automatic disclosure model. A significant benefit for non-residents is receiving total or partial refunds for the taxes paid in Switzerland. Embedded in each of them are precise definitions of the types of taxes covered, procedures for transmitting information, and levels of administrative assistance. The primary purpose of these treaties is to prevent duplicative taxation of an individual’s income (salary and royalties) and assets (e.g., wealth and inheritance) by different countries. For Switzerland, a crucial ingredient in negotiating such treaties is doing so without sacrificing bank customer confidentiality.¹⁷⁵

Appendix 2: History Behind the Banking Act of 1934

The Banking Act of 1934 (BA) is about 90 years old, but there are still healthy debates about its passage. These historical disagreements are understandable because this Act resulted from a rich and complex interplay of internal and external politics, combined with considerable financial, political, and economic uncertainty. One way to frame the debate and clarify meaningful cause-and-effect relationships is to separate efforts to reform Switzerland’s bank secrecy rules from efforts to improve its system of financial regulation. Bank (customer) secrecy addresses the nature and type of customer-specific information that financial institutions can (or must) reveal to third parties (e.g., the Swiss Department of Justice, Swiss tax authorities, or foreign officials and justices). The fundamental basis for Switzerland’s banking secrecy is a firm conviction that Swiss citizens are “The Sovereign,” and the Government has no right to disrespect a sovereign’s privacy. This belief is in sharp contrast to countries with presidents-for-life, emperors, kings, and dictators, for which “Government” is “The Sovereign.” Switzerland’s fervent belief in the proper relationship between governments and sovereign individuals is the principal reason for its citizens’ unwillingness to relinquish their privacy rights, even though the nation may be forced or decide to refuse such rights externally.

Financial regulation addresses the range of checks and balances that central banks and governments impose on the operations of financial institutions so that overarching national goals, such as limiting financial risks, ensuring competent management, and providing equal treatment under the law are achieved. The information needed for financial regulatory purposes is usually aggregated and, therefore, unlikely to reveal individual customer information. As a result, the release of consolidated customer information for purposes of federal regulation is rarely at odds with banking secrecy laws.

Pressure in Switzerland for greater national regulation of banks rose and fell during the early part of the twentieth century with the ebbs and flows of political, economic, and financial conditions. Public and government outcries for reform increased with the outbreak of significant financial and political problems but quickly receded when conditions improved or more important issues emerged.

Swiss Financial Regulation and Banking Secrecy Before World War I

Viewing Swiss banking secrecy from a broad historical perspective helps separate myth from reality. During the early twentieth century, Swiss banks were regulated by a motley assortment of cantonal rules and regulations. Before 1934, there were no specific national banking laws to protect customers’ confidential financial information. Safeguards that existed were general in nature and housed under the umbrellas of Switzerland’s civil, commercial, and criminal laws governing privacy and agency (see Fig. 4.1 at the beginning of this chapter). As a result, banks had greater liberties to regulate themselves, which opened the door to abuses of discretion. Fortunately, this loose regulatory environment served Switzerland well. Banks took their responsibilities seriously to protect and defend customers’ confidentiality. A clear majority of the nation’s bankers and elected officials (mainly conservative and right-of-center politicians) intended to keep it that way.

Of course, not everyone agreed, and one of the most prominent areas of contention stood squarely at the intersection of banking secrecy and tax “fairness.” On the banking secrecy side, intense pressure was put on the Swiss government by politicians (e.g., Social Democrats) and their constituents for tax reforms that would reduce the nation’s debts and more evenly spread the tax burden.¹⁷⁶ These advocates realized that tax reform would count for little if individuals were able to misreport their incomes and wealth by relying on bank (customer) secrecy laws to protect their dishonesty and deception. This possibility kept the Swiss banking secrecy issue in the crosshairs of controversy.

On the financial regulation side, political minority groups, such as farmers and blue-collar workers, wanted safeguards to protect their life savings from over-zealous, risk-taking bankers. They advocated greater national scrutiny over domestic financial institutions to keep bank risks within reasonable limits, thereby safeguarding all depositors’ wealth (e.g., savings). These groups voiced justified concerns about financial transparency, but they also recognized that the foundation of Switzerland’s economic strength rested, in part, on an internationally competitive financial system. By seeking too much safety and threatening too severely the nation’s banking secrecy rules, reforms could have the unintended consequence of jeopardizing healthy growth, relatively low-interest rates, moderate inflation, and the nation’s sound currency. It was a price few were willing to pay.

During the early years of the twentieth century, a political odd-couple was created when the Swiss Worker’s movement, represented by the Socialist Party, joined forces with farmers and small business owners, represented by the Farmers’, Commercial, and Citizens’ Party.¹⁷⁷ Both parties found common ground in attempts to pass federal legislation that protected constituents’ savings from excessive risk-taking by banks. They also sought to defend borrowers from large creditors and spread the tax burden. Therefore, financial regulation and banking secrecy were the heart of intended reforms.

