Banking in Switzerland is characterized by stability, privacy and protection of clients’ assets and information. The country’s tradition of bank secrecy, which dates to the Middle Ages, was first codified in a 1934 law.All banks in Switzerland are regulated by the Federal Banking Commission (FBC), which derives its authority from a series of federal statutes.

Overview

Switzerland is an economically advanced and prosperous nation, with a gross domestic product (GDP) larger than that of some larger western European nations. In addition, the value of the Swiss franc (CHF) has been relatively stable compared to that of other currencies.In 2003, the financial sector comprised an estimated 14% of Switzerland’s GDP and employed approximately 180,000 people (110,000 of whom work in the banking sector); this represents about 5.6% of the total Swiss workforce.

Swiss neutrality and national sovereignty, long recognized by foreign nations, have fostered a stable environment in which the banking sector was able to develop and thrive. Even though it is near Europe’s geographical center, Switzerland maintained neutrality through both World Wars; is not a member of the European Union or the European Economic Area; and was not even a member of the United Nations until 2002.

As of 2003, an estimated one-third of all funds held outside their country of origin (sometimes called “offshore” funds) are kept in Switzerland. However, this number fell significantly in 2002; the total amount of private money managed by Swiss banks was $2.2 trillion, which is $400 billion less than a year earlier. This has been attributed to both a bear market and possibly to stricter regulations on Swiss banking.

The Bank of International Settlements, an organization that facilitates cooperation among the world’s central banks, is headquartered in the city of Basel. Founded in 1930, the BIS chose to locate in Switzerland because of the country’s neutrality, which was important to an organization founded by countries that had been on both sides of World War I.

Foreign banks operating in Switzerland manage 870 billion Swiss francs worth of assets (as of May 2006.)

Law and Regulation

The Federal Banking Commission, an independent agency of the Swiss government within the Federal Department of Finance, supervises most banking-related activities as well as securities markets and investment funds.Regulatory authority is derived from several statutes.

The office of the Swiss Banking Ombudsman, founded in 1993, is sponsored by the Swiss Banking Ombudsman Foundation, which was established by the Swiss Bankers Association. The ombudsman’s services, which are offered free of charge, include mediation and assistance to persons searching for dormant assets. The ombudsman handles about 1,500 complaints raised against banks yearly.

Statutes

Banking law of 1934

The Swiss Parliament passed the Banking Law of 1934, which codified the rules of secrecy and criminalizes violation of it. The secrecy provisions were not included in the first draft of the law, which mainly concerned administrative matters such as bank supervision. The provisions, found in Article 47(b), were added before passage of the bill due to Nazi authorities’ attempts to investigate the assets of Jews and “enemies of the state” held in Switzerland.

Recent statutes

A new banking law entered into force on 1 January 1995. The law permits foreign banks to open subsidiaries, branches, or representative offices in Switzerland without approval by the FBC. This opportunity is based upon reciprocity, and requires a prior agreement between Switzerland and foreign governments. The new law also requires banks to announce any acquisition or sale of its shares by a major shareholder (minimum 10% of capital or voting rights) to the FBC (shareholders engaging in such activity must notify the bank). The bank can also hold major shareholders of a bank liable for improper conduct. To enforce compliance with these shareholder requirements, the FBC is authorized to block their voting rights if they fail to comply. In addition, the FBC can now provide information to foreign law enforcement authorities in cases covered by mutual legal assistance agreements.

Electronic payments

Swiss banks, as well as the post office (which handles some financial transactions) use an electronic payments system known as Swiss Interbank Clearing (SIC). The system is supervised by the Swiss National Bank and is operated via a joint venture. SIC handled over 250 million transactions in 2005, with a turnover value of 41 trillion Swiss francs.

Major banks

As of 2006, there are 408 authorized banks and securities dealers, ranging from the “Two Big Banks” down to small banks serving the needs of a single community or a few special clients.

UBS AG and Credit Suisse are respectively the largest and second largest Swiss banks and account for over 50% of all deposits in Switzerland; each has extensive branch networks throughout the country and most international centres.

