Swiss Banks End Secret Accounts

Date May 5, 1991

In a move aimed at repairing the reputation of Swiss financial institutions, the Swiss Federal Banking Commission announced a plan to eliminate secret Swiss bank accounts by September, 1992.

Locale Zurich, Switzerland

Key Figures

• Elisabeth Kopp (b. 1936), first female justice minister of Switzerland
• Markus Lusser (1931-1998), member of the board of governors of the Swiss National Bank
• Dick Marty (b. 1945), Swiss federal prosecutor whose investigation of Sharkarchi Trading contributed to the scandal involving Elisabeth Kopp

Summary of Event

As part of a long campaign designed to rescue the tarnished image of the nation’s financial institutions, Switzerland, deservedly known as the financial capital of the world, on May 5, 1991, announced that it was abolishing the most secret “Form B” bank accounts. Secrecy-loving depositors had long used these accounts to keep their identities hidden by using other agents as fronts.

According to a rule of the Swiss Federal Banking Commission, after June 30, 1991, Swiss banks would not accept any more Form B or “anonymous” accounts. A few exceptions to this ban were allowed. The preexisting thirty thousand account holders were given until September 30, 1992, to divulge their identities or close their accounts. Numbered accounts that keep the owner’s name separate from all other records would still be allowed, provided that the account holder’s name is known by at least two bank officers.

The widely hailed demise of secret accounts came about primarily as a result of concerted international pressures directed against the Swiss haven for financial hideaways. The Swiss authorities gradually responded to these external pressures. In 1986, the Swiss government froze assets of dictators Ferdinand Marcos of the Philippines and Jean-Claude “Baby Doc” Duvalier of Haiti. During the same year, to cooperate with a U.S. investigation, Bank Leu of Switzerland turned over files to U.S. officials for use in the Dennis Levine insider trading case. Insider trading was declared a crime in Switzerland in 1988. In 1990, the Swiss government froze Iraqi assets and made money laundering a crime. Swiss banks were directed to make customers certify that their deposits are not linked with any criminal activities. Then came the abolition of secret bank accounts.

For more than half a century, unpopular dictators of many developing countries secretly amassed wealth, often in violation of their domestic laws. They needed a financial haven such as that offered by Switzerland to protect their treasures, in secret, from instability in their countries as well from the insecurity of their regimes. International networks of drug lords and terrorists also needed financial conduits that permitted anonymous, secret accounts to facilitate their schemes. Secret accounts were no less valuable to wealthy tax evaders, particularly those from European countries with especially high taxes. These accounts were also instrumental for regimes with ambitious military programs that faced international sanctions. The elimination of Form B accounts was expected to curb undesirable financial activities, particularly those related to drug trafficking, terrorism, and international sanction-violating actions.

The tough antilaundering stance of the Swiss authorities was prompted by the international chastening Swiss banks had received after disclosures that their accounts were being widely used by global money-laundering operations, which attempted to hide sources of cash by routing the money through legitimate outlets. The Swiss banking system, renowned for its secrecy, for many years attracted the wealth of dictators and tax-evading wealthy people. In the 1970’s and 1980’s, illegal drug operations found the time-honored Swiss tradition of secrecy very convenient. Until the mid-1980’s, it was a well-founded speculation that drug operations were using the Swiss banking system for their highly lucrative schemes. Hard and concrete evidence started to surface when, in 1987, Los Angeles narcotics officers seized three Zurich-bound suitcases stuffed with $2 million in currency.

Although the entire Swiss financial and banking system was accused of being a haven for dirty money, Switzerland’s Federal Banking Commission, in a twenty-eight-page report published in mid-1989, faulted Credit Suisse in particular. Credit Suisse handled the bulk of the money in that billion-dollar scheme involving the laundering of drug money and was disciplined for inadequately supervising its accounts.

The Swiss government also faced domestic scandals, one of which involved Hans Kopp, a prominent Zurich lawyer and the husband of the nation’s first female justice minister, Elisabeth Kopp. A money-laundering case at the time involved Sharkarchi Trading, a Zurich-based firm dealing in currency. Elisabeth Kopp tipped off her husband, a director and vice chairman of Sharkarchi Trading at that time, shortly before publication of the prosecutor’s report. News of the tipoff resulted in a high-level scandal and the justice minister’s resignation. This incident and others tarnished the image of the Swiss government as well as that of the country’s banking system. This was particularly damaging because Switzerland was considering becoming a member of the European Community (EC) and was working toward conformity with the rules and regulations of that organization.

Reforms of the Swiss banking system reflected Swiss authorities’ response to the changing world around them and their effort to adjust and redefine Switzerland’s role as a leading financial center. The number of dictators trying to hide money was gradually decreasing. The powerful nations of the world were showing their concerns about money laundering, particularly that related to the drug trade. European competition in the international financial industry became increasingly intense. In this context, when the Swiss government announced its plan, and then took steps, to abolish the Form B accounts and pledged broader reform of the Swiss financial system, the news drew global attention.

