SWISS BANK SECRECY

INSIDE THE BOX: Confidentiality for bank clients is enshrined in Swiss law. Here, a bank employee works in the safe room of the Zuercher Kantonalbank (ZKB) in Zurich. REUTERS/Christian Hartmann

Pressure on Swiss bankers to disclose more about their tax-evading foreign clients has opened a deep rift in the fiercely independent nation. The battle for the Swiss soul

BY EMMA THOMASSON ST. GALLEN, SWITZERLAND, APRIL 18, 2013

SPECIAL REPORT 1 SWISS BANK SECRECY The battle for the Swiss soul

Offshore assets held in Switzerland Swiss banks’ holdings of the offshore wealth of Americans and Europeans have fallen since 2008 By origin, in percentage North Asia- Latin Middle East America Europe Pacific America and Africa 2008 7 55 10 11 17 2009 2010 2011 2 48 11 12 27 0255075 100%

Source: The Boston Consulting Group (BCG)

“ f you can’t trust a Swiss banker, what’s Swiss People’s Party and the heads of small- ourselves to be intimidated unjustifiably un- the world come to?” asked James er private banks, sees such a surrender as a der pressure from abroad and we don’t have IBond in the 1999 film “The World is betrayal not just of clients but of core Swiss sufficient confidence in our own strengths.” Not Enough”. values. Client confidentiality – the “duty of Thomas Matter, a banker and politician It has come to this: Swiss banks, under absolute silence” – has been part of Swiss from the Swiss People’s Party, is blunt- pressure from countries such as the United law since 1934, and a tradition for centuries, er. “Swiss people love freedom,” he told States, France and Germany, have been giv- helping Switzerland prosper as its neigh- Reuters. “The state was always for the citi- ing up their secrets, in some cases handing bours were repeatedly wracked by war. zen and not the other way round.” foreign tax authorities the names of their This conservative faction fears that the The debate, which has included person- account holders. To avoid being black- very notion of what it means to be Swiss is al attacks and accusations of betrayal, has listed by the Organisation for Economic under threat. hamstrung the coalition government as it Cooperation and Development, the Swiss Josef Ackermann, the former boss of attempts to settle tax disputes and restore government has agreed to share more in- Deutsche Bank who recently returned to the reputation of the financial industry. formation with foreign authorities hunting Switzerland to take up a job as chairman Last week’s announcement by tax cheats. of Zurich Insurance, has expressed alarm Luxembourg that it would lift bank secrecy The foreign assault has opened up a at the discord and called on Switzerland to rules from 2015 for EU citizens only adds huge rift inside the fiercely independent resist international attacks. to the pressure. Alpine nation. “It must not be that the big powers chip UNWRITTEN CODE Some bankers, as well as many academ- away at the legal order of the small ones,” ics and centrist and left-leaning politicians, Ackermann said in a March speech to A sign on display in UBS’s museum, from think the country should bow to the inevi- Zurich’s business elite. “Our biggest prob- a bank founded in 1747 in the Italian- table and abandon strict secrecy. The prag- lem seems to be that we sometimes allow speaking part of Switzerland, could almost matists include big banks like UBS AG and be Switzerland’s mantra: “MASSIMA Credit Suisse Group AG, which argue that DISCREZIONE” it promises. to survive they have no choice but to sur- It must not be that the big Swiss bankers have long adhered to an render more information about their cus- powers chip away at the legal unwritten code similar to that observed by tomers and close the accounts of those who order of the small ones. doctors or priests. Bankers do not acknowl- won’t come clean. edge clients in public for fear of exposing But a conservative old-guard, including Josef Ackermann them as account holders; they often carry politicians from the powerful right-wing chairman of Zurich Insurance business cards with just a name, rather than

