Switzerland: Offshore Business Sectors
Switzerland is the world's largest private banking center. It is home to 297 major banking institutions and is estimated to hold up to 35% of the world's private wealth. Assets under management of Swiss banks are estimated to top CHF10 trillion.
In recent years a combination of legislative measures and market forces have re-orientated the Swiss banking services market so that banks cater less and less to the traditional small-to-medium-sized private accounts and more and more to large professional clients for whom sophisticated services are being offered at competitive prices.
One of the driving forces behind these changes has been Switzerland's desire to be seen internationally to be playing a meaningful part in the war against organized crime and money laundering.
Until 2009, the Swiss banking sector was regulated by the Federal Banking Commission (FBC) under the Banking Law of 1934, as amended most recently in 1999. Banking is defined to include all deposit-taking activity, but does not include the issuance of bonds or securities trading. The offices, branches, agencies and permanent representatives of foreign banks are covered by the law. Banks are licensed by the FBC. See Law of Offshore for details of the licensing process, and the FBC's supervisory regime. As of January, 2009, the FBC's role was swallowed up in the newly-created FINMA.
The Banking Law contains stringent provisions to ensure secrecy, which are echoed in the FBC's regulations, and are an important component of Swiss banks' appeal to investors and depositors. The secrecy provisions are subject to limited exceptions contained in the domestic and international legislation that Switzerland has adopted as part of its campaign against money-laundering.
The key pieces of legislation in this respect are the Money Laundering Act 1998 and the Federal Act on International Mutual Assistance in Criminal Matters 1983. The Money Laundering Act in particular has been very effective: it allows penalties of up to USD7m for non-compliance, and in the six months after it came into force assets totalling USD124m were seized. See Law of Offshore and Other International Agreements for further details of these two pieces of legislation.
In June, 2004, new anti-money laundering regulations spelling the end of the legendary numbered account in its traditional format came into force. Although the ordinance requiring, among other things, the ending of entirely anonymous money transfers abroad, was introduced in 2003, the one year transition period ended on June 30, 2004.
In 2001 the European Union began negotiations with Switzerland to attempt to gain agreement for the information-sharing required as part of the EU's withholding tax directive, without which it would not have been effective.
Although the EU declared the Savings Tax Directive a done deal at the beginning of 2003, at least as regards its own members, the reality at the end of the year regarding negotiations between Brussels and Switzerland was that while the EU was trying to make passage of 'Bilaterals II' dependent on a dilution of Swiss banking secrecy, the Swiss were refusing even to begin the process of legislating for the Savings Tax Directive while 'Bilaterals II' remained unsigned.
By February, 2004, the EU was ratcheting up the pressure, with public statements by EU ministers urging Switzerland to change its position. But then Swiss Finance Minister, Hans-Rudolf Merz was sticking to his guns on the issue of separate negotiations regarding security cooperation and tax fraud (part of 'Bilaterals II'). Switzerland had insisted from an early stage that they wanted an opt-out in the area of judicial cooperation, and was continuing to hold its ground on the issue of the Savings Tax Directive, insisting that compromise was reached on the judicial issue before it signs up to the measure.
Finally in May a compromise was reached over the 'Bilaterals II' requirement for information exchange and judicial cooperation over crime, with Switzerland agreeing to provide legal assistance under the terms of the Schengen agreement in cases relating to indirect taxes such as customs, VAT, and alcohol and tobacco levies, but - crucially - being exempted from providing such assistance in casesof direct taxation.
This was enough for the Swiss to be able to accept the Savings Tax Directive, but Brussels had to put off the implementation date of the Directive until July, 2005, to allow time for the Swiss parliamentary process to grind out the necessary legislation. Switzerland's chief international tax negotiator, Robert Waldburger had warned that: "From the Swiss point of view, it's impossible that the January 1, 2005 date will work. If everything goes really well, parliamentary approval in Switzerland will take 12 to 14 months." After last-minute haggling by Italy and Belgium, the Directive entered into force in July 2005.
In January 2009, a Swiss Bankers Association report reflected on Switzerland's success in gaining status as a leading global wealth management centre.
The report stated that the tradition of high-end services, the availability of skilled staff, and a redictable regulatory environment have all contributed to Switzerland’s leading position among global wealth management centres.
"Switzerland provides wealth management banks that are a pillar of market positioning in an increasingly brand-conscious industry. Merging tradition and entrepreneurial spirit has winning ways and, clearly, a profitable edge," the report said.
The report assessed how Switzerland compares to its global peers, in what ways Swiss wealth management banks differentiate themselves, and which strategic responses to industry threats and opportunities they have espoused.
With 9.1% of global assets under management (AUM), Switzerland is among the world’s leading trio of wealth management centres, alongside the United States and the United Kingdom.
It is the world’s leader in offshore private banking, with a market share of 27%. The country’s largest banks, UBS and Credit Suisse, rank among the world’s largest wealth management firms.
At the end of 2011, AUM in Switzerland (securities holdings in bank custody accounts) reached CHF5,300 billion.
In March, 2009, as part of his marked enmity towards Swiss banking secrecy, German Finance Minister Peer Steinbrueck ordered German banks with Swiss subsidiaries to close any accounts - notably those of Liechtenstein foundations - considered to be 'lacking in transparency'.
Also in March, the Swiss Federal Council announced that Switzerland intends to adopt OECD standards on administrative assistance in tax matters in accordance with Article 26 of the OECD Model Tax Convention. The decision will permit the exchange of information with other countries in individual cases where a specific and justified request has been made. The Federal Council has decided to withdraw the corresponding reservation to the OECD Model Tax Convention and to enter into negotiations on revising double taxation agreements. Swiss banking secrecy remains intact, said the Council.