What does Banking Secrecy mean in general?
According to Article 43 of the 1934-enacted Swiss Banking Act, if bank employees or other people share or otherwise disseminate information about the account relationship with third parties, they could receive fines or up to five years in prison.
Those who act negligently risk a fine of up to 250,000 francs.
This regulation deals with specific data on specific accounts, balances, and bookings. Bank client confidentiality also protects information about whether someone is connected to a bank. Banking secrecy also generally prohibits cantonal authorities (and only them) from obtaining information about persons liable to income tax from the bank. A violation of banking secrecy is a criminal offence under Swiss law. However, banking secrecy is lifted in certain cases. This includes, for example, when proceedings are initiated against a person for tax fraud, which means that the taxpayer submits false, forged, or inaccurate documents to the tax authorities (but not in the case of tax evasion, which does not involve such practises).
Changes to Banking Confidentiality
Banking secrecy was partially relaxed in 2017, but for the most part, this was only in the area of taxation. More than 100 countries are participating in this transformation process, including not only banks but also major financial centres. In another 90 countries, there are no agreements, but they still apply in full.
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The account information of bank clients (not bank data) is forwarded to foreign tax authorities due to the automatic exchange of information.
If accounts and deposits at Swiss banks are not declared in the tax return, the bank cannot pass on any information to the tax authorities. The banks also cannot answer the question of whether there is a business relationship between the taxpayer and the bank at all.
If the taxpayer has submitted falsified documents such as lists of securities and salary statements with his tax return, this tax fraud can be prosecuted through criminal proceedings. In the course of these criminal proceedings, banking secrecy could be lifted.
If clients are liable to pay tax abroad, Swiss banks automatically send information to the Federal Tax Administration through the automatic exchange of information (AEOI). The information is forwarded to the country where the person is liable to pay tax.
It only remains to be seen whether this is the end of the regulations or whether further relaxations will be made in connection with banking secrecy.
Negative Consequences
By repealing fiscal banking secrecy, Switzerland loses a competitive advantage. Since 2009, the Swiss financial hub has experienced an increase in the number of international clients withdrawing funds. According to the Swiss National Bank, foreign private clients’ securities holdings have decreased from around CHF 680 billion to CHF 510 billion. Since 2009, the percentage of foreign private clients with custody accounts has decreased from 62% to 45%. According to management consultancy Ernst and Young (EY), just 11% of Swiss banks reported asset outflows of more than 10% in 2018. Banks with losses of 2% or more have increased from a third to 42%.
According to EY, overseas institutional clients somewhat offset losses from international private clients. Domestically, things are looking up. Since 2009, domestic private consumers’ securities holdings have expanded from less than CHF 400 billion to more than CHF 600 billion. As Swiss banks establish premises and increase their product offerings, the local market is becoming more tempting.
Without banking secrecy, Swiss banks need to work harder to recruit overseas clients and show that they can succeed without a special tax environment. Not just international private clients’ decreased interest in Switzerland demonstrates a loss in its financial hub status. The Swiss National Bank reports that banks’ share of the Swiss economy’s value added has practically halved since 2007, to 4.8%.