SPECIAL REPORT 2 SWISS BANK SECRECY The battle for the Swiss soul

bank or contact details; and, at least until evade taxes. Visitors should avoid personal Networks were forged during compulsory the 1990s, they never advertised abroad. questions, advises Communicaid, a consul- military service; an education at St. Gallen That code was written into law after tancy which advises businesses on cross- University cemented those ties. 1932, when French police arrested two cultural awareness. It would also be wise to Now the picturesque city is the epicentre Swiss bankers who were entertaining mem- steer clear of discussing “Swiss banks, mon- of the battle over privacy. bers of Parisian high society in an apart- ey or Switzerland’s military role in World Philippe Mastronardi, a retired law pro- ment near the Champs Elysees. The police War One or Two.” fessor, has led a group of Swiss academics in seized a list bearing the names of hundreds Neutral Switzerland’s self-image as a calls for the government to agree to an au- of French clients who had hidden their safe haven for the persecuted and their as- tomatic exchange of bank client data with wealth in secret accounts, including two sets was punctured in the 1990s, when a foreign authorities. Transparency is neces- bishops, several generals, top industrialists, national commission found it had refused sary, he says. Switzerland faces a “paradigm two newspaper magnates and several poli- entry to many Jews escaping the Nazis. Its shift. We need to change deeply rooted be- ticians. The ensuing scandal helped usher banks had even emptied Jewish accounts liefs and myths of Swiss autonomy.” in the Swiss Banking Act, which made it left dormant after World War Two. Until recently, St. Gallen was home a punishable offence for bankers to divulge to Wegelin & Co, founded in 1741 and ST. GALLEN FRATERNITY information on their clients unless they Switzerland’s oldest private bank. suspect a crime. While Zurich and Geneva are Switzerland’s Last year the U.S. Justice Department Even today, few Swiss like to discuss the main financial centres, the once close- indicted Wegelin on charges that it en- fact that much of the country’s prosper- knit banking fraternity had its roots in abled wealthy Americans to evade taxes ity was built on bankers helping foreigners the ancient hermitage city of St. Gallen. on at least $1.2 billion hidden in offshore

IN THE SHADOW: The city of St. Gallen is where many Swiss bankers forged early ties, through military service and university. REUTERS/Michael Buholzer

