Swiss banking secrecy: Myth or reality?

By Felix Egli and Fiona Gao Yue, VISCHER
0
2224
LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link

We are often asked by Chinese clients and contacts what Swiss banking secrecy means exactly and whether it still applies.

Misleading term

The term itself is misleading as banking secrecy is protecting the privacy of the customers of the bank, rather than the secrets of the bank. It should more properly be called “bank customer secrecy”. But, as the term “banking secrecy” has been used for decades, we also use it here.

Felix Egli Senior Partner, Head of the China Desk VISCHER
Felix Egli
Senior Partner, Head of the China Desk
VISCHER

The legal concept

Banking secrecy is set out in article 47 of the Federal Act on Banks and Savings Banks of 1934. It reads as follows (unofficial translation):

Art. 47 Federal Act on Banks and Savings Banks

1 A custodial sentence of up to three years or a fine shall be awarded to those who intentionally:

a) disclose a secret which was entrusted to them or of which they had become cognisant due to their office or employment, in their capacity as an executive, employee, mandatee or liquidator of a bank, or as an executive or employee of an audit firm;

b) incite someone to breach such professional secrecy obligation.

2 Where the offender acts negligently, they shall be sanctioned by fine of up to 250,000 Swiss francs (US$270,200).

This law never has offered absolute protection in the case of criminal prosecution. However, criminal prosecutors of foreign states must apply for assistance in criminal matters under the Federal Act on International Mutual Assistance in Criminal Matters (IMAC) in order to obtain information that is protected by banking secrecy under Swiss law.

The IMAC is subject to bilateral treaties for mutual assistance in criminal matters. It confers no right to obtain cooperation and applies only to criminal matters for which recourse to courts is permitted under the law of the requesting state.

The IMAC provides criminal assistance only with respect to criminal acts that would also be punishable in Switzerland. It further requires reciprocity and a commitment of the requesting state to use any Swiss information only for the subject of the prosecution itself and for no other purpose.

Nevertheless, all applications for assistance in criminal matters must be denied in any of the following cases.

  • If the subject of the proceedings is an act which, in the Swiss view, is of a predominantly political nature.
  • If the subject of the proceedings constitutes a violation of the obligation to perform military or similar service.
  • If the subject of the proceedings appears to be directed against the national security or military defence of the requesting state.
  • If there are reasons to believe that the foreign proceedings do not meet the procedural requirements of the European Human Rights Convention.
  • If there are reasons to believe that the foreign proceedings are being conducted so as to prosecute or punish a person on account of their political opinions, their belonging to a certain social group or their race, religion or nationality.

Further, in article 3 subsection 3, the IMAC explicitly provides that a request prosecuting tax evasion – rather than tax fraud – has to be denied.

Distinction: Tax evasion vs tax fraud

Why does the IMAC make this distinction? Because in Switzerland, tax evasion is not a criminal act while tax fraud is. Simply put, tax evasion refers to omitting or overlooking the declaration of taxable income or assets in a tax report, while tax fraud refers to defrauding tax authorities by forging tax reports or their underlying documents, or by building a web of lies.

Fiona Gao Yue Associate China Desk VISCHER
Fiona Gao Yue
Associate
China Desk
VISCHER

The Swiss government asks that taxpayers self-declare their taxable income and assets in order to save on the costs of hiring additional tax administration staff. This self-declaration could bring the taxpayer into a conflict of interest, and the Swiss legislature felt they should not criminalize taxpayers who succumb to it.

Since tax evasion is not a crime in Switzerland but is one in most other jurisdictions, foreign prosecutors who were prosecuting tax evasion had been unable to obtain criminal assistance to set aside the Swiss banking secrecy for decades.

A shelter, but not for tax evaders

However, this came to an end. When the global financial crisis broke out in 2008, the US no longer took Swiss law and sovereignty into consideration and simply threatened to indict the Swiss banks and their top-level executives in the US if they did not voluntarily disclose their American customer relationships. The globally active Swiss banks could not afford to be indicted in the US, as it would imply the loss of an important market.

Additionally, Swiss banks which do not have an American presence could not afford being indicted in the US, as they would lose their ability to clear US dollars as a result. For example, Wegelin & Co – the only Swiss bank indicted in the US – collapsed within a few months after indictment due to losing their ability to clear US dollars.

As a result of the US power play, Switzerland finally budged. Aiming to protect its financial sector from destruction, Switzerland has continuously softened the construction of the pertinent law over the last five years. The construction of the laws has been changed until almost nothing qualifies as tax evasion anymore. Such was the extent of their changes that eventually the US obtained the information they wanted. Of course, such construction applies generally, and not only with respect to US requests.

As a result, Swiss banking secrecy no longer offers protection against most of what previously had been qualified as tax evasion. Switzerland has thus joined all other European countries in not being a shelter for foreign tax evaders.

Nevertheless, there is almost nowhere in Europe one can find a banking secrecy of the Swiss type, and the Swiss banking secrecy still works perfectly in non-tax-related matters, including in the case of prosecution on account of political opinions, race, religion or nationality.

Felix Egli is a senior partner and the head of the China Desk of VISCHER. Fiona Gao is an associate on VISCHER’s China Desk

(Vischer)

Schützengasse 1

P.O. Box 1230

8021 Zurich

Tel: +41 58 211 34 00

Fax: +41 58 211 34 10

E-mail: FEgli@vischer.com

fgao@vischer.com

www.vischer.com

LinkedIn
Facebook
Twitter
Whatsapp
Telegram
Copy link