For the most part, this coalition was unsuccessful because its sword of success was double-edged. On the positive side, “success” held the potential for new federal bank regulations to balance the power struggle between large financial institutions and the average wage earner. It also had the potential to spread the nation’s tax burden more evenly by exposing tax shirkers and cheats. On the negative side, “success” held the potential to trigger massive capital flight from Switzerland. Equally important, many worried that weakening banking secrecy protections could allow the federal government to abuse its newly acquired rights by inspecting Swiss residents’ bank accounts for general tax purposes. It was clear that a significant portion of foreign capital inflows to Switzerland was stimulated by the nation’s political and economic stability, military neutrality, low inflation rates, commitment to a strong currency, and moderate tax rates. Another important (albeit unquantified) portion was the nation’s reputation for protecting bank customers’ confidentiality.

Calls for financial reform in Switzerland grew louder between 1906 and 1915 when nearly 100 Swiss banks failed. They reached a peak between 1910 and 1913 when losses at approximately 45 Swiss banks were significant enough to rival the federal government’s budgeted spending.¹⁷⁸ Bank failures and mounting losses provided first-hand evidence of financial-risks-gone-wild, which empowered pressure groups to seek greater financial regulation. Like a flash-in-the-pan, these flames of financial reform in Switzerland were quickly extinguished during the summer of 1914 by the outbreak of World War I. The War’s massiveness and urgency increased international demands for Switzerland’s real and financial resources (especially by Austria, France, and Germany), diminishing the relative importance of bank reforms.

Swiss Financial Regulation and Banking Secrecy Between World War I and 1934

The years immediately following World War I were relatively prosperous ones for Switzerland. The nation’s policy of military neutrality allowed its financial, economic, and social infrastructure to remain largely intact despite vast destruction in the countries surrounding it. Post-war reconstruction in Europe put heavy demands on Switzerland’s financial and industrial sectors, resulting in healthy profits and strong economic growth. Latent public support for financial regulation resurfaced slowly due to a lack of sufficient popular, political, and central bank support. Similarly, attempts to modify general provisions in the Swiss Code of Obligations, Civil Code, and Criminal Code by enacting operating rules, in areas such as bank disclosures, licensing, auditing, debt-to-equity levels, liquidity, and accounting practices, were anemic, at best.¹⁷⁹ Without hard evidence that greater regulation would improve economic conditions and without convincing proof that Switzerland’s financial system was in jeopardy, the force of momentum maintained the status quo.

These early post-World War I years were especially difficult for Switzerland’s neighboring countries. Ravaged by war, with infrastructures torn and in need of repair, these governments sought to broaden both their tax bases and tax rates, which encouraged capital outflows to safe-haven countries. Switzerland’s geographic position between Austria, France, Germany, Italy, and Liechtenstein made it an obvious destination for capital transfers. Swiss bankers, entrepreneurs, and a majority of politicians, who were “still firmly rooted in the liberal thinking of the nineteenth century,”¹⁸⁰ defended the notion that, if Switzerland’s banking secrecy rules were less competitive than rival nations, it might suffer the consequences of corrosive capital flight. As well, the Swiss Bankers Association was concerned that enabling the government to inspect bank records “would shatter the confidence of domestic and foreign investors in the traditional discretion of Swiss commerce” and “many deposits would be withdrawn and hidden away.”¹⁸¹

Major changes occurred in Switzerland during the late 1920s and early 1930s, which finally brought federal regulation to the Swiss banking system and provided federal guarantees of banking secrecy protection. The forces that caused these paradigm-shifting changes were mosaic in nature, involving economic and political factors, none, alone, with enough power to achieve such far-reaching goals. Of the two major reforms included in the BA (i.e., federal financial regulation and federal banking secrecy protection), it is fair to say that the stronger was financial regulation. As crucial as federal protections of bank customer secrecy were to some politically active constituencies in Switzerland, its inclusion in the Act rested on a giant wave created by the engine of financial reform.¹⁸²

The forces spurring financial reform were different from the forces prompting federal banking secrecy protections. Financial regulation was encouraged mainly by the economic and political turbulence in post-World War I Europe, overexpansion of credit during the 1920s by Switzerland’s three major banks, and a cataclysmic reduction in global trade due to the Great Depression. By contrast, pressures to fortify banking secrecy provisions were driven by foreign governments’ attempts to expand their tax bases into Switzerland, Adolf Hitler’s suppression of German Jews and other minority groups, a financial affair at Basler Handelsbank, and a Supreme Court decision on sequestration policy.

Pressures to Increase Financial Regulation

Understanding the primary drivers behind the financial regulation reforms in Switzerland highlights the multifaceted interplay of economic, political, and social forces at work during the late 1920s and early 1930s. It also helps to better explain why the BA was passed and the relative insignificance of banking secrecy as the cause.

Turbulence in Surrounding Countries

In the years immediately following World War I and well into the 1920s, the Swiss economy was stable relative to nearby nations. The collapse of the Ottoman Empire (1908–1922), Russia’s Bolshevik Revolution (1917), and Russian civil war (1919 – 1922) were followed, in relatively short order, by Germany’s hyperinflation (1921–1923), the rise of Fascism in Italy (1922–1945), and the ascent to power in Germany of Adolf Hitler and National Socialism (1921–1933). Changes in Switzerland’s neighboring countries occurred so fast and so often that the realm of possible future outcomes for world order became much more threatening and obscure. From this turmoil and uncertainty came a surge of interest in reaffirming and strengthening Switzerland’s domestic banking system’s safety to prevent unwanted spillover effects. Conservative politicians and their constituents advocated stricter bank regulations because they felt such rules preserved confidence in the Swiss banking system, prevented capital outflows, secured greater financial and commercial transactions, and promoted banking sector employment.