Earlier Swiss legislation outlawing money laundering that went into effect on August 1, 1990, added teeth to the regulations. That legislation, with a provision of maximum penalties of five years in prison and one million Swiss francs (at that time the equivalent of US $734,200) in fines, covered accountants, lawyers, and portfolio managers who could be linked to any accounts related to money-laundering schemes.

Significance

The most important impact of the Swiss abolition of secret accounts was symbolic. Switzerland, the long-standing financial capital of the world, recognized and poised itself to adjust to ongoing changes in the world in general and in Europe in particular.

As a result of outlawing money laundering and insider trading and of abolishing secret accounts, some loss of existing as well prospective deposits was inevitable. The postreform impact on deposits was less than it might have been, however, because several Switzerland-based institutions, including Bank Julius Baer and Credit Suisse, had anticipated the change and stopped accepting Form B accounts as early as 1989.

Some other countries with extensive offshore banking, such as Austria, Luxembourg, Hungary, and the Bahamas, were expected to attract some of the secrecy-cherishing foreign depositors away from Swiss banks. None of these countries, however, had large-scale global financial institutions similar to those of Switzerland, and their strength, efficiency, and capacity to absorb and utilize deposits were no match for their Swiss counterparts. Furthermore, as the international momentum to eliminate money laundering continued, these countries increasingly came into the spotlight and were pressured to tighten their banking laws. Most began adjusting to the changing global conditions by introducing new regulations.

Private Swiss bankers expressed mixed feelings about the reforms. Many believed that the loss of deposits would be compensated for by improved image. The political stability of Switzerland, the discretion among private bankers, the abundance of sound institutions, the absence of foreign-exchange controls, tax avoidance, and secrecy were some of the factors, they argued, that would help them retain clients and continue to attract new ones. Swiss bankers were aware that Switzerland’s charms, as the grandfather of all offshore investment centers, with 70 percent of total bank deposits belonging to foreigners, were quite faded. The Swiss franc, renowned for its stability, had experienced serious turbulence. The Swiss inflation rate, at about 5 percent, was no longer the lowest in Western Europe. Efforts by the Swiss National Bank to tighten monetary policy were not sure to restore the Swiss franc’s once legendary financial health.

The Swiss reformed their banking system less for domestic reasons than for international ones. With the domestic market cooling, Switzerland had embarked on a large-scale global expansion of investment. The leading Swiss banks owned large brokerage houses in London and New York and managed hundreds of billions of dollars in corporate pension funds worldwide. The Swiss concluded that hiding dirty cash might prove risky and costly for them in the future. They understood their long-term interests in maintaining an image of providing reputable financial services to the world.

In an increasingly globalized economy, Switzerland faced stiff European competition. Frankfurt and Paris as well as London bid for bigger slices of the action in the international financial market. Many European depositors, traditionally concerned about socialism in their own countries, found their domestic banks preferable as socialist tendencies declined worldwide. Tax evasion remained an attractive feature of Swiss banks because it was not yet illegal in Switzerland. Declining top tax rates made tax evasion less worthwhile, however. Switzerland’s share of offshore asset management was two-fifths of the world’s total in 1991, and the nation’s financial services, most of them driven by non-Swiss money, accounted for more than 10 percent of gross national product, employing 120,000 people and adding US$6.5 billion a year to Swiss tax revenue. Swiss stakes in this competition, therefore, were very high.

Switzerland also aggressively sought its share in the international stock market. It lagged behind London and Frankfurt in stock market operations, and the lack of a unified trading mechanism, high trading costs, poor liquidity, inadequate regulation, and lack of dealing transparency handicapped the growth of the Swiss stock market. Proposed reforms to augment the stock market, including the opening of share registers, were intended to attract more foreign vestment and push up undervalued share prices, which were depressed by restricted ownership. Once Switzerland joined the European Community, the big Swiss banks would be well positioned, particularly with their subsidiaries or branches in EC countries. A strong deposit base at home and steady inflows of foreign capital would still be critical for overseas ambitions, particularly as half of Switzerland’s 630 banks and near banks faced the prospect of merger or shutdown in the mid-1990’s.

In the context of this global scenario, improving the tarnished image of its financial institutions was critical to Switzerland. The issue of secrecy, apparently at the core of reform, may have been misunderstood by many. To say that anonymous or numbered accounts were completely secret from the Swiss authorities before this change is incorrect; therefore, the steps to eliminate secret accounts and reform the system to bring everything into the open cannot be taken at face value.

