The history of secret banking in Switzerland

Offshore accounts are quite the topic of discussion this week, but they’ve long been a haven for the rich and famous. Moving one’s funds to an international bank account is considered a status symbol, given how few are able to do it.

One country’s financial system stands higher than any other, though. It’s the country James Bond banks in, and a country whose banking policies are a closely guarded, tight-lipped shroud of mystery and intrigue.

Everyone the whole world over knows: if you want to hide your money away, you open a Swiss bank account.

Reach for the Moon with Thousand Dollar Bills

It’s estimated one-third of all worldwide funds held in offshore accounts are kept in Switzerland. Swiss banks are known to manage roughly US$2.7 trillion.

A trillion is an unfathomably large number to comprehend. To try and put it into perspective, imagine you had many $1000 bills and even more spare time — if you decided to stack the notes on top of each other, you could create piles thus high:

• 1 million dollars = 4 inches high
• 1 billion dollars = 364 feet high
• 1 trillion dollars = 63 miles high

It can’t be easy to keep such staggering wealth hidden, so how does Switzerland manage it?

The Law of Banking Secrecy in Switzerland

Switzerland made their private banking laws formal in 1934 with the Federal Act on Banks and Savings Banks. The Act made it a criminal offense for a Swiss bank to reveal the name of an account holder. But this was not the beginning of Swiss banking secrecy; the Act merely enforced a tradition that dates back to the middle ages.

Swiss banking secrecy laws can be found as early as 1713 when The Grand Council of Geneva established regulations that required bankers to keep a registry of all their clients but prohibited the sharing of information with anyone except the client.

Under protections afforded by Swiss law, a Swiss bank and its customers share a confidentiality similar to that between doctors and patients or lawyers and their clients.

Swiss Warmongering and Profiteering

During the early days of modern Europe, Swiss mercenaries were notable for their service in foreign armies, particularly those of France. The Swiss were veterans of the Hundred Years’ War and were considered the most elite fighting force at the time. The Vatican’s Swiss Guard is a remnant of this legacy.

When the Swiss came home from their war travels, they needed a place to store their profits, and it was these funds that aided the creation of Swiss banks.

Due to the nature of the source of the money, i.e. warmongering, mercenaries required a discreet banking system to keep their pennies safe. By offering such a service, the Swiss banks attracted the custom of the returning soldiers.

There are many old banks in Switzerland dating from this era. Wegelin & Co., established in 1741, was the oldest bank in Switzerland until 2013 when it restructured. But Hentsch & Cie and Lombard Odier, both founded in 1796, are still open for business.

The Famous Swiss Neutrality

These old and established banks in Switzerland have been aided by Swiss neutrality and a national sovereignty long recognized by foreign nations. The stability fostered an environment in which the banking sector was able to develop and thrive.

Switzerland maintained neutrality through both World Wars and is not a member of the European Union, nor was it a member of the United Nations until 2002, allowing the banks to operate without any outside interference.

The Questionable Past of Swiss Banking

The Swiss are very proud of their history of secretive banking, and rightly so. Though it has led to aspersions being cast by the rest of the world.

Most famous were the inquiries made into the conduct of Swiss banks during the Nazi Germany period, especially regarding funds allegedly stolen from victims of the Holocaust. The Volcker Commission was tasked with investigating the actions of Swiss banks during the second world war but found “no proof of systematic destruction of records of victim accounts, organized discrimination against the accounts of victims of Nazi persecution, or concerted efforts to divert the funds of victims of Nazi persecution to improper purposes.” However, it also “confirmed evidence of questionable and deceitful actions by some individual banks in the handling of accounts of victims.”

The Questionable Present of Swiss Banking

Other European countries had long complained banking secrecy provisions in countries such as Austria, Liechtenstein, Luxembourg, and Switzerland encouraged tax evasion by their citizens. The issue was addressed at the Organisation for Economic Co-operation and Development (OECD) and the G20. As a result, nearly every country agreed to treaties that would insist on the exchange of banking information in cases of suspected tax evasion.

Outside of Europe, the 2001 USA PATRIOT Act also targeted banking secrecy, as the U.S. sought to punish terrorists around the world by following their money trails. The Act created many new rules in an attempt to defeat bank secrecy, including a list of offshore banks that U.S. banks were not allowed to wire money to.

After much pressure from other nations, Switzerland eventually signed an international agreement in May 2015. The agreement aligns Swiss bank practices with those of other countries and, in effect, ends the special secrecy that clients of Swiss banks had previously enjoyed.

The Questionable Future of Swiss Banking

As a result of tax avoidance and terrorist hunts, many of the privileges Swiss banking customers had are being rescinded.

But are these legitimate reasons to pull down the shroud of such a long-standing notion of banking secrecy? Should governments be allowed access to anyone’s financial information, any time they choose? How many innocent customers are victimized in the pursuit of a few criminals?

It seems unlikely that the Swiss will forego such a tradition so easily, and the Panama Leak shows how clandestine offshore banking is still very much a thing… for now.