We all know Switzerland is an amazing country, famous for its stunning landscapes, excellent watches, and fine chocolate but this prosperity is built upon a powerful financial sector that has been thriving from Switzerland’s carefully crafted policies first introduced far back in 1515! This article will explore how the Swiss banking system has evolved and the benefits of having it, as well as some premonitions as to how this system may change following the invasion of Ukraine.
What makes Swiss Banks Special?
In The Wolf of Wall Street protagonist, Jordon Belfort travels to Switzerland to meet with private banker Jean Saurel who advises him to open an account in a European relative’s name to avoid taxes. Later, Saurel travelled outside of Switzerland where bank-client confidentiality was not upheld; he was then arrested on U.S. soil for money laundering!
While this scene portrays an exaggerated account of the Swiss Banking system, it does highlight the notoriety of the Swiss banking system in facilitating financial crimes for wealthy clients through a series of historical policies and decisions that can be outlined since 1550:
16th Century Wars of Religion: When Swiss Calvinists fought foreign wars as mercenaries. They brought in large injections to the Swiss economy, this influx of capital was the catalyst for the creation of banks. Calvinists also didn’t have the same taboos toward lending and borrowing, unlike other religions during this time period. Furthermore, Switzerland was a country with relatively poor natural resources – all of these were incentives for establishing a strong financial services sector.
1713: When the Council of Geneva introduced rules prohibiting banks from sharing client information. Many Swiss banking houses were founded in the 18th century, as catholic royalty and European aristocrats fled from social upheaval. This would later be enshrined formally into the law.
1815: Following the defeat of Napoleon Bonaparte, Switzerland signed an agreement with the major European powers in the Congress of Vienna. They agreed to permanently recognise Switzerland as an autonomous, neutral country, which meant Switzerland became a very attractive place to hold wealth later during WW1 & WW2.
The Swiss Banking Act of 1934: Made it a criminal offense for anyone associated with a bank to disclose client information. The law in combination with high taxes and increased scrutiny in other economies prompted large capital flight to private Swiss accounts.
Gold: Switzerland only exited the partial gold standard in the ‘90s, making it the last country to embrace a fiat system, as this was a strict requirement for joining the IMF. Additionally, Switzerland’s large industry in gold storage and refinement has meant that Swiss banks are the leading providers for gold laundering which again improves their reputation as a stable place to hide wealth.
Should You Open a Swiss Bank Account?
There are multiple types of Swiss bank accounts:
Current Accounts, Joint Accounts, Saving, and Investment Accounts – which are standard banking services worldwide. These services are very popular in Swiss canton banks (retail banks).
Numbered Bank Accounts – Typically offered by private banks, these are similar to standard bank accounts but instead of being assigned to your name they will belong to a unique code that represents you. This code is used instead of your name in bank statements, and this should minimise how much information bank employees have on each individual client which means information is unlikely to be leaked. However, the fees associated with opening such accounts are high – reaching up to 2000 francs (£1600) a year!
These were used back in 1910 to avoid the heavy taxes imposed during WW 1. Today, client information will still be stored in physical paper files which should mean only the owners and higher-ups of the banks will know the name of individuals who open numbered accounts.
For citizens of the USA and most Western countries, Switzerland has agreed to disclose all information about anyone who sets up a numbered account, and banks are allowed to ban any international payments for their numbered accounts.
Underground vaults and bunkers – These are the least regulated banking services, but also the most expensive. They are also very inconvenient – it is impossible to spend money when it’s stored as gold 10ft under the ground! Though this might still be an option for someone seeking to discreetly pass on an inheritance.
There is a natural trade-off between privacy and liquidity here, but there do exist alternative methods of storing money that might give the best of both. Particularly, Offshore LLCs and Offshore trusts are now the standard tools for avoiding taxes and can be open in locations such as Luxembourg, Cayman Islands, Belize, and Jersey.
NOTE: Before considering any of this it would be best to speak to a financial adviser or tax attorney if there may be any additional costs with the process, and to check if it is fully compliant with the law.
An End to 500 Years of Neutrality?
Since the 1990s, there has been increasing pressure on Switzerland to get its banks to disclose more information about clients who hold their wealth there. Especially after revelations that Swiss banks such as Credit Suisse have been laundering money for Japanese Yakuza, hiding the wealth of African Dictators, and of course the infamous storage of Nazi Gold during WW2 by the Swiss National Bank.
Following Russia’s invasion of Ukraine, there has been a renewal of interest amongst the international community in tackling these issues and it is likely that the generally conservative Swiss populace is changing its mind too. Due to these dual political and geopolitical incentives, I think there is a genuine possibility that Switzerland’s foreign policy will change significantly over the coming years, and it would not be surprising if this leads to an overhaul of the Swiss banking sector too - considering that the country is a major place for Russian oligarchs to hold their wealth.
Switzerland is currently applying sanctions against Moscow as stringent as the EU’s despite not being a member of neither the EU nor NATO. According to the Financial Times, accounts linked to 223 Russians have already been frozen. This will inevitably hurt Switzerland’s reputation as a secure place to store assets, but it has improved its international reputation and so it is still too early to say whether this decision is best for Switzerland’s economy and banking sector.