Overexpansion of Credit

Seeds of financial turmoil are often sewn during the halcyon days of economic growth because prosperity can be a narcotic that leads to overconfidence, excessive credit expansion, lax management, and mispriced risks. During the 1920s, the lending practices at three of Switzerland’s eight major banks¹⁸³ created dangerous exposures to German debtors. Efforts exerted near the end of the decade to curtail these risks were too little and too late. In 1931, a looming banking crisis caused Germany’s Brüning government to impose currency controls, which froze more than CHF 1 billion of Swiss bank deposits. Switzerland’s financial institutions were over-leveraged and highly vulnerable to the vagaries of external financing sources, public confidence, and changes in economic conditions. The frozen assets threatened the liquidity and solvency of three large Swiss banks.

Reduction in Trade Due to the “Great Depression”

Germany’s banking crisis put significant pressure on Swiss banks, but the financial coup-de-grâce was the economic destruction created by the Great Depression. The resulting increase in worldwide unemployment and reductions in global real GDP precipitated the misguided passage of international trade barriers and currency controls, which reduced international trade and capital flows and hindered global economic recovery. Bilateral clearing agreements were set up to balance global trade flows, and capital restrictions were imposed to curtail excess pressures on fragile exchange rates. As a result, the pendulum of financial reform swung forcefully toward stricter directives.

The chill of diminishing economic activity spread internationally from the United States, which slowed and then reversed Switzerland’s economic growth. Asset values of Switzerland’s eight major banks fell by more than 50%. In the wreckage of declining business profitability, five Swiss banks had to be restructured, and three needed government assistance to survive.¹⁸⁴ Only Swiss Bank Corporation and Credit Suisse endured the crisis without government support or capital shrinkage.¹⁸⁵ Banque d’Escompte Suisse failed in April 1934, and between 1930 and 1939, approximately 60 other Swiss banks had closed their doors or were acquired.¹⁸⁶

Of these bank failures, one played a particularly important role in the government’s decision to impose federal regulations on the country’s banks. With 75% of its loans blocked by Germany’s payment moratorium, Swiss Volksbank (SVB) was able to survive beyond December 1933 only after the federal government and Swiss National Bank (SNB) invested CHF 100 million (more than 20% of the government’s budget) in the bank’s cooperative capital.¹⁸⁷ In effect, SVB became a nationalized bank when the government subsidized it, and its fate was sealed when the government took seats on SVB’s board of directors.

Domestic and foreign residents’ concerns about the safety of their Swiss franc deposits led to widespread support for stricter and more transparent national bank supervision. To many, the need for government assistance was a clear signal that Swiss banks had crossed the line of prudence and were no longer managing their affairs in careful, sensible, and discreet ways. The threat of a systemic meltdown of Switzerland’s financial markets convinced many of the need for greater regulation. Critics asked a simple but compelling question: If Swiss banks needed and were willing to accept federal funds to survive in times of crisis, how could they object to greater federal regulation once conditions improved?

Pressure to Increase Banking Secrecy Rules

The passage of national rules and regulations to protect banking secrecy was a significant step in the nation’s history. As mentioned earlier, the forces spurring these reforms differed from those prompting financial regulatory improvements.

Foreign Efforts to Increase Their Tax Bases

The 1920s were challenging for most European nations. Reconstruction costs and war debts from World War I were enormous, and the primary sources of government funding were from taxes on decimated income and wealth bases. For Germany, the vanquished nation, large reparation payments were added to its other numerous and significant obligations, making potential tax payments for German residents even larger.

Many Europeans (not just Germans) hid funds in Swiss bank accounts to avoid steep taxes, which reduced their nations’ tax bases. Victorious countries, like France, placed scorn on residents who were suspected of shirking tax payments by hiding income in Switzerland, but particular anger was cast on German residents who were thought to be depriving military victors of their rightful share of negotiated reparation payments. Government officials and the agents of these tax-deprived nations began visiting Switzerland to identify individuals who were thought to be circumventing taxes by depositing funds there. Bribery and coercion of Swiss bank employees were also used to extract information about unreported accounts.