Due to their size and complexity, UBS and Credit Suisse are subject to an extra degree of supervision from the Federal Banking Commission.

UBS

UBS came into existence in June of 1998, when Union Bank of Switzerland, founded in 1862, and Swiss Bank Corporation, founded in 1872, merged. Headquartered in Zurich and Basel, it is Switzerland’s largest bank. It maintains seven main offices around the world (four in the United States and one each in London, Tokyo, and Hong Kong) and branches on five continents.

As of 2005, UBS had a net profit of US$7.2 billion, a market capitalization of over $100 billion, and 69,569 employees.

UBS has used the slogan “You & Us” in their marketing communication. The slogan aims to highlight the firm’s client-based approach. Source: UBS branding

Credit Suisse

Credit Suisse is the second-largest Swiss bank. Based in Zurich, it was founded in 1856; its market capitalization (as of 2005) is $61.7 billion, and the company has about 63,000 employees. The Credit Suisse Group includes private banking, investment banking, asset management and insurance divisions. It acquired The First Boston Corporation in 1988 and merged with the Winterthur insurance company in 1997; the latter brand name is still in use for Credit Suisse’s insurance products.

Central Bank

The Swiss National Bank serves as the country’s central bank. Founded by the Federal Act on the Swiss National Bank (16 January 1906), it began conducting business on 20 June 1907. Its shares are publicly traded, and are held by the cantons, cantonal banks, and individual investors; the federal government does not hold any shares.Although a central bank often has regulatory authority over the country’s banking system, the CNB does not; regulation is solely the role of the Federal Banking Commission.

Cantonal banks

There are, as of 2006, 24 cantonal banks; these banks are state-guaranteed semi-governmental organizations controlled by one of Switzerland’s 26 cantons that engage in all banking businesses. The largest cantonal bank, the Zurich Cantonal Bank, had a 2005 net income of CHF 810 million.

Banking privacy

Swiss bank secrecy protects private banking information; the protections afforded under Swiss law are similar to confidentiality protections between doctors and patients or lawyers and their clients. The Swiss government views the right to privacy as a fundamental principle protected by all democratic countries. While secrecy is protected, in practice all bank accounts are linked to an identified individual, and a prosecutor or judge may issue a “lifting order” in order to grant law enforcement access to information relevant to a criminal investigation.

Taxation

Swiss law distinguishes between tax evasion and tax fraud. If any holdings are not declared to the taxation authorities, a natural or legal person commits tax evasion. Tax evasion is not considered an offence, but only a misdemeanour. It is assumed that failed declaration of one’s assets is not sufficient evidence for criminal intent, as the chance of unintentional failure is too high. However, tax fraud is considered a criminal offence under Swiss law and prosecuted according to the Swiss Penal Code. A forged tax declaration, like the statement of significantly below-market valuation of real estate or the counterfeiting of bank statements, is such a criminal offence of tax fraud.

European Union

Pressure on Switzerland has been applied by several states and international organizations attempting to alter the Swiss Offshore regime. The European Union, whose member countries geographically surround Switzerland, has complained about member states’ nationals using Swiss banks to avoid taxation in their home countries. The EU has long sought a harmonized tax regime among its member states, although many Swiss banking officials (and, according to some polls, the public) are resisting any such changes.

Since July 1, 2005, Switzerland has charged a withholding tax on all interest earned in the personal Swiss accounts of European Union residents.

In 2001 and 2002, an amnesty was offered by the government of Italy in which taxes and penalties on repatriated funds were limited on funds repatriated from Switzerland; 30 to 35 billion euro worth of deposits were returned to Italy.In 2003, a similar amnesty was approved by the government of Germany.

United States

In January of 2003, the United States Department of the Treasury announced a new information-sharing agreement under the already extant U.S.-Swiss Income Tax Convention; the agreement is intended to facilitate more effective tax information exchange between the two countries. Said a Treasury official, “This Mutual Agreement should improve our access to needed information” under the terms of the tax treaty.

Money laundering

There are several measures in place to counter money laundering. The Money Laundering Act sets forth requirements of account holders’ identification, and requires reporting of any suspicious transactions to the Money Laundering Reporting Office.

