Switzerland’s Financial Identity Crisis: The Slow Death of a Secretive Tax Haven

Once was a time when what was Swiss was as clear as an alpine lake.

Its Gruyère could be relied upon to be meltingly delicious in a fondue. The finely crafted watches of Zurich could be relied upon to keep the time to the second. And the bankers could be relied upon to keep the wealthy’s cash safe, secure and secret from the eyes of foreign authorities.

As the Swiss celebrate their National Day in 2014, the cheese is still great, the watches still tell the time – but the bankers can’t keep your money hidden anymore.

The world is pushing Switzerland into a financial identity crisis. Its major information-sharing deals with the likes of the US, UK and France have left the country’s publicity-shy account holders nervous.

The whole point of keeping your money in a Swiss bank account was to keep it hidden from your home country’s tax officials. So it’s no surprise that there has been capital flight from Switzerland to other tax havens, where no such information-sharing agreements have been made.

And it wasn’t just the world’s tax dodgers who found shelter in between the Swiss Alps, where the low-tax regime favours non-residents. Cigar-puffing, desk-banging, dissident murdering despots also knew they could find a friendly financier in Switzerland, who would blind their eyes to international sanctions.

Everybody’s favourite sartorial disaster and now-deceased Libyan dictator General Muammar Gaddafi was known to have had funds stashed in Switzerland. So, it is rumoured, does wrinkled Cuban revolutionary Fidel Castro. And dead bespectacled North Korean tyrant Kim Jong-Il did too.

Tax Information Deals

Philippe Zimmermann, a partner at EY Financial Services Switzerland, said that there is a definite “trend to tax transparency”.

“As a result, we see that money is flowing out from several foreign banks which exit the Swiss market due to increased regulation and the costs associated with it,” he told IBTimes UK.

In 2011, the Swiss agreed a landmark deal with UK officials. It allowed the UK tax office HMRC to see what UK taxpayers held assets in Switzerland. This was in order to send them a bill for any past unpaid tax, and to ensure that future payments flowed accordingly.

Similar deals have been forged with France and Singapore as the hunt for Switzerland’s hidden wealth spreads. And the US signed a tax treaty with Switzerland that offered an amnesty to the country’s banks who admitted to helping Americans dodge taxes.

In exchange for immunity from prosecution for assisting tax evasion, the Swiss banks had to tell the US Internal Revenue Service (IRS) how they hid Americans’ assets, hand over data on secret accounts, and pay financial penalties.

Intense Pressure

According to WealthInsight, a financial research firm in London, Swiss banks manage $2.1tn (£1.24tn, €1.56tn) of offshore wealth.

But WealthInsight noted in a report that the “Swiss wealth management model is under intense pressure” because of growing public anger over offshore finance – particularly in light of government austerity measures – and policymakers’ attempts to assuage that rage.

To make matters worse, the Swiss have antagonised their key trading partner the European Union (EU) by more-or-less trashing the current agreement between the two.

Switzerland gets largely unfettered access to the EU’s market of 500 million citizens on the condition that it subscribes to some key principles, including the free movement of labour, and that it pays an entry fee.

But the Swiss voted in a February 2014 referendum to restrict European migration into their borders, which will see the end of free moving labour into the country.

So the EU has initially retaliated by freezing co-operation with Switzerland in certain areas, such as its exclusion from the Erasmus foreign student programme.

And it is weighing up how to respond more broadly, which raises significant questions for the Swiss economy and the financial sector within it.

Around two thirds of Swiss trade is with the EU. The EU, because of the effective Swiss cancellation of its terms of entry to the market, can now remould its agreement with Switzerland – which could lead to new tariffs or a higher entry fee for the central government.

With the current uncertainty around Switzerland’s vital relationship with the EU, and what it all means for the domestic economy, those with money to invest may be doubly put off of Swiss banks when taking greater tax transparency into account as well.

Wrong Path

There is still more money flowing into Switzerland than there is going out. Though the most recent available data is somewhat dated, it is still after the movement towards tax transparency first began.

According to the Swiss National Bank, foreign direct investment into the country was 671.5m Swiss francs (£437m, €552m, $740m) in 2012, up from 606.8m Swiss francs in 2011.

And in spite of the nearing end of Swiss financial opacity, all is not lost for the Swiss banking system, which has produced such big names as UBS and Credit Suisse. EY’s Zimmermann said Switzerland “remains an attractive country for several reasons”.

“A bank relying on discretion and banking secrecy would definitely be on the wrong path,” he said.

“The strength of the Swiss banking sector relies primarily on the quality and skills of its workforce, the stability of the Swiss currency and its political system.

“In addition, the labour market is relatively flexible and the regulatory environment is recognised to be on a high standard and reliable.”

Perhaps the future of Swiss banking lies not in its secretive past, but on a new paradigm of reliability – that rare troika in finance of honest, fair and transparent dealing.