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“SPIRAL OF LIES” accounts. In January the bank pleaded guilty. Wegelin executives, who had already Washington, Paris and Berlin have really sold the non-U.S. business to fellow St. turned up the heat on Switzerland in the Gallen bank Raiffeisen, announced they past few years. In 2009, UBS agreed to would close what was left of the bank. hand the United States the names of more The guilty plea was a crucial turning than 4,000 American clients and pay a point in the Swiss debate, because in ad- $780 million fine to avoid prosecution for mitting fault Wegelin’s executives also in- helping Americans evade taxes. Other big criminated their fellow bankers. banks such as Credit Suisse and Julius Baer From about 2002 to about 2010, the have handed over information on their bank’s managing partner Otto Bruderer employees involved in U.S. business, while told a U.S. District Court in Manhattan, TURNING POINT: Wegelin & Co’s bosses Credit Suisse has made provisions in its ac- Wegelin had agreed with certain U.S. tax- incriminated rival Swiss bankers for helping counts for hefty fines. payers to evade U.S. tax obligations. “Such Americans evade taxes, which unlocked an German states have bought data on se- conduct was common in the Swiss banking unusually fierce response.REUTERS/ Arnd cret Swiss account holders and both Credit industry,” Bruderer said. Wiegmann Suisse and Julius Baer have paid fines to Prominent conservative politician settle German tax investigations; France Christoph Darbellay publicly called has raided Swiss banks and their clients Wegelin executives “traitors” and ac- and is investigating a scandal involving cused Bruderer and his co-owner, Konrad $780 million Swiss bank accounts held by former French Hummler, of dragging Swiss finance budget minister Jerome Cahuzac. Cahuzac The fine UBS agreed to pay to through the dirt. avoid prosecution. Smaller banks has been charged with fraud. Hummler sued Darbellay for libel. The “I was caught in a spiral of lies and I did pair settled out of court in January, but the fear ruin from such penalties wrong. I am devastated with remorse,” he public spat - unusual in a country which fa- said in his blog on April 2. vours consensus over conflict – underscores bank secrecy and it is hard for us to open Julius Baer and Credit Suisse declined to the strength of feeling. up, even if it is just about clearing up this comment for this article, but Credit Suisse Hummler, Bruderer and Darbellay de- tax evasion question.” pointed to remarks made by Chairman Urs clined to talk to Reuters for this story. Sergio Ermotti, chief executive of UBS, Rohner in September. Swiss banks need to The sense of betrayal was keen among has echoed that, saying automatic transfer embrace a business model based on tax- conservatives, because Hummler, a of client data could be a solution if adopted compliant money, he told a conference; any straight-talking former head of the Swiss worldwide. “Bank secrecy as we knew it a de- approach that rests on different standards Private Bankers’ Association, had long been cade ago is over,” he told the TagesAnzeiger will fail. “It is economically stupid and one of the most ardent public defenders of newspaper in October. UBS, Switzerland’s morally unacceptable.” bank secrecy. In 2009 he told Der Spiegel biggest bank, declined to comment for this The old guard is having none of it. magazine that tax evasion by Germans was story; the bank introduced a compliance “Automatic exchange of information is a “legitimate defence by citizens” against a policy in 2012 demanding its bankers re- not a global standard nor will it become a “disastrous social welfare state.” quest verbal confirmation from new clients global standard any time soon,” Zeno Staub, The St. Gallen banker who bought that they have paid their taxes. head of mid-sized Swiss bank Vontobel, told Wegelin’s non-American business has bro- At the St. Gallen playhouse through Reuters in February. “If it does not become a ken with that philosophy. Raiffeisen boss March, a satire called “The End of Money” standard, but just an isolated European solu- Pierin Vincenz raised heckles early last year portrayed a Swiss banker as the bad guy. tion, we should not adopt it ... There is no when he became the first top banker to say The playwright wanted the show to open reason to lapse into panic and search franti- Switzerland will ultimately have to accept in Zurich, the financial capital, but the cally for a Plan B, C or D.” the automatic transfer of bank client data main theatre turned it down. Swiss media Patrick Odier, president of the Swiss to foreign tax authorities. blamed the banks which sponsor the play- Bankers Association (SBA) and senior part- “We are in a real transformation pro- house; the show’s artistic director denies ner of Geneva-based private bank Lombard cess,” he told Reuters. “We grew up with they interfered. Odier, also defends the code of secrecy.

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“Automatic exchange of information goes Many Swiss see foreign attacks on the bankers and another from the big banks.” against the core values of not only the Swiss banks as part of an economic war against a Matter, the banker-politician, agrees: banking service but against the core values wealthy but relatively powerless small state. “The internationally orientated banks are of the Swiss people in general,” Odier said. “There is this deep feeling that we are not making no noise, no complaints. They are He added that automatic exchange of infor- treated right and the only reason Switzerland following the path of least resistance,” he mation with the European Union is not an is being picked on is because we’re so suc- said. “But this is not just about the future of option for Swiss banks because Switzerland cessful,” said Martin Naville, head of the the financial centre, it’s not just about the is not an EU member, so the bloc can only Swiss-American Chamber of Commerce. banks, it’s about the freedom of citizens.” demand equivalent measures such as a with- Figures from the Boston Consulting The potential loss of secrecy hurts big holding tax on savings income that is already Group for 2012 show that the United banks – together UBS and Credit Suisse ex- in place with all EU states. Kingdom, along with the Channel Islands pect European customers to withdraw up to On this basis, banks were prepared to and Ireland, have $1.9 trillion in offshore 65 billion francs ($70 billion) in coming years discuss broadening the existing agree- wealth, a close second behind Switzerland’s due to tax issues. But that represents just a ment, he said, adding: “Swiss banks al- $2.1 trillion. The United States banks about fraction of their total assets; they are far more ways comply with global standards and $600 billion, predominantly in Miami and diversified and less dependent on secrecy their developments.” New York. than small private banks, many of which may In February, Odier wrote to members of struggle to survive. A study by KPMG and TOO SMALL TO SQUEAL the cabinet urging them not to lose sight St. Gallen University showed the number of of the interests of bank clients. His con- Swiss politicians have been drawn into Swiss private banks already fell to 148 in 2012 fidential letter was leaked to Swiss radio, the brawl. from 169 just four years earlier. prompting questions about his stated com- Philipp Mueller, head of the liberal Odier admits there were competing mitment to making sure banks only accept Free Democrats, the party traditionally views in his organisation, but insists the taxed assets in future. closest to the banks, recently complained Swiss industry is united in its core values. Odier says he is committed to that to Odier about confused messages from “There is no dissension on the fact we want change: “We pursue the objective of a finan- his organisation. to remain a very credible, safe, stable and cial centre that does not allow the misuse of “It can’t go on like this,” he told Reuters. predictable financial centre for the future as privacy laws.” “We hear one thing from the private we are today and we want to make sure that business-friendliness prevails.” Raiffeisen’s Vincenz, who sits on the board of the Bankers’ Association, has called for more assertiveness. “We have to be more political. That is difficult for the typical banker. For years, what was wanted here was discretion,” he told a February conference organised by St. Gallen univer- sity alumni. His bank has set up a new sub- group of the Bankers’ Association to repre- sent the interests of Swiss domestic banks.