Hitler’s Suppression of Jews and Other Minority Groups

The ascent to power of Adolf Hitler and his National Socialist Party during the 1920s and 1930s was at the expense of Jews and other minorities, who had their freedoms and property systematically confiscated.¹⁸⁸ Hitler’s SS agents traveled frequently to Switzerland to identify Jewish bank customers. Once identified, pressure was put on bank employees to disclose the wealth that these German residents stored abroad. From June 1931 until the passage of the BA, Germany passed several laws, regulations, and ordinances, intended to confiscate the foreign assets of targeted groups.¹⁸⁹ Especially heinous were two laws passed in June and July 1933. The June legislation required domestic residents to disclose all foreign-held assets, with violators facing prison terms of up to three years.¹⁹⁰ In July, even stricter legislation was passed providing a legal basis for confiscating the foreign-held assets of Jewish residents.¹⁹¹

Finance historian Helen Junz estimates that, in 1934, German Jews discharged $1.6 billion worth of liquid assets for transfer to safer countries, such as England, Switzerland, and the United States.¹⁹² Families from Austria, France, Hungary, The Netherlands, and Poland liquidated and transferred another $1.4 billion in personal assets.¹⁹³ Swiss efforts to deprive Adolf Hitler the spoils of this immoral aggression against his own citizens were part of the reason for passing the BA. A proposed banking secrecy article had been initiated in 1931, and the first draft of Article 47, which remained virtually unchanged in the final Act, was composed in 1933. Therefore, both events occurred before the German government passed its extreme discriminatory and racial laws.¹⁹⁴

Basler Handelsbank Affair

Severe recessions in Germany and France during the early 1930s caused a desperate search by their governments for tax revenues. The Brüning government in Germany (March 1930–May 1932) and Herriot government in France (June–December 1932) responded by enacting measures to halt or reverse capital outflows to Switzerland and other nations. They combined these restrictive rules with government-sponsored espionage to uncover assets believed to be hidden in Swiss accounts.

Accusations of tax evasion came to a boil in October 1932, when the Paris branch of Basler Handelsbank was searched, and evidence was uncovered showing the Swiss bank had actively aided and abetted French customers seeking to avoid coupon taxes. The amounts involved were estimated to be more than one billion French francs.¹⁹⁵ A search by French authorities of Basler Handelsbank’s Paris premises uncovered a list with more than 1,000 customers’ names.

Leftists used the “Paris Affair” to criticize the government for its halfhearted attempts to curb tax fraud. The French government reacted to the criticism by trying to use the affair to open Basler Handelsbank’s books. Suits were filed against Basler Handelsbank, two employees were imprisoned, and the bank’s assets in France were frozen, with their release made contingent on the French government’s inspection of the Swiss bank’s books. As for impact, the Paris Affair had a minor effect on Switzerland’s financial system and economy because it caused only a temporary outflow of capital by some frightened depositors. Nevertheless, this incident served as a wake-up call because it was perceived by Swiss authorities as a foreign assault on the nation’s banking secrecy rules, in particular, and Swiss sovereignty, in general.

Because the Paris Affair occurred in October 1932 and because the first draft of the BA appeared in February 1933, the sequence of events increases the likelihood of a cause-and-effect relationship. Passage of the Act was a way for the Swiss government to send a strong message to the French government that this was not a skirmish between the French government and a Swiss bank but rather a skirmish between two governments, and Switzerland would not back down.¹⁹⁶

Supreme Court Decision on Sequestration Policy

A final major factor influencing Switzerland’s decision to include banking secrecy protection in the BA was a Swiss Supreme Court ruling that broadened the legal grounds for sequestering documents in Swiss banks. Many politicians and bankers interpreted the ruling as potentially weakening the nation’s confidentiality protections. Legal appeals by Basler Handelsbank and Credit Suisse to reverse the decision were rejected, so the Swiss government responded to these perceived confidentiality threats by including federal protection for banking secrecy in the BA.¹⁹⁷

Provisions in the Swiss Banking Act of 1934

For opposition groups, the banking secrecy provisions in Article 47 of the BA were disappointing because they might enhance the ability of bank customers to protect their identities, hide incomes and wealth, and circumvent taxes. One might ask then: If there were such opposition, why did banking secrecy provisions pass so swiftly and virtually uncontested? Switzerland’s National Council cast 119 “yes” votes for the banking secrecy article to only one “no” vote, and members of the Council of States voted unanimously for the measure. The problem was that legislators were faced with a dilemma. There was clear public and legislative support for stricter financial regulation, but backing for federal banking secrecy protections was significantly weaker. The fear was that any legislation that opened the books of Swiss banks to the eyes of federal regulators (i.e., civil servants), who were supposed to be monitoring and controlling bank-wide exposures, would also reveal the names and account information of specific customers. If such information were disclosed formally or informally to domestic or foreign tax authorities, the repercussions (it was thought) could be severe and the consequences unintended.

Advocates of financial reform feared that blocking the banking secrecy provisions in Article 47 risked losing needed support for their own initiatives. In the end, the perceived benefits from greater financial regulation trumped the possible costs that might result from federal laws to protect the confidentiality of bank customers and thereby enable the evasion of income and property taxes. Legislators concluded that it was better to savor one political victory and treat changes in Swiss banking secrecy rules as a battle to be fought in the future. As a result, the federal government was granted the ability to exercise direct supervision over the country’s banks, and the confidentiality of customer information was protected by making its disclosure a federal crime.

Appendix 3: Switzerland’s Dormant Accounts Controversy: 1947–2023

Immediately after World War II and during the following seven decades, Switzerland was embroiled in an international controversy involving the return of dormant bank accounts to their rightful owners and beneficiaries. Swiss law required banks to transfer the deposits of deceased customers to their rightful heirs, so one might wonder about the source of this controversy. To separate rightful beneficiaries from charlatans who were unjustly claiming the accounts of deceased individuals, Switzerland required claimants to provide three pieces of information: a death certificate, name of the depositor’s bank, and bank account number. Because families of Holocaust victims were not issued death certificates, these rules were the source of an impasse that resulted in many claims on Swiss bank accounts being met with rejections.

