Taunted for shielding "dirty money", Switzerland enforces a series of rules and designates regulatory bodies to stamp out money-laundering and abuse of its hospitality by persons in power who imagined Swiss banking secrecy to be impenetrable.
"DESPITE the picture presented in detective stories, spy films and in the media, anonymous bank accounts do not exist in Switzerland. The names of the holders of numbered accounts are known, albeit only to a small circle of people within the bank. In terms of banking confidentiality, no distinction is made between numbered and other accounts" (for instance, coded accounts - "Tulip" and "Lotus" among others - that emerged when the Bofors gun scandal erupted). The Swiss Bankers Association's (SBA) wry remarks occur in a brochure published to dispel myths about Swiss banks. This umbrella organisation of the Swiss financial centre was founded in 1912 in Basel. Its membership covers almost all banks, auditing firms and securities traders.
The SBA performs a self-regulatory role along with the Swiss Federal Banking Commission (SFBC). Affiliated to the Finance Ministry, the commission issues banking licences and exercises regulatory and supervisory powers under the statutory authority. At the apex is the Swiss National Bank (SNB), which conducts monetary policy. Unlike central banks in other countries, it is involved not in supervision of banks but in conducting monetary policy so as to ensure the stability of the financial system.
Over decades, a mystique has surrounded Swiss banks, some aspects of which were not flattering though most won universal admiration and, what is more, confidence. One-third of the world's private fortune resides in Swiss banks. One estimate put it at $2,500 billion and private Indian deposits at $80 billion. Banking has contributed a lot to the country's prosperity and is a pillar of its economy. It generates about 11 per cent of the gross domestic product (GDP) now as against 5.8 per cent in 1990. The share of assets deposited in Switzerland by resident and non-resident clients is roughly equal, even with a small home market. There are 356 banks in all. Towering above the rest are the two giants, the UBS A G and the Credit Suisse Group. Most offer private banking services. The "private bank" is one whose partners have unlimited personal liability as against the limited liability of corporation. Many of the 15 "private bankers" trace their history to the 18th or 19th century. This is not the only distinctive trait of Swiss banking. Two others are skilful asset management, which created over half of the banks' total added value, and, of course, the famed banking "secrecy".
They are, however, but a part of the ambience in which the entire financial centre works; an ambience, which owes everything to stability - political, economic and fiscal - low inflation and high efficiency; and low interest rates, thanks to a high savings ratio. None of them can explain the massive influx of foreign money but for Switzerland's international position. Its neutrality, maintained with prudence and discretion, is a guarantee against political pressures on banks and depositors.
The Swiss have become highly sensitive to taunts about shielding "dirty money". The CEO of the SBA, Urs P. Roth, rejects criticism of aloofness. "Some of our competitors go to quite some lengths to create this impression... some other financial centres are green with envy at the fact that little Switzerland" corners a 30 per cent market share globally.
The secrecy, as we know from India's own happy experience, is not impenetrable. The Swiss government and courts responded handsomely to India's requests in the Bofors case. The National Front government, headed by V.P. Singh, assumed power in December 1989. It sent a Central Bureau of Investigation (CBI) team to Switzerland on January 24, 1990. On the strength of a letter handed over two days later to Pierre Schmid, then Vice-Director of the Federal Department of Justice and Police, the Swiss government got the entire Bofors money frozen - Swedish kroner 319 million, equivalent to Rs.64 crores in 1986 and more than twice as much now. If the banks' papers reached India only in January 1997 it was thanks to obstruction by later Indian governments, the suspects involved and delays in the Indian judicial process.
In the case of the former President of the Philippines, Ferdinand Marcos, the Swiss government exercised its emergency powers under Article 102 of the 1874 Constitution, much to the annoyance of the banks. The new Constitution of 1989 recasts it in Article 184-187. Assets of President Duvalier of Haiti were also frozen.
