Switzerland is a country famous for its beautiful landscapes, swiss alps, cheese & chocolates. But there is one more thing that makes this country a choice for the ultra-rich around the globe. It is Swiss banks. Swiss banks are famous for their privacy, confidentiality, security, and service. We have seen and heard about people involved in unlawful activities using Swiss banks. From Hollywood movies to parliaments of many countries. But have you ever wondered how a small & neutral country like Switzerland established its banking that allured mega-rich people from all over the world? In this story, we’ll understand why mega-rich love Swiss Banks. How a small country became one of the famous banking hubs? What are the benefits of Swiss banks that other banks can’t provide? And finally, we will see some dark sides and how it impacts the global financial system.
The Beginnings
Switzerland has a long history of banking, dating back to the 16th century when Swiss merchants and bankers began offering financial services to wealthy European families. This marks the beginning of Switzerland’s reputation as a safe haven for money. Then in 1748, the Lombard loan was introduced in Switzerland, allowing customers to borrow money using securities as collateral. This financial innovation became a cornerstone of Swiss banking. By this time, there were no big income taxes in many countries and the purpose of Swiss Banks was to provide security. Wealthy people were using Swiss banks as safety from wars and political disputes in their nations.
In 1815, Switzerland’s international neutrality was established by the Congress of Vienna. This brought a lot of money to Swiss Banks. Its banking secrecy became a way to build an empire similar to other European countries like France, the United Kingdom, and Spain. In 1907, the Swiss National Bank was formed. It helped to stabilize the country’s currency and establish a reputation for financial stability. The Swiss Bank Corporation and Credit Suisse were also founded during this period and became major players in the banking industry.
During World War I, Swiss bankers went to France as well to advertise the Swiss banking system. It then followed a lot of wealthy people shifting their valuables to Swiss Banks. By this time, countries started to put income tax to support the war. And Swiss banks’ privacy and security helped people to avoid taxes. In 1934, Switzerland introduced the Swiss Bank Secrecy Law to maintain the anonymity of the client. After this law disclosing the identity of a client without their consent is considered a crime. Since then Switzerland has become the Tax Haven for many wealthy individuals around the globe.
Modern-Day Swiss Banking
Throughout the 20th century, Swiss Banks attracted a large number of foreign depositors to avoid paying taxes in their home countries. Wealthy people saved money on taxes and the Swiss banking industry became more prominent. Today the banking industry in Switzerland contributes 10% to the GDP. But in recent years as technology took its leap, and now every transaction is recorded with almost all bank accounts. And that’s why it’s becoming hard for people to send their money to Swiss bank accounts without paying taxes. Getting money from undisclosed Swiss accounts without paying taxes is equally hard
Apart from this, foreign governments are putting more pressure on Swiss banks to disclose foreign nationals’ banking accounts. After the 2008 financial crisis, Swiss Banks were scrutinized for tax evasion and money laundering reasons. After this Switzerland agreed to cooperate with international tax authorities and become more transparent. Switzerland signed the U.S. Foreign Account Tax Compliance Act (FATCA) to disclose the US client information to the IRS if the client provides consent.
In 2018, Switzerland’s parliament passed a new law where banks can share client information with foreign authorities in case of suspected tax evasion. Swiss banks also introduced KYC and made it mandatory to declare the source of money before opening Swiss bank accounts. Recently during the Russia-Ukraine War, Swiss banks had to stop maintaining accounts for Russians after sanctions were imposed from Europe.
Benefits of Swiss Banking
Despite the recent changes in Swiss banks to introduce more transparency and support foreign authorities, Swiss Banks are still a major choice for many wealthy individuals in the world.
Privacy
The first reason for this is Privacy. According to the Banking Law of 1934, unless there are legal concerns that are justified in a Swiss court, Swiss banks can not reveal the identity of a customer without their consent. If anyone is breaching this law, they will be subject to a fine of 250K Swiss francs and jailed for up to 5 years. This law is the main reason why people still choose Swiss banks. Privacy protects people in case of wars and economic collapses of countries. It also gives people a shield from unwanted attention in case their income is growing in their home countries. This saves wealthy people from online fraud and gives them a sense of security.