Early on, there were signs of progress with agreements such as the London Declaration (1943), Safehaven Program (1944), Vesting and Marshalling Decree (1945), and Paris Reparations Agreement (1946). They can be viewed as stepping-stones to the dormant account controversy that began in the mid-1990s and continued until the first part of the twenty-first century.

Dormant Accounts, Heirless Assets, and the Law

Countries differ with respect to ultimate beneficiaries of unclaimed, heirless assets. For example, US escheat laws transfer unclaimed tangible and intangible property to the State when owners die intestate and without any legally recognized heirs. The length of time a US bank account may lie dormant before it is transferred varies from state to state, but it is generally within the three-to-seven-year range.¹⁹⁸ After World War II and until relatively recently, Switzerland had neither escheat laws nor a statute of limitations on inactive bank deposits. These accounts remained with the banks until they were claimed, and account owners or their heirs had forever to claim them.

Between World War II and 1959, attempts were made to resolve any unanswered questions about unclaimed dormant accounts. In 1947, the Swiss Bankers Association (SBA) requested banks to report accounts that might belong to Nazi victims without heirs, but balances worth a total of only CHF 482,000 were reported. In a follow-up investigation in 1959, the reported amount was well below CHF 1 million.¹⁹⁹ From 1949 to 1951, Switzerland transferred dormant accounts of Polish, Hungarian, and Romanian citizens, respectively, to these nations’ central banks.²⁰⁰

In 1962, the Swiss Federal Council passed the Registration Decree, which required Swiss financial institutions to report all accounts that were dormant since May 9, 1945, and belonged to foreign or stateless individuals who had reasonable evidence of persecution on religious, racial, or political grounds.²⁰¹ Accounts fitting this description were reported to the Claims Authority, which was an officially sanctioned unit created for this purpose. Non-compliance ran the risk of a CHF 10,000 fine or imprisonment.

By 1968, Swiss asset managers had reported to the Claims Authority unclaimed assets worth nearly CHF 10 million, of which it took responsibility for distributing approximately 45%. Distributing the rest (about CHF 5.5 million) was made the responsibility of asset managers. By 1974, two-thirds of the unclaimed funds were donated to the International Committee of the Red Cross in Geneva, and a third went to the Swiss Federation of Jewish Communities.

Dormant Account Controversy in the 1990s

The “Dormant Account Controversy” filled many newspaper articles in the 1990s. Media spread the belief that Swiss banks were still holding substantial amounts of Holocaust victims’ assets, and access to them (as well as information about them) was being denied or hindered by Switzerland’s banking secrecy laws.

Allegations against Swiss banks led to a tug-of-war involving public and private participants. Keeping these participants in mind is essential because the war against Swiss bank secrecy was fought on multiple fronts. Swiss banks and the Swiss National Bank (SNB) were on the one side. On the other side were Jewish organizations, such as the Jewish World Congress and World Jewish Restitution Organization, with considerable support from the US federal government, several US states (e.g., New York, Massachusetts, and Florida), and New York City.

The SBA reacted to media charges in September 1995 by publishing its Guidelines on the Treatment of Dormant Accounts, Custody Accounts, and Safe-Deposit Boxes Held in Swiss Banks,²⁰² which included procedural ways for banks to maintain long-term, proactive contact with customers. These Guidelines tried to ensure that dormant funds were administered uniformly and not misused. They also restored connections with proxies, if possible, and provided user-friendly access to information about dormant accounts—and did so in ways that would not threaten customer confidentiality. A Banking Ombudsman was made responsible for handling inquiries.²⁰³

The SBA Guidelines considered an account dormant after ten years unless there was proof the account holder had died, or it was considered impossible to contact heirs or proxies. To manage inquiries, the Central Claims Office under the auspices of SEGA Aktienregiser AG was made responsible for keeping records of dormant accounts. Banks were required to report to the Central Claims Office all dormant accounts valued at more than CHF 500.²⁰⁴ Individuals seeking information on dormant accounts would first contact the Central Claims Office, and, if the information in SEGA’s files was a close match to any request, the call for information would be forwarded to the bank where the account was housed. Afterward, the bank was required to carefully examine the requests’ merits. Those requests with standing would be settled promptly, but all bank decisions had to be reported to the Central Claims Office. In cases where a bank denied a request, justification had to be reported. If there were any residual concerns, the Central Claims Office had the power to examine the relevant bank records and make its own determination.

In 1995, the SBA also commissioned a new survey, but its mandate was to report dormant accounts belonging to suspected holocaust victims. The SBA study on heirless assets in Swiss banks was published in February 1996, revealing 775 additional accounts with assets amounting to nearly $32 million.²⁰⁵

Certain vested-interest groups saw Switzerland’s attempts to uncover and publish dormant accounts as inadequate. On April 23, 1996, hearings chaired by N.Y. Senator Alphonse D’Amato on the deposits of Holocaust victims were held before the US Senate Banking Committee. In response to growing concerns, on May 2, 1996, the SBA signed a Memorandum of Understanding (MoU) with the World Jewish Restitution Organization and World Jewish Congress, which represented the Jewish Agency and Allied Organizations.²⁰⁶ The MoU founded the Independent Commission of Eminent Persons (ICEP), whose mandate was to: (1) identify Swiss bank accounts that were owned by victims of Nazi persecution and (2) assess the behavior of Swiss banks concerning requests by these victims and their heirs for information about dormant accounts.

