Swiss Banking Secrecy Rule Dealt Setback in Month to Forget

(Bloomberg) -- Two events this month may have finally brought the curtain down on secrecy rules that were the key to Geneva and Zurich’s private banking heyday, when foreign clients could come armed with suitcases of cash and their bankers would look the other way.

Swiss tax authorities announced they’d shared details on 2 million accounts with other countries for the first time as part of rules on information exchanges introduced last year. Then last week Switzerland’s Supreme Court said a former Julius Baer Group Ltd. executive didn’t break secrecy rules, ruling Swiss law didn’t apply at the Cayman Islands unit where he worked.

“Bank secrecy used to be sacrosanct even in Switzerland, but now with automatic exchange of information agreements kicking in and then this decision, we see that’s being steadily eroded,” said Kern Alexander, chair of finance and law at the University of Zurich.

It’s been a rough few years for Switzerland’s banks and confidentiality. U.S. prosecutors in 2013 opened a program allowing Swiss banks to come clean on American clients evading taxes in exchange for leniency.

Credit Suisse Group AG paid a $2.6 billion fine and more than 80 other Swiss banks coughed up over $1.3 billion in penalties. The 272-year old Wegelin & Co. was forced to close after striking its deal with the U.S.

Vontobel Holding AG, a Swiss bank founded 94 years ago, has taken a different approach. It’s registered an entity with the U.S. Securities and Exchange Commission that focuses on wealthy clients liable for U.S. taxes, Bloomberg reported. On Friday, it took over $1.2 billion in U.S. client assets from a Swiss rival.

While the bad October started with the government’s data transfers, the Baer ruling raises difficult questions about how Swiss banks can in future control the flow of information out of tax havens around the globe. Lenders had been able to safeguard foreign clients’ anonymity through the nation’s legendary bank secrecy laws.

According to Article 47 of the Swiss Banking Act first crafted in 1934, anyone who divulges clients’ secrets can be sentenced to five years in prison. The rule was used to convict self-described whistleblower Herve Falciani who gave stolen information about HSBC Holdings Plc clients to French tax authorities.

But last week the Supreme Court put clear geographic limits on Article 47 when it upheld the acquittal of Rudolf Elmer, a Swiss accountant who worked at a Baer unit in the Cayman Islands. The court said that secrecy rules stop at the border and don’t apply to Swiss lenders’ far-flung entities around the world.

‘Not Exportable’

“Banking secrecy is not exportable,” Judge Laura Jacquemoud-Rossari said in the Elmer ruling.

The verdict was delivered after Jacquemoud-Rossari and the other judges expressed their opinions at a public hearing, an unusual format that shows it was intended for a broader audience, said Ursula Cassani, a University of Geneva law professor.

“It’s a precedent as precedents go in Switzerland,” Cassani said.

Swiss banks rely on foreign units in the Caribbean and Channel Islands to attract wealthy offshore customers. Some of the units are created as locally-domiciled entities both to limit a bank’s legal exposure and also to cut its corporate tax bill. But trying to tap those benefits while also invoking Article 47 is greedy, says the University of Zurich’s Alexander.

“They want the limited liability, the tax advantages such a structure offers and then they want to have extraterritorial application of Swiss bank secrecy law,” says Alexander. “It’s trying to have your cake and eat it too, to put it mildly.”

The unpleasant October surprises could continue beyond Halloween. UBS is on trial in Paris over accusations it illegally sent Swiss employees across the border to poach clients -- and launder undeclared money. The Zurich-based bank rejects the allegations.

Silver Lining?

There may be a silver lining if the Elmer case motivates Swiss banks to bring operations and clients back “home,” says Daniel Zuberbuehler, the former head of the Swiss Federal Banking Commission.

“It’s certainly not good when someone gets away with behaving rather unproperly,” he said. “If they want to offer them the maximum protection, they’ll have to tell them: ‘Keep your account in Switzerland, we’re no longer giving you an offshore account.’ So that might even bring business back home.”

To contact the reporter on this story: Hugo Miller in Geneva at hugomiller@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Andrew Blackman

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