The Swiss Federal Department of Finance explains the problems involved. One is that such funds are split up in various countries in banks with an international network of branches, as was done in the Bofors case. Secondly, the "problem is particularly acute" if a foreign serving head of state or government, enjoying immunity from criminal proceedings, is involved. The solution lies clearly in raising hurdles at the outset. No such problem arose in the case of Vladimiro Montesinos Torres, former head of Peru's secret service and presidential adviser. In August 2002 his funds ($77 million), which were frozen in the banks, were returned to Peru. Investigations by an examining Magistrate's Office in Zurich revealed that they represented bribes on arms deliveries to Peru and that moneys were paid into his accounts in Luxembourg and the United States as well.
To this class belong Benazir Bhutto and her husband, Asif Ali Zardari. They were convicted of receiving bribes from pre-shipment inspection companies Cotecna/SGS and sentenced to imprisonment for six months with a fine of $50,000 each by Daniel Devaud, a Swiss Investigating Magistrate, on July 30, 2003. On appeal, the Tribunal de Police in Geneva, comprising three judges and a six-member jury, suspended the sentence on August 13. (The status of the Tribunal de Police is equal to that of a district court in the subcontinent.) Allegedly, the money, thus earned, was laundered in offshore companies. Cotecna/SGS were said to have paid 6 per cent of the amount received from the Government of Pakistan to two companies, namely Mariston Securities and Nassam Overseas, as agreed with the couple. Their frontman is alleged to be Jens Schlegelmilch, a lawyer. The investigation, spread over five years, was thorough. The magistrate also ordered transfer of $12 million from the account of Benazir and Zardari, the amount they had received, to the Government of Pakistan. An amount of $11.75 million was confiscated from accounts with the UBS and Barclay banks in Geneva belonging to companies registered in the British Virgin Islands that had Benazir and Zardari as their beneficial owners. Magistrate Daniel Devaud also ordered confiscation of a necklace worth 117,000, which Benazir Bhutto had bought from the money in one of her accounts. It was found in the vault of a Swiss bank. Currently the case is under examination by the Federal Attorney-General for its transmission to the jury.
What precisely then is the scope of the much-vaunted banking secrecy? Like the physician and the lawyer, the banker is bound to preserve his customers' secrets. France and Austria also make a breach of their duty a punishable offence. Switzerland is unique in making it a cognisable offence, punishable regardless of failure to complain by the aggrieved customer.
The Swiss Federal Act on Banks and Savings Banks was enacted in 1934 in the wake of the rise of Nazi Germany. Its Article 47 is directed primarily against espionage in banking. Nazi agents began bribing bank employees to crack the secrecy of accounts. Once a depositor was known, the agents demanded his assets under threat of reprisals against relatives living in Germany. In those circumstances, to many, the existence of a secret secured bank account made a lot of difference.
Article 47 reads thus: "1. Whoever wilfully divulges a secret which has been entrusted to him in his capacity as a representative, officer, employee, authorised agent, liquidator or commissioner of a bank, as an observer of the banking commission, as an officer or employee of a recognised chartered accountant, or which secret he learned about in such capacity and whoever incites to such divulging of professional secrecy, shall be punished with imprisonment of up to six months or with a fine of up to 50,000 Swiss francs.
2. If the offender has acted negligently, the punishment shall be a fine of up to 30,000 Swiss francs.
3. Breach of professional secrecy remains punishable even after dissolution of the official or private mandate or work contract.
4. The foregoing rules do not affect federal or cantonal rules concerning the obligation to testify and furnish information to a government authority" (Emphasis added, throughout).
This applies to all accounts. The numbered accounts enjoy special legal protection. This provision, as Clause 4 suggests, is subject to a higher duty to testify before a court in appropriate cases. Disclosures to public authorities are mandatory under the law in cases involving inheritance, bankruptcy, debt collection and crime. A magistrate can order disclosure in such cases. Accounts are numbered or coded only to ensure that the holder's identity is known only to a few within the bank.