According to the CIA World Factbook, Switzerland is “a major international financial center vulnerable to the layering and integration stages of money laundering; despite significant legislation and reporting requirements, secrecy rules persist and nonresidents are permitted to conduct business through offshore entities and various intermediaries…” However, Switzerland’s cooperation in transnational financial issues has been praised by several major U.S. officials. A Federal Bureau of Investigation anti-terrorism official noted that Switzerland was one of several countries to participate in joint task forces targeting financing of Al-Qaeda terrorist cells; a former Assistant Secretary of the Treasury praised Swiss cooperation and the country’s assistance in the finding and freezing of terrorist and Iraqi assets.

Numbered bank accounts

Some bank accounts are afforded an extra degree of privacy. Information concerning such accounts, known as numbered accounts, is restricted to senior bank officers, rather than being accessible to all the employees of a bank. However, the information required to open such an account is no different from that of an ordinary account; completely anonymous accounts are prohibited by law. Should a criminal investigation take place, law enforcement has access to information related to a numbered account in the same way it has access to information about any other account.

Swiss banks and the Holocaust

Several inquiries have been made into the conduct of Swiss banks during the National Socialist (Nazi) regime in Germany (1933-1945), especially regarding funds deposited by or stolen from victims of the Holocaust.

In October of 1996, as inquiries into the banks’ activities during the Holocaust were ongoing, Swiss ambassador to the United States Carlo Jagmetti admitted that some banks prevented Holocaust survivors from accessing their funds, although he disputed the amounts claimed in lawsuits by survivors. Among those leading inquiries into the banks’ conduct during the war was Alfonse D’Amato, a United States Senator from New York. United Bank of Switzerland security guard Christoph Meili became a prominent whistleblower when he prevented the destruction of Holocaust-era records and brought attention to their existence. Due to his actions, Meili lost his job and received death threats; he became the first Swiss citizen ever granted political asylum in the United States. After settling in southern California, he was honored by the Los Angeles Jewish community.Meili was supported financially by several Jewish organizations, and was offered a full scholarship at Chapman University in California. In 1998, an international panel of historians released a study that claimed a significant amount of gold had been stolen from Holocaust victims, as well as the treasuries of conquered countries, and deposited in the Swiss National Bank. The panel found that, despite evidence of theft and wrongful acquisition of the gold, the SNB continued to accept the deposits.In 2000, a United States District Court judge approved a US$ 1.85 billion settlement between several Swiss banks and Holocaust victims. An estimated 50,000 accounts in Switzerland were opened by victims during the Nazi regime; some banks refused to make payments to victims’ families because of the lack of death certificates.

International competition

With recent changes in the Swiss bank secrecy regime, other states, such as Panama and Singapore, have attracted depositors seeking privacy and protection. Having taken steps to make its banks more attractive, Singapore strengthened penalties for violators of bank secrecy (and now imposes steeper fines and longer jail sentences for offenders), and modified its laws on trusts and inheritance. Singapore is also now the location of Credit Suisse’s international banking headquarters.

Panama on the other hand, is Latin America’s largest banking centre, where major international banks are located. Often criticized for alleged non-compliance of banking regulations aimed to deter money laundering, in reality the Panamanian Banking Centre is far more strict than several States of the United States and other banking centres of the Caribbean.

In fiction

Swiss banks have figured prominently in several works of fiction.

The book and film The Da Vinci Code feature the fictional Depository Bank of Zurich.

In the novel and film The Bourne Identity, main character Jason Bourne wakes from amnesia and finds a Swiss bank account number implanted in his hip.

In the film Munich, the Mossad agents’ operational and personal funds are deposited into a Swiss Bank Account.

In the film Inside Man, a young American working at a Swiss Bank during World War II receives handsome sums for collaborating with the Nazis, including diamonds and stolen treasures. These remain in the Manhattan Trust Bank in New York City which he finances after the war, presumably using other monies gained through his involvement with the Nazis. It is the first branch and the flagship of a banking empire which subsequently makes him extremely rich over the next 60 years.