Low-Risk Investment
Another reason is Low-Risk Investment. Swiss banks are required to maintain a high capital adequacy ratio. Money kept in Swiss bank accounts is 100% insured. While in the US, which is the largest economy in the world, FDIC secures deposits only up to $250,000.
Beat the Inflation
Another reason is to beat inflation. Many wealthy individuals still don’t invest all of their money in the stock market and want to keep it safe in saving & checking accounts. In countries where inflation is high, the value of money in bank accounts is decreasing. That’s why people keep their money in Swiss banks where generally the inflation is less than 1% as compared to global 2% inflation.
In fact, in 2022, where countries like the US are facing average inflation of 6.5 & 7%, the inflation in Switzerland is 3.5%. This makes their currency more stable in case of an economic slowdown. In the year 2000, 1 US dollar was equivalent to 1.69 Swiss Francs, in 2023 it’s equivalent to 0.92 Swiss Franc. In the last 22 years, the US dollar has lost almost half of its value compared to the Swiss Franc. And the way money printing is going in developed countries, there is no doubt that this gap will keep rising in the future.
Solid Economy
And finally, people choose Swiss banks because of Switzerland’s Solid Economy. Switzerland is among the least corrupt nations in the world. The country has not been at war for a very long time and maintains positive diplomatic relations with almost every country. While this is not a benefit for people in developed nations, it is a huge benefit for people living in countries participating in wars and having corrupt government policies.
Loopholes in the System
While the Swiss Government has introduced stricter laws to know the identity and source of income of their clients and maintain transparency with foreign authorities. But still, people are using Swiss banks with multiple loopholes in the system. People from countries where direct deposits in Swiss banks are recorded or taxed use Shell companies and trust funds in foreign lands. Swiss banks have a numbered account system where the identity is not disclosed unless criminal charges are proven for tax evasion or money laundering. And that’s why people don’t use their names, instead, they use shell companies and trust funds created in other countries.
People also get the nationality of multiple countries and disclose only single nationality. And many countries don’t have any laws for maintaining accounts with Swiss banks. People set up shell companies and declare them as “Offshore accounts” to avoid taxes and run them through Swiss banks without paying taxes. Also if any account holder gets caught in case of criminal activities or money laundering, then also only the identity is shared with foreign authorities, money will still be maintained and in most cases will be transferred to beneficiaries. With some commission, Swiss banks also issue traveler’s cheques without showing the identity of the account holder. People use this for their daily expenditures. Apart from this, Swiss banks provide safe deposit boxes as well to protect precious assets. These items are not taxed and it’s a generational wealth that is safe with Swiss banks.
Dark Side
While we have seen many reasons why people use Swiss banks. But this whole Swiss Banking System has a few dark sides as well that you won’t hear most often. The first dark side is that the Swiss Banking System is completely biased toward the wealthy. They help rich people to become richer by tax evasion using offshore accounts and bank secrecy laws. The secrecy laws also give rise to money laundering, corruption, and many financial loopholes. You can check the corruption in the recent downfall of the Swiss bank Credit Suisse.
Swiss banks directly or indirectly help individuals in evading taxes, which affects the lives of millions of people in their home country. When the wealthy are not paying taxes Government is not getting enough money to support the welfare programs in the countries. It affects many kids from getting a quality education and a proper life. Countries’ development is affected and this impacts the quality of life for many tax-paying individuals in their countries. This is immoral and a violation of basic human rights.
In the past few years, many governments around the world have tried to impose strict laws on Swiss banks. But at max, they were able to get only the list of wealthy people who have accounts in Swiss Banks, their wealth and source of income are still a big question. Though the Swiss government claims to cooperate with foreign authorities and include transparency in the system, illegal ways always find their way toward the Swiss bank’s accounts.
So that’s about the Swiss Banking System today. Let us know what you think about Swiss Banks in the comments below.