However, tax evasion is not a criminal offence in Switzerland. Its tax law rests on the principles of self-declaration and respect for "the realm of privacy" which the state must respect. A false declaration is punishable in administrative proceedings. But tax fraud is a criminal offence. So, of course, is bribery of public officials.
There is no absolute anonymity in the numbered accounts. No bank can open an account without knowing who the customer is. Less than 10 per cent of the bank accounts are numbered accounts. They are opened only when the depositor is already a customer of the bank or, in the case of a new customer, when the bank has established through interviews and references, that he has legitimate reasons for wishing to be protected.
NUMBERED accounts exist in Austria, Belgium, Hong Kong, Luxembourg, Singapore and some other countries as well. In some of them the identity of the depositor is unknown even to the bank.
In 1977 there were two major developments that affected the traditional secrecy in Swiss banking. One was the coming into force of the Swiss-American Treaty on Legal Assistance in Criminal Matters. It had been signed as far back as 1973. It contains special provision allowing extensive legal assistance in the prosecution of members of organised crime. The other was formulation of a voluntary code of conduct by Swiss banks. It expired in 1982 but was renewed every five years thereafter. It is policed by the SNB.
One gets a fair idea of the state of things in 20 countries in the mid-1980s from the Staff Study of the Crime and Secrecy: The Use of Offshore Banks and Companies made by the Permanent Subcommittee on Investigation of the Committee on Governmental Affairs, U.S. Senate, published in February 1983 (98th Congress, 1st Session; S. Pet. 98-21). Of Switzerland it said: "With less than 0.03 per cent of the world's population, it is the world's third largest financial power. A large proportion of the money flowing into Switzerland comes from other havens. This is referred to - and may serve legitimate tax minimisation or legitimate concealment purposes - as `layering'. A limited calculation by Professors Blum and Kaplan indicates that about two-fifths of all Swiss banking transactions (the U.K. excluded) are with or via havens. If London, the major offshore financial centre, is included, then more than half of all Swiss transactions are within the less regulated Eurocurrency market." Indeed, 40 per cent of the influx is through foreign banks.
"The Swiss, like financial authorities in London or Singapore, designate themselves as a financial centre rather than a tax haven per se. Fully 3 per cent of its workforce is in banking. Certainly Switzerland's haven characteristics are limited. Switzerland does not charter offshore Swiss companies. Swiss registered companies pay taxes on income and must have local directors. Swiss licensing procedures are strict, and the country's chartered banks operating abroad do so under the controls of Swiss federal authorities; the National Bank and the Banking Commission."
The study cited the code drafted in 1977 entitled "Agreement on the Observance of care by the banks in accepting funds and on the practice of banking secrecy". It was revised in July 1982. It is popularly known as the Convention on Diligence. The following provisions are self-explanatory:
Article 3: "1. Banks undertake not to open bank accounts or securities deposits nor to effect fiduciary investment unless they have ascertained, with such care as can be reasonably accepted in the circumstances, the identity of the person entitled to the funds to be credited or to be invested. 2. When opening an account or deposit as by concluding a fiduciary operation, the identity of the contracting party as well as of the beneficial owner is to be established in accordance with the executive regulations. 3. In case of transactions for large amounts at bank counters, the identity of the contracting party is to be examined."
Article 4 read: "1. In case of doubt, when opening accounts or deposits the banks require a written declaration from the customer as to whether he is acting for his own account or for account of a third party and in the latter case, for whose account. 2. For this purpose the banks use Form A, which is an integral part of the agreement."
Form A obligated the depositor to make this declaration: "The undersigned is aware of the fact that banking secrecy, protected in accordance with Article 47 of the Federal Law on Banks and Savings Banks of November 8, 1934 (as amended on March 11, 1971) is not unrestricted. The organs, employees and mandatories of the bank are liable to give evidence and information vis-a-vis the authorities where federal and cantonal stipulations require their doing so (for instance, in criminal proceedings). This obligation also exists vis-a-vis foreign authorities insofar as the Swiss Confederation grants judicial assistance to the country in question. The undersigned is also aware of the fact that the establishment of accounts and deposits maintained under numbers or passwords is a purely internal measure of the bank affecting in no way its obligation vis-a-vis the authorities to testify or to furnish information."