Independent Committee of Eminent Persons (Volcker Commission)

Headed by Paul Volcker, a well-respected former Chairman of the US Federal Reserve, the Independent Committee of Eminent Persons (ICEP) conducted, what came to be, the largest bank audit in the history of the world. To accomplish its mission, the ICEP identified all the accounts in Swiss banks from 1933 to 1945, matched them with the names of Nazi persecution victims, and then used other forensic means to identify as many other account holders as possible.

The decree that established the ICEP also created a claims resolution process that required Swiss banks to make public (i.e., publish) the names and other information on both residents’ and non-residents’ accounts that had remained dormant since 1945. The Swiss Federal Banking Commission (SFBC) paved a legal path for the release of this confidential information (on January 22, 1997) by declaring the ICEP’s investigation an “official special audit.” This way, the SFBC ensured that Swiss bank secrecy rules did not interfere with the Commission gaining full access to needed bank account information.

The “Volcker Commission,” as it came to be known, spent three years investigating dormant Swiss bank accounts in search of their owners. Its investigation was broader than previous searches, such as the one in 1962, because the SFBC ordered Swiss banks to report all dormant accounts that were either open or opened by any non-Swiss resident between 1933 and May 9, 1945, and were inactive for more than ten years. Of the estimated 6.85 million accounts that fit these criteria, the Volcker Commission combed through 4.1 million of them, nearly 60%, auditing 59 Swiss banks and about 300,000 of the still-existing dormant accounts.²⁰⁷ Among the newly found assets were deposits of individuals who placed funds in Switzerland under assumed names and through agents, as well as Allied and Axis soldiers who died in battle, and individuals who, until 1989, were living behind the Iron Curtain.

The Volcker Commission’s work dovetailed with efforts of Swiss banks, the SBA, and the SFBC to publish the names of dormant account owners. On July 23, 1997, the SFBC published, in major newspapers around the world and on the Internet, a list of 1,872 names connected to 1,756 dormant accounts, which were valued at CHF 60.2 million.²⁰⁸ This was followed on October 20, 1997, by the publication of names connected to an additional 3,687 accounts valued at CHF 5.8 million, bringing the total to 5,559 accounts, with a gross value of CHF 66.0 million.²⁰⁹ In addition, 10,758 accounts of Swiss residents and accounts of unknown domicile were made publicly available in Switzerland. Finally, 63,738 accounts with balances under CHF 100 were reported but not published. After the ICEP reviewed the 74,496 accounts that were not internationally published, those with balances less than CHF 100 were closed, and the proceeds were given to the International Committee of the Red Cross.²¹⁰

After three years of work and a cost of about $800 million (i.e., CHF 1 billion), which Swiss banks paid, the ICEP issued its final report on December 6, 1999.²¹¹ The Commission estimated that nearly 54,000 accounts were related to its targeted research, with a current value—mainly interest—between $643 million and $1.36 billion. Of the 4.1 million accounts in the ICEP’s “Accounts Databases,” 53,886 (i.e., 1.3%) were found to have “probable or possible relationships to victims of the Nazi regime.” Of these accounts, 72% were already closed, and 23% were suspended,²¹² leaving 5% open and dormant.²¹³

In its final report, the ICEP:

• 1. Found the quality and quantity of data it retrieved from Swiss banks to be far beyond its expectations²¹⁴;

• 2. Praised Swiss banks (with only a few exceptions) for their cooperation;

• 3. Recommended the creation of a database containing all 4.1 million Holocaust-era accounts in Switzerland²¹⁵;

• 4. Found that, even though there were instances of account misuse by banks, there was no evidence of systematic or pervasive data alteration or information destruction by Swiss banks;

• 5. Confirmed evidence that some banks engaged in “questionable and deceitful actions” in the way they handled Holocaust victims’ accounts, but these actions occurred years in the past;

• 6. Urged Switzerland to adopt laws that require publication of dormant account owners and pass escheat laws, which mandate the transfer of inactive account (after a set period) to the canton or federal government, thereby removing any incentive for banks to withhold information;

• 7. Decided to restore to victims both the fees charged to dormant account holders and to multiply by a factor of ten the 1945 claims to reflect the 50-year opportunity cost of funds while they were in Swiss bank accounts²¹⁶; and

• 8. Unanimously recommended that the SFBC publish the names of 25,187 account holders in the top three categories of the ICEP’s study (i.e., the most-likely-to-be victims’ accounts).²¹⁷

Progress to release additional names of possible dormant account holders was made well after the ICEP’s report was published. On January 13, 2005, Swiss banks published the names of approximately 3,000 additional account holders who were believed to be victims of Hitler’s persecution and could lay claim to deposits worth millions of dollars.²¹⁸

The Eizenstat Report

On October 3, 1996, a class-action suit²¹⁹ was filed against the Union Bank of Switzerland, and a second, broader suit²²⁰ followed shortly after that on October 21, 1996.²²¹ These legal actions charged certain Swiss banks and other financial entities (not the Swiss government) with collaborating and aiding Nazi persecution of Jews by retaining and concealing Holocaust victims’ assets and laundering funds that were either looted by the German regime or extracted from the profits of slave labor.