The elimination of Form B accounts, the most secret Swiss accounts, may not have ended secrecy itself, but it did end a myth about such secrecy. The implied secrecy simply never existed. Anonymous numbered or secret accounts were governed by the Due Diligence Convention of the Swiss banks. The convention, a codified standard of ethics of the Swiss banking community first issued in 1977, remained in effect until September 30, 1992. To comply with the convention, banks were required to identify their clients and maintain records of their identities.

For an account representing a legal person (such as an offshore company) opened by a member of an association affiliated with the Swiss Institute of Auditing Firms and Certified Accountants or by a “person bound by professional confidentiality” (in most cases a Swiss lawyer), a bank could shift the burden of due diligence to such an agent. The bank could rely on a written statement made by the agent, using a standard account-opening form (Form B), that the beneficial owner had been identified by the agent and that the identified client was not abusing bank secrecy. Practically, the signing of Form B shifted the bank’s obligation of due diligence to the Swiss lawyer or accountant.

Even before the reform, the identity of the secret owner of an account could be ascertained by a Swiss judge in criminal proceedings, whether initiated in Switzerland or abroad. In the case of criminal prosecution requested by a foreign country, assistance from Swiss banks was required (and bank secrecy possibly lifted) only in compliance with Swiss laws, particularly in the case of acts defined as crimes under the laws of both the requesting country and Switzerland. This created a loophole for cases involving tax evasion or violations of exchange control regulations, neither of which was illegal in Switzerland.

The immediate consequence of the new regulations was that the burden of due diligence was shifted back to banks, which would have to know their clients’ identities systematically. The legal situation of account holders (or beneficial owners), as far as bank secrecy and the criminal sanctions provided for in case of its violation were concerned, would not be affected.

In sum, the abolition of Form B accounts did not change Swiss banking to any great degree. Swiss lawyers are still entitled to serve their clients and to be protected by Swiss professional secrecy as long as such activity takes place in the course of their “typical activity.” The legendary Swiss bank secrecy and legal privilege thus continued unabated, although the myth of the truly anonymous or secret Swiss bank account came to an end.

It is not surprising that Swiss bankers insisted that privacy and discretion would remain key features of Swiss private banking. To minimize the possible impacts of the perceived end of bank secrecy, the Swiss Bankers Association assured the world, in a press release shortly after Form B accounts were abolished, that the decision “has not in any way changed the contents and significance of Swiss banking secrecy.” The reforms did close many of the loopholes used in money laundering by drug lords, terrorist networks, unpopular and militarily ambitious dictators, and tax evaders, thus promoting a global environment for business and commerce that is more conducive to emerging international legal frameworks and norms.

Bibliography

Block, Alan A., and Constance A. Weaver. All Is Clouded by Desire: Global Banking, Money Laundering, and International Organized Crime. Westport, Conn.: Praeger, 2004. Examines the role of international banking in money laundering for organized crime. Focuses on a scandal featuring the Bank of New York, but provides information on Swiss banking practices as well.

Braitman, Ellen. “Swiss Expect to Weather Curbs on Account Secrecy.” American Banker 156 (May 15, 1991): 6. Brief article intended for a general audience discusses the views of Swiss bankers about the potential effects on their business of eliminating secret accounts.

Dunant, Olivier, and Michele Wassmer. “Swiss Bank Secrecy: Its Limits Under Swiss and International Laws.” Case Western Reserve Journal of International Law 20 (Summer, 1988): 541-575. Article written before the reforms provides a thorough legal analysis of banking secrecy in Switzerland.

Gautier, Horace. “Anonymous Swiss Bank Accounts: The End of a Myth?” International Financial Law Review, July, 1991, 9-10. Presents an excellent nontechnical review of the implications of abolishing Form B accounts.

Kochan, Nick. “Service or Sophistication?” Euromoney (July, 1992): 84-86. Analyzes Swiss bankers’ perspectives on how they can succeed in international competition after the reforms.

Lombardini, Carlo. “Swiss Keep It Secret.” International Financial Law Review, July, 1991, 35-37. Discusses the legal implications behind the 1987 agreement between the Swiss Bankers Association and its members on the observance of care in accepting funds and on the practice of banking secrecy.

Ramasastry, Anita. “Secrets and Lies? Swiss Banks and International Human Rights.” Vanderbilt Journal of Transnational Law 31, no. 2 (1998): 325-456. Discusses the uses of Swiss bank accounts by dictators and criminals, which contributed to the Swiss decision to end the practice of bank secrecy.

Swary, Itzhak, and Barry Topf. Global Financial Deregulation: Commercial Banking at the Crossroads. Cambridge, Mass.: Basil Blackwell, 1992. Survey of commercial banking in seven major industrial countries, including Switzerland, examines and analyzes the development, organization, regulatory environment, domestic and foreign competition, relationship to economic activity, and performance of commercial banks. Also reviews effects of various factors on the future role and functioning of commercial banks.