Article 1 of the code declared the object: "The banks do not support attempts of their customers to deceive authorities in Switzerland or abroad, in particular tax authorities, either by way of incomplete or in any other way misleading attestations."
The simpler new Form A for "Establishment of the Beneficial Owner's Identity"
Article 8 said: "The banks undertake not to actively assist in the transfer of capital from countries whose legislation restricts the investment of funds abroad."
Article 9 dealt with tax evasion: "The banks do not support attempts of their customers to deceive authorities in Switzerland or abroad, in particular tax authorities, either by way of incomplete or in any other way misleading attestations."
But there was also another form, the notorious Form B, which contained a "Declaration on the opening of an account or a deposit by a Swiss national bound by professional secrecy"; generally, a lawyer or an accountant. It read: "The undersigned declares: 1. that he is bound by a legally protected professional secrecy; Art. 21 point 1 of the Swiss Criminal Code. 2. that he is a member of an association affiliated to the ... (name of a representative professional body)... . this capacity, he confirms that the beneficial owner of the assets to be deposited with the bank is known to him personally and that by observing all the care which can be reasonably expected under the circumstances, no fact is known to him which gives indication of banking secrecy being evaded or abused by the entitled party and in particular of criminal acquisition of the assets in question."
Form B, made under Article 6 of the Agreement, permitted banks to trust the bare word of the real owner's "trustee". Small wonder that the staff study found this to be "a large loophole" in the code. Other criticisms concerned flight of capital, tax evasion and insider trading. It was a fertile source of grave abuse. "Variations allow the beneficial owner to be hidden behind offshore companies, for although Switzerland registers no such companies as Swiss, Swiss attorneys are able to purchase companies in Liechtenstein, Panama, the Channel Islands, the Caymans, Liberia, and elsewhere, without leaving their offices. They can buy a Caribbean bank without leaving Zurich. A young lawyer who does not know the ropes can purchase any number of havens establishments by mail simply by responding to advertisements in The Herald Tribune. Certainly Swiss lawyers are as adept as any in `layering' secrecy through complex arrangements of haven nominee companies and accounts."
THE Swiss were not inactive as the abuses piled up. "Knowledgeable Swiss sense that Switzerland, because of its rapid movement to reduce incentives and possibilities for its use as a criminal money haven, has compelled such monies to go elsewhere. Corporate fraud managers and high-rolling financiers are said to bank in the cleverest centre of all, the city of London itself. It is not surprising that the investigator continually encounters the philosophy, `if we don't do it, they will'. This was encountered in London as an excuse for doing nothing by way of enforcement collaboration against offshore crime." On the other hand, Swiss officials were critical of the U.S. not only for not invoking the Treaty "more often but for failing to apply forfeiture to criminal proceeds".
Form B, it was reported, was abolished from July 1, 1991. Banks had to ask Form B depositors to disclose their clients' identity by September 1999 (The Statesman, June 30, 1991). In its present form, the revised code of 1977, is entitled "Agreement on the Swiss banks' code of conduct with regard to the exercise of due diligence". Dated December 2, 2002, it went into force on July 1, 2003.
Article 1 now reads thus: "With a view to preserving the good name of the Swiss banking community, nationally and internationally, with a view to establishing rules ensuring, in the area of banking confidentiality and when entering into business relations, business conduct that is beyond reproach, with an effort to provide effective assistance in the fight against money laundering and against financing acts of terrorism, the banks hereby contract with the Swiss Bankers Association in its capacity as the professional body charged with safeguarding the interests and reputation of Swiss banking: (a) to verify the identity of their contracting partners and, in cases of doubt, to obtain from the contracting partner a declaration setting forth the identity of the beneficial owner of assets; (b) not to provide any active assistance in the flight of capital; (c) not to provide any active assistance in cases of tax evasion or similar acts, by delivering incomplete or misleading attestations."