BATTLE OF THE COMMITTEES As the fight drags on, Finance Minister Eveline Widmer-Schlumpf has struggled to get agreement on a strategy to make sure Swiss banks stop accepting untaxed assets. It doesn’t help that conservatives have resented her ever since 2008, when she CLOUDS OVER ZURICH: In Switzerland’s financial capital, some see bank privacy as a fundamental broke ranks in the Swiss People’s Party to freedom. REUTERS/Michael Buholzer form a centre-right splinter party.

SPECIAL REPORT 5 SWISS BANK SECRECY The battle for the Swiss soul

In November, she set up a working group year, in part because the German Social upheaval that we cannot evade.” to examine how much bank information Democrats oppose a system that lets tax Landolt, who also works part-time as Switzerland shares abroad. The conserva- evaders stay anonymous. a political consultant at UBS, concludes: tives pounced: a deputy from the centre- Mueller and other Swiss politicians have “When a tsunami is coming, we can’t just right Christian People’s Party complained vowed that there will be no repeat of an say tsunamis are banned and think it won’t that the panel excluded banks, persuading emergency law that allowed UBS to hand happen anyway.” the parliament’s upper house to vote for over its client data to Washington. As a a rival task force that would include bank result, the United States and Switzerland Additional reporting by Katharina Bart and representatives. The lower house still has have yet to agree a deal to halt U.S. inves- Oliver Hirt. Edited by Sara Ledwith and to vote on this motion. Widmer-Schlumpf tigations of Swiss banks. Switzerland said Simon Robinson said in an emailed statement she was work- on Wednesday it was considering a solution ing with bankers towards a compromise. likely to involve many banks paying hefty So far, Switzerland has sought bilateral fines and revealing client names, but any agreements with countries, for instance deal will face a rocky ride in parliament. FOR MORE INFORMATION offering to have its banks tax the assets Martin Landolt, the head of Widmer- Emma Thomasson, of foreign citizens without naming them. Schlumpf ’s centrist BDP party, says the Bureau Chief, Switzerland Britain and Austria have agreed to this, banks have to reinvent themselves. “There are [email protected] and the government is in talks on similar conservative forces in Switzerland who think Sara Ledwith, Assistant Enterprise Editor deals with Greece and Italy. But Germany they are doing something good when they [email protected] – the country with the most offshore Swiss defend the status quo, when they defend bank Michael Williams, Global Enterprise Editor bank accounts – threw out the idea last secrecy ... and don’t understand that this is an [email protected]

FORTRESS: The Swiss are proud to store more than your money. A secret bunker in the Alps houses a “digital genome” which will provide the blueprint for future generations to read data stored on defunct technology. REUTERS/ Arnd Wiegmann

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