Switzerland is the haven for offshore assets, owing to its veiled banking system that values privacy. The Swiss legislation, Federal Law on Banks and Savings Banks, passed on November 8, 1934, essentially forbids anyone from having access to account holder information, not even the Swiss government. This has lead to the popular trend of hiding assets in numbered accounts, in order to evade taxes, and in some cases to protect looted money. The Union Bank of Switzerland AKA UBS AG (NYSE: UBS) and Credit Suisse AG (NYSE:CS), are the two largest Swiss banks that account for over 50 percent of the balance sheet total of all banks in Switzerland. Both UBS and CS have been the target of investigations by governments from all around the globe.

Economic Strength of Switzerland

Swiss Tax Evasion
Derek Bacon, for The Economist

In the April of this year, Standard & Poor’s Ratings Services released a report, “Banking Industry Country Risk Assessment: Switzerland” which categorized the country as having a low risk economic profile due to diversified high income, through robust financing by government that was both competitive and flexible. The financial system is also furnished with minimal dependence on borrowing and debts, moreover the real estate market is moderately indebted, which reduces the chances of economic imbalance.
Complementing all the economic stability of Switzerland is the status of the Swiss Franc, which has suffered very few swings in its value over the years, on the other hand, the Euro and the US Dollar have gone above and below on all sides. Forex traders all over the world have had the longstanding view that when all other currencies go under, the mighty franc does not just stay put, rather it rockets higher.

Spoils of World War II

All this talk of Swiss stability and banking safety easily leads to the logical argument; how much of this economic haven is the direct product of tax evasion assets and spoils of World War II. Swiss banks have faced allegations of destroying records pertaining to assets of Jewish victims of Nazi holocaust. Moreover it is also claimed that art treasuries stolen from Jews alone could be worth up to 65 billion pounds (or 10% of Switzerland’s GDP). Much of this gold came from looting Jews and other ethnic groups who were persecuted in those times.

The research of Volcker committee  (chaired by ex Federal Reserve chairman Paul Volcker), stated that an estimated 6.8 million swiss bank accounts were opened in the period of 1933-1945, out of these 2.7 million accounts and their relevant data was destroyed by authorities during the Holocaust era. The report alleges that approximately 36,000 accounts had a link to victims of Nazi violence. The Swiss Federal Banking Commission (SFBC) has denied and accepted many such claims, and after a decade of negotiations and interim, reports a settlement of $1.25 billion was approved by a US Judge in November 2000. The Swiss banks and the holocaust victims are still embroiled in litigation in US courts. Back in the mid 90’s, US participation in litigation against Swiss banks lead to prolonged tension and misunderstandings between the two countries.

 Tax Evasion Inquiries

“We are the best economy in the world. People admire our democracy; we are a country with many virtues. We are actually the model for the future. Sharing responsibility with the people – that is the future.” These were the words of Ueli Maurer, Defense minister of Switzerland. While the words may sound pompous, the economic stabilty of Switzeland is a fact. The means it uses to achieve this stability are debatable and controversial. Historically, all of the major tax evasion inquiries have been directed to Swiss banks. Tax evasion costs governments $3.1 trillion annually, according to the Tax Justice Network. The banking system of Switzerland allows tax evasive assets to thrive, and therefore has received criticism for as long as one can remember.

In the face of euro crisis and the general slowdown of economy all over the world , the crackdown on tax evaders has heightened. The offices of UBS AG (NYSE: UBS)  and Credit Suisse were raided by French and German authorities in recent months, in attempts to find out information on affluent French and Germans, who evade taxes by stashing money in offshore accounts. Credit Suisse agreed to pay $180 million to Germany to end allegations of tax fraud.

The US was involved in a series of investigations to uncover tax fraud by thousands of wealthy Americans. The dispute led to a settlement in 2009, whereby UBS had to pay $780 million in penalties to the US government. UBS admitted to its misdeeds.

Germany, the most significant trade partner of Switzerland, has had serious issues with the secrecy that surrounds the  Swiss accounts, as mentioned above. But a recent treaty signed by the authorities of both countries seems to send the message that Germany has accepted defeat in face of the inflexible Swiss attitude. A deal that has been termed as ‘rewarding’ to tax evaders and ‘a slap in the face’ of honest citizens, will allow those who have hidden their assets in Switzerland to make them legal, by transferring the tax returns to the German treasury anonymously.  Britain has also signed a similar treaty that attempts to legalize undeclared assets, by payment of a withholding tax.

While the pressure of international investigations continues to rise and some countries resort to compromising with the Swiss government over their controversial banking system, the fact remains that laws that criminalize the disclosure of account holder information, but treat tax evasion as a mere offence punishable by fine, can never constitute a fair financial system. Switzerland may not be responsible for the financial woes of Europe, but the country took years to accept that its banking system needed probing and meanwhile not just built the image of a stable country, but it also taught tactics of tax fraud and asset hiding to the crooks of the world.