Form R for "Declaration by Swiss attorney or notary upon opening an account or securities account".
Article 2, adds: "The banks undertake to verify the identity of the contracting partner when establishing business relations with the said partner. This regulation applies to: opening of accounts or passbooks; opening of securities accounts; entering into fiduciary transactions; renting of safe-deposit boxes; entering into management agreements for assets deposited with third parties; the execution of transactions with securities, currencies as well as precious metals and other commodities exceeding the amount of CHF 25,000, cash transactions exceeding the amount of CHF 25,000" (Swiss francs). The new Form A is simpler. Article 5 limits lawyers' right to open accounts on behalf of their clients to these specific purposes only. That is when Form R is used.
The writer heard an extremely lucid account of developments in the last decade from James Nason, Head of International Communications of the SBA, in Basel on September 29. He is, of course, not responsible for any error of fact or comment in this article. The march of legislation is impressive. The Swiss Criminal Code was amended in 1994 to punish money-laundering. More to the point, Article 305 ter was inserted to punish whoever handles money "on a commercial basis and abstains from determining the identification of the beneficial owner with sufficient care and adequate to the circumstances". It recognises a right to reveal to the authorities indications "that assets derive from felony".
The Federal Act on the Prevention of Money Laundering in the financial sector, enacted on October 10, 1997, effectively enforces the motto "know your customer" by a series of rules and designates bodies, which will oversee observance of the laws. The SFBC has drawn up criteria for determining when money-laundering might be taking place - transactions that make no economic sense, withdrawals immediately after deposit, sudden burst of activity, transactions outside the normal business of the depositor. It has, additionally, issued detailed guidelines to banks dated March 26, 1998 to assist them in understanding the complexities of the Act.
In October 2000 the two big Swiss banks and nine other international banks, in cooperation with Transparency International and Professor Mark Pieth, a jurist, launched a set of global due diligence standards known as the Wolfsberg Anti-money Laundering Principles based largely on Swiss regulations. Adherence to them is voluntary.
Finally, on December 18, 2002, the SFBC issued an ordinance "concerning the Prevention of Money Laundering". It defines "politically exposed persons" as "heads of state or of government, senior government, judicial or military officials, or party officials on the national level, or senior executives of state-owned enterprises of national importance" as well as persons with family, personal or business ties to them. Article 17 (2) (g) enjoins "enhanced due diligence obligations" through additional investigations in transactions of higher risk; inter alia where the depositor is a PEP (politically exposed persons). The ordinance, which took effect on July 1, 2003, lists 39 "indicators of money laundering".
It bears mention that on May 1, 2000, the Swiss Criminal Code was amended to punish corruption, including corruption of public officials outside Switzerland. Bribery of Foreign Office-holders is also now punishable.
But, of course, the Swiss law that is most famous in India and elsewhere is the Federal Act on International Mutual Assistance in Criminal Matters (IMAC). Enacted on March 20, 1981, it came into force on New Year's Day 1983, along with a Decree of Federal Council, made under the Act, to fill in the details. It was amended on October 4, 1996, in significant respects, especially to provide elaborate procedures for appeal.
The Federal Office for Police Matters is a division of the Federal Department of Justice and Police at Berne. Under the IMAC, the Federal Office receives requests for assistance "directly from the Ministry of Justice of the requesting state" (Article 29 (2)). They need not be routed through the usual diplomatic channels. Article 17 says that "the Federal Department of Justice and Police shall decide cases under Article 1a." This is a 1996 insertion. Article 1a reads thus: "In the application of this Act, the sovereignty, security, public order or similar essential interests of Switzerland shall be taken into account." The Hindujas invoked this to urge: "If you send the papers concerning the Hindujas to India, Swiss interests will suffer." The courts rejected the plea.