Growing public interest in the controversy led the United States government, in October 1996, to commission its own investigation. Stuart Eizenstat, Special Envoy to the US Department of State, and historian William Slaney were chosen to lead the study. In May 1997, their report, entitled US and Allied Efforts to Recover and Restore Gold and Other Assets Stolen or Hidden by Germany During World War II–Preliminary Study, was published with its foreword penned by Stuart Eizenstat.²²² On June 25, 1997, hearings on the “Eizenstat Report”²²³ were held before the US House Committee on Banking and Financial Services. These proceedings resulted in the June 1998 publication of the Eizenstat-Slaney Report, which was generally considered more balanced and fairer than the original Eizenstat report.²²⁴ With the benefit of time and perspective, the report was able to judge Switzerland in both absolute terms and in terms relative to other neutral nations, such as Spain, Portugal, Turkey, and Sweden. On both levels, Switzerland’s actions were viewed more benignly than they were in the press and at the beginning of the process.

Independent Commission of Experts (Bergier Commission)

Shortly after the United States commissioned the Eizenstat-Slaney study, the Swiss Parliament established, by federal decree, on December 13, 1996, the Independent Commission of Experts: Switzerland—Second World War (ICE). Under the leadership of respected Swiss professor and historian, Jean François Bergier, ICE’s mandate (among other things) was to assemble a panel of renowned historical experts who would have unprecedented access to (otherwise) confidential information to clarify historical events. Rather than focus only on dormant accounts, the ICE’s challenge was to conduct a detailed and thorough study of the involvements, if any, by Swiss banks, the SNB, and Swiss bank supervisors before, during, and immediately after World War II. Particular focus was on international gold transactions, currency dealings, trade flows, asset sales, fugitive capital, and looted goods. From its inception in December 1996, the Commission took about five years to complete its study, with a budget that eventually reached CHF 22 million.²²⁵

In July 1998, the Bergier Commission released its “Gold Report,” which included preliminary findings regarding the SNB and German central bank during World War II.²²⁶ In relatively rapid order, after that, the Commission published a series of notable findings. On December 10, 1999, it released a report on Swiss refugee policy (Switzerland and Refugees in the Nazi Era), followed on August 30, 2001, by the publication of eight additional reports.²²⁷ By March 22, 2002, the Commission’s work was complete, resulting in 25 individual reports. At a substantial cost, ICE produced a historical record, in German, that will generate interest for decades to come.

Swiss Banks’ “Settlement Agreement” with the World Jewish Congress

In 1996, the World Jewish Congress filed a class-action lawsuit against Switzerland’s three big banks, and by 1998, it had gained significant momentum.²²⁸ Flames of concern were stoked, in May 1997, by a provocative foreword written by Under Secretary of Commerce Stuart Eizenstat for a preliminary report to the House Banking and Financial Services Committee. More gas was thrown on the fire when New York City’s treasurer used the controversy to ban UBS from participating in a billion-dollar bond issue. Similar actions were threatened by other municipal and state treasurers (e.g., California, Massachusetts, and New Jersey). Some members of the US Congress, such as Senator Alphonse D’Amato, threatened to delay or prevent the proposed merger of UBS and Swiss Bank Corporation.²²⁹ These actions, combined with threats of further retaliation, caused Credit Suisse and UBS, on January 26, 1999, to settle this class-action suit by agreeing to pay $1.25 billion into a “Settlement Fund” to cover any remaining claims by Holocaust survivors or victims’ heirs from World War II.²³⁰ For the agreement to be valid, 17 major worldwide Jewish organizations had to sign “organizational endorsements,” thereby, assuring the Swiss banks that they would not revive their claims in the future. The required signatures were assembled by March 30, 1999.

Starting in June 1999, worldwide notice was given (in 27 different languages) to survivors, heirs, and interested parties about this “Global Settlement.” Initial Questionnaires were distributed to potential claimants, of which approximately 600,000 were returned. Disbursements were paid to five settlement classes (see Table 4.2) that included individuals deemed to be “Victims or Targets of Nazi Persecution.”²³¹ In return for this sizeable payment, the agreement called for a blanket release from all claims on Swiss banks, the SNB, the Swiss government, and Swiss industry. In addition, calls for political sanctions or penalties on Switzerland were to be stopped immediately.

