Historically, people used Swiss bank accounts primarily for privacy reasons: banks in Switzerland were governed by strict privacy laws which prevented them from disclosing information about their clients to outside sources like foreign governments and tax agencies. For even greater protection, people could open so-called numbered accounts, those for which banks conduct business with their clients through the account number rather than through the individual’s name. In recent years Swiss banking laws have been adjusted through international pressure and new offshore banking hotspots have sprung up elsewhere in the world, but Swiss banks are still influential in the banking industry because their combination of historical stability and strong (if no longer unlimited) privacy.
– Privacy and Swiss Banking –
The most important attraction of the Swiss banking industry, historically and today, is the strong privacy laws which govern the banking industry in Switzerland. The most infamous use of Swiss banking privacy comes in the form of numbered accounts – accounts in which banks correspond with their clients and refer to the accounts publicly by use of the bank account number rather than the actual name of the account-holder. In practice, however, it is the privacy protections afforded by the Swiss banking industry rather than the use of numbered accounts which gives the greatest benefit to accountholders.
In practice, the protection given by Swiss privacy laws is not absolute. A judge’s order can be issued requiring a bank to disclose information about an accountholder to a plaintiff, such as a tax agency investigating a tax fraud case. These limitations are largely set in place to restrict the abuse of the banking system by money launderers, organized criminal groups, and international terrorist organizations. Although the terrorism concerns are relatively new, use (and misuse) of Swiss banking privacy is not. Nazi Germany, for example, is well known to have used Swiss bank accounts, in part to store proceeds from the confiscation of Jewish properties during the Holocaust.
– Taxation and Swiss Banking –
The most obvious reason to use anonymous banking services, however, is to avoid paying taxes in one’s own country – and, historically, Swiss taxes on interest earned in that country are relatively low as well.
A tax agency with proof that a citizen has committed tax fraud can, legally, go to a Swiss court and apply for an order to have privacy protection lifted on a given accountholder in order to complete its investigation and confiscate taxes owed. However, again, Swiss privacy laws provide much more protection in this respect than those in many countries. Under Swiss law, as in many countries, submitting a deliberately falsified tax return is a crime. However, simply failing to report income, known as tax evasion, is classified as a civil offence and, historically, proof of tax evasion was not sufficient to force a Swiss bank to disclose the identity or details of a client.
– Recent Changes to Swiss Banking –
Switzerland is no longer the pinnacle of the offshore banking industry. New tax and banking havens have sprung up, typically on small, developing island countries like Nauru and the Cayman Islands. At the same time, the entire industry has been placed under strong pressure from the United States and the Organization for Economic Cooperation and Development (OECD) for its potential misuse by organized criminal organizations and, worse, by terrorist organizations.
In response to this pressure, the Swiss have introduced a number of reforms which weaken traditional banking privacy, without eliminating it entirely. Swiss banks can still (in most cases) refuse to supply information about their clients before proof of tax fraud is submitted, but special treaties now govern how they deal with international clients. For example, in 2010 UBS bank disclosed information about thousands of clients after it was caught offering tax evasion packages to American clients. The Switzerland government recently eliminated the distinction between tax evasion and tax fraud where foreign accountholders are concerned (Swiss citizens retain their traditional protections), withholds tax on interest earned by European Union citizens, and Americans opening accounts must guarantee their bank that they are not evading taxes already owed to the Internal Revenue Service (IRS).
To escape some of the restrictions, Credit Suisse itself is now a Singapore-based corporation. New laws have not entirely eliminated the reasons why people use Swiss bank accounts, but they do mean that Switzerland is considered a much more respectable and less seedy element of the international banking industry than some other countries.