The law is wide in its reach. Article 1l says: "A person pursued within the meaning of this Act is any person suspected, under investigation or affected by a sanction. A sanction is any punishment or (other penal) sanction." The requesting state can as legitimately seek the bank accounts of suspects abroad as it can those of suspects at home.
Four forms of cooperation are provided by the IMAC - extradition of the offender; "transfer of proceedings and punishment of offences"; execution of foreign criminal judgments; and, what concerned us, "assistance aimed at supporting criminal proceedings abroad". This is provided for in Part 3 of the IMAC comprising Articles 63 to 80. Article 63 defines Swiss assistance widely enough to cover acts that "appear to be necessary for proceedings carried out abroad in criminal matters or serve to retrieve the proceeds of the offence". That includes search of persons and rooms and seizure of things, obtaining of evidence as well as handing over the assets "with a view to forfeiture or restitution to the entitled person". Part 1, comprising Articles 1 to 31, contains general provisions applicable to all the four forms of assistance.
Article 67 embodies what is known as the principle of speciality: "Information and documents obtained through the means of mutual assistance shall not be used for investigative purposes nor be introduced in evidence in the requesting state in any proceeding relating to an offence for which assistance is not admissible. Any further use shall be subject to approval by the Federal Office.
"This approval is not necessary: (a) if the facts which are the basis of the request constitute another offence for which mutual assistance would be granted, or (b) if the foreign criminal proceedings is directed against other persons having participated in committing the offence."
The amended Article 65a enables "persons who are participating in a proceeding abroad" to assist in the proceedings in Switzerland and "to have access to the files", save the secret papers themselves subject to the proceedings. After the conclusion of the mutual assistance procedure, the documents or assets seized as evidence "shall be put at the disposal of the competent foreign authority". That is how the Bofors accounts papers were sent to India.
While the 1996 Amendment streamlines the procedure in some respects it also rather widens the ambit of appeals. Section 3 of Part 3 adds Article 80e to 80l on appeals. Decisions of the cantonal authority of last instance or of the federal authority on the conclusion of the mutual assistance proceedings shall be subject to appeal to the Federal (Supreme) Court together with all prior incidental decrees.
The executing as well as the appellate authority and the federal office may impose conditions "totally or partially" on the grant of mutual assistance (Article 80p). They are communicated to the requesting state at the final stage giving it an option to accept or reject stipulations. But, imposition of the conditions by the federal office is also subject to appeal to the Federal Court.
The Federal Supreme Court ruled, on December 10, 1997, in the Marcos case, that Swiss interests do not lie in the rejection of the foreign request necessarily. On the contrary - it is not in the interest of Switzerland to become a safe haven for flight capital or "criminal moneys". This damages its reputation and, with it, the country's interests as well. The court ruled emphatically that this must be taken into account when a decision is being made on the foreign requests for assistance.
IMAC covers tax fraud but not tax evasion. Incomplete, even false, tax returns constitute "evasion" punishable by tax authorities with fine. Falsification of records is the criminal offence of tax fraud. So is "wilful deceit" to evade tax even without tampering with records.
On February 20, 1989, India and Switzerland concluded an agreement by exchange of letters between Ambassador A.S. Chib and the Chief of the Swiss Federal Department for Foreign Affairs, Rene Felber. It was based on IMAC and included offences of bribery, fraud and deception. The Code of Criminal Procedure, 1973 was amended in 1990 to insert sections 166 A and B to enable the Swiss to avail themselves of India's assistance, reciprocally.
This mosaic of laws puts Switzerland at the head of countries determined to stamp out money-laundering and abuse of its hospitality by persons in power who had imagined that Swiss banking secrecy was impenetrable. The Swiss Financial Centre will emerge all the stronger for its greater safeguards for probity.
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