Table 4.2 Five settlement classes

The Settlement Agreement required the appointment of a Claims Resolution Tribunal Special Master (CRT Special Master), whose job was to devise an allocation and distribution plan for the funds. On December 15, 1998, the Court appointed Judah Gribetz, a recognized New York attorney who spent years in government service, to fill this role. Gribetz’s distribution proposal was published on September 11, 2000, in a two-volume, 900-page document entitled Proposed Plan Allocation and Distribution of Settlement Proceeds. After that, this report was sent to the more than half-million individuals who had returned the Initial Questionnaires. In recognition of the number and value of accounts that the Volcker Commission uncovered, the proposed plan recommended the allocation of up to $800 million for individual claims (i.e., to the “Deposited Assets Class”), and a deadline of December 11, 2004, was eventually set for this category’s claimants.²³²

The remaining funds were to be distributed among four major groups: slave laborers (two categories), refugees, and individuals whose accounts were looted during the War. Approximately 200,000 surviving slave laborers (Class I and Class II) would receive $1,450 each. Surviving refugees who were denied entry or expelled from Switzerland would receive $3,625 each. Mistreated Swiss residents would receive $725 each, and $259 million was to be allocated to members of the “Looted Assets Class.”²³³ Due to its broad definition, the “Looted Assets Class” included the largest number of individuals, potentially counting anyone who tried to escape Nazi tyranny. It was also difficult to prove that any of these individuals’ transactions were channeled through Swiss banks or Swiss financial entities. Unfortunately, it was also the neediest group, so the Court found a cy pres remedy²³⁴ that allocated $259 million to them over the ten years ending in 2011.²³⁵

Of the $1.288 billion that was finally distributed (see Table 4.3), approximately 80% went to Jewish Nazi victims or their heirs and the remainder to non-Jewish groups, such as Roma, Jehovah’s Witnesses, homosexuals, and disabled individuals, as well as needy (e.g., old and poor) members of the “Looted Assets Class,” slave laborers, and refugees.²³⁶ A relatively small payment (approximately $1.4 million) was made to legitimate claimants of unpaid insurance policies, and, finally, $10 million was allocated for the Victim List Fund to memorialize the sufferers and survivors of Nazi persecution.²³⁷ By the end of 2010, nearly all the funds had been distributed to 458,436 individuals (see Table 4.3).²³⁸

Table 4.3 Swiss Banks Settlement Fund Distribution Statistics as of January 31, 2020 (Amounts Approved by the Court) Holocaust Victim Assets Litigation Case No. CV 96-4849

Swiss Humanitarian Fund

As the dormant account battle grew and intensified, Switzerland’s international image became like the distorted image in a circus mirror. To remedy this, on February 26, 1997, the “big three” Swiss banks combined contributions with others in the private sector to create a humanitarian fund called the Fund for Needy Victims of the Holocaust/Shoa (aka, Swiss Humanitarian Fund or Holocaust Fund). Its purpose was to provide relief worldwide from natural disasters, genocide, poverty, and violence. Funded initially by CHF 100 million from Switzerland’s major banks, the trust grew to CHF 273 million after donations from the SNB, acting in a private capacity, and private companies.²³⁹ Over the course of its five-year history, the Swiss Humanitarian Fund distributed CHF 295 million to approximately 312,000 survivors of Nazi persecution.²⁴⁰ In 2002, it was closed due to concerns about its relative lack of size, efficiency, and speed. The CHF 12 million ($8 million) remaining in the Fund were divided between the World Jewish Restitution Organization and the Swiss Red Cross.²⁴¹

Claims Against the Swiss Insurance Industry

One group that was largely untouched by the $1.288 billion agreement was the Swiss insurance industry. Threatened with class action suits of their own, Swiss and other European insurance companies came to an understanding with Jewish organizations in August 1998 to create the International Commission on Holocaust Era Insurance Claims (ICHEIC). During the next three years, the names of about 45,000 individuals with potential claims were reported—mainly by Allianz, Axa, Generali, Winterthur, and Zurich insurance companies.²⁴² The Swiss Banks Settlement Insurance Claims Process was set up to provide a means for Nazi victims or their heirs to make claims on insurance companies (“participating companies”) on which contracts were open or opened between 1920 and 1945. Under the process, legitimate owners or heirs of unpaid policies could have their claims adjudicated by Claims Resolution Tribunal (CRT). On June 28, 2001, the Claims Process Guidelines for Insurance Claims were judicially approved and put under the purview of the CRT. It stipulated that the Settlement Fund be financed by Swiss insurance companies, with a maximum $25 million payment to compensate victims.

Conclusion

Switzerland’s neutrality dates back to the 1515 Battle of Marignano in northern Italy and has been officially recognized by European nations since the Congress of Vienna in 1814–1815. The nation’s long-standing tradition of protecting private property, defending national sovereignty, and following the international rules of the game has deep roots in its commercial, civil, and criminal codes, as well as the nation’s Napoleonic legal heritage. Since 1934, Switzerland has had federal laws requiring banks and their employees to protect customers’ confidential financial information. Strict neutrality and strict banking secrecy rules have created a burning conflict that erupted into a public campaign for access to dormant accounts and huge payments.

A major takeaway from Switzerland’s dormant accounts controversy is a positive one. Despite the nation’s vigorous defense of federal banking secrecy laws, which protect an individual’s inalienable rights to privacy, these laws did not impede the investigations of the Independent Committee of Eminent Persons (i.e., Volcker Commission), Eizenstat-Slaney Report, or Independent Commission of Experts (Bergier Commission). The system was adapted to provide empathy and compensation to the descendants of Nazi victims.²⁴³