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Swiss Banking Norms: Facts and Myths

Swiss Banking Norms:  Facts and Myths

By Nidhi Mardi

Edited by Namitha Sadanand, Associate Editor, The Indian Economist

“Instead of digging for gold, get back 1000 tons of gold worth black money stacked into Swiss Banks over which India is subject to global mockery”, roared PM Narendra Modi in his campaigning speech a few months back, highlighting how tackling corruption will be a prime target of his party’s agenda. The hue and cry had already begun when in 2006 a report by the Swiss government titled the Swiss Banking Association report, revealed that $1456 billion worth of Indian black money in its accounts, which is today estimated to be around $2 trillion. The newly elected government has already taken baby steps by creating a task force comprising agencies such as the Enforcement Directorate, the Income Tax Department and Directorate of Revenue Intelligence with the prime agenda of tracing black money derived from corruption, ‘hawala’, terrorist financing etc. deposited in off-shore tax havens like the Swiss Bank. However the big question is-what makes Swiss bank accounts a suitable resort for black money? The answer lies in taking a look at some important aspects of Swiss Banking regulations.

The first aspect to be noted is privacy. The Swiss banker’s requirement of client confidentiality is found in Article 47 of the Federal Law on Banks and Savings Banks, which came into effect on November 8, 1934. The article stipulates that, “anyone acting in his/her capacity as member of a banking body, as a bank employee, agent, liquidator or auditor, as an observer of the Swiss Federal Banking Commission (SFBC), or a member of a body or an employee belonging to an accredited auditing institution, is not permitted to divulge information entrusted to him/her or of which he/she has been apprised because of his/her position.” Thus Swiss law in a way forbids its bankers from revealing clients’ account details and other confidential information in any manner, the violation of which leads to immediate prosecution by the Swiss public attorney. A banker violating Swiss banking regulations faces upto six months in prison and a fine upto six months prison and a fine upto 50,000 Swiss francs.  These stringent secrecy norms prevent bankers from revealing any information to a third party, including the Swiss Government.  There is, however, an exception to the secrecy norm, wherein substantial criminal allegations must be brought forth before national as well as foreign government agencies can be allowed access to information. These criminal activities include drug trafficking, insider trading as well as organized crime.

The second important reason to emphasize is the low risk involved due to revised Depositor Protection norms of Swiss Banks. Depositor protection in Switzerland is governed by the Swiss Bankers Association’s self-regulatory Depositor Protection Agreement; depositor protection has been suitably strengthened and has been codified into the Swiss Banking Act with a few additional requirements since July 1, 2004. These regulations are even applicable to non-bank security dealers. Protecting depositors is vital in maintaining public confidence in the Swiss banking system. Another Depositor protection Agreement was set up by the Swiss Banking authority with its member banks in 1984, which guarantees that even in case of a bank failure, depositors will rapidly receive their legal privileges. This is further strengthened by Swiss law which demands all banks to have high capital adequacy.

Further, the Swiss franc is considered to be one of the world’s premier currencies with virtually zero inflation and has been historically backed by at least 40 percent gold reserves.  Switzerland has had an extremely stable economy and infrastructure for many years and hasn’t been at war with another country since 1505. Hence for a person overseas who is not engaging in a significant criminal activity, Swiss Bank’s privacy norms ensure that it’s highly unlikely anyone can ever find out about his/her account. One also enjoys inheritance tax exemption. Though Swiss residents have to pay 35% tax on the interest and dividends they earn, non residents do not have to pay any such taxes except Swiss Withholding Tax and EU withholding tax applicable in only few cases.

A customer does not have to travel to Switzerland to open an account with Swiss bank. It can be opened through an exchange of correspondence between the bank and client. A representative is usually sent from their local office to collect and verify the necessary documents. A call to the bank is enough to collect and deliver cash from doorstep. The banks also do not follow a strict due diligence procedure in contrast to Indian banks. According to Swiss Bankers Association, a professional organization of the Swiss financial centre, any adult person can open an account with a bank in Switzerland. Some private banks in Switzerland don’t even require a minimum deposit for an ordinary current or savings account.

However one needs to debunk myths like the existence of anonymous accounts which does not exist in Switzerland; banks need to know the client before opening an account, Even numbered accounts, where business is carried out under a number or code instead of the customer’s name, are not anonymous. These numbered accounts are also not allowed for Global cash transfers.  Hence the concept of anonymous Swiss Bank accounts is but a myth created by thrillers and the media to hype the idea of corruption. The high level of confidentiality offered to domestic and foreign customers is not absolute and does not necessarily shield criminals, against popular belief. Thus, though Swiss Banks offer a high degree of privacy, their norms are neither lax nor promote corruption. They sure are a refuge for many who seek solace in the Swiss banking experience, in contrast to stringent Indian banking regulations and its stringent due diligence procedure. Only time will tell how well the newly elected Modi government negotiates with the Swiss banking authorities to fulfill its agenda of tracing millions of dollars’ worth of Indian black money in Swiss bank accounts.

Nidhi is currently pursuing Economics in Lady Shri Ram College, Delhi University. She has a keen interest in global economic affairs. An avid reader, she loves writing on various topical issues in economics, politics and international affairs. She loves travelling and considers herself much of a movie buff.

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