[The following excerpted from The International Man’s recent article, “Switzerland’s Struggle Against Fiscal Imperialism” | For the original article in entirety, click “Read More” below]
Nick Giambruno: Today we’re going to talk about what has happened in Switzerland in recent years. Roland, thank you for joining us. First, why don’t you tell us a little bit about your background?
Roland: I have been in banking and asset management in Switzerland all of my professional life. When I started my investment advisory service, there was not much regulation in the industry, and it was relatively easy to do business. But over the years, it has gotten very difficult; today everything is regulated. So the evolution hasn’t been good. I am happy that I don’t have to start a business again, because it is pretty much impossible to do it the way I did it.
Nick: What is the source of this negative change?
Roland: I think it all started out with the UBS case. Everybody knows about what happened: UBS got into trouble because they violated foreign laws—but not Swiss laws. And since UBS is the biggest Swiss bank, the case helped the US get the ball rolling to attack the Swiss banking system as a whole.
Nick: Let’s take a step back. What makes the Swiss banking system unique in your opinion?
Roland: It goes back to before World War II, when the Swiss banking law was enacted. The Swiss bank secrecy was put in place mainly because of the situation in Nazi Germany, where the Jewish community was looking for a safe haven for money. That was the origin of Swiss banking secrecy, which ever since has been a successful Swiss banking formula.
Today, Swiss banking secrecy no longer exists except for Swiss citizens. There’s no place in Switzerland one can find a bank that would open an account today that is not declared in the country where the client comes from.
How long will Swiss banking secrecy last for Swiss citizens? We don’t know, but I think it is under threat from the Socialist Party, which works very hard at getting the Swiss banking secrecy removed for Swiss citizens as well.
Nick: I think one of the most offensive aspects of this whole episode is foreign countries imposing their own laws on Switzerland. Now, if a foreigner has an undeclared bank account in Switzerland, it should be the responsibility of that foreign citizen to deal with his own obligations within his own country. It should not be the duty of Switzerland to make sure that clients comply with whatever the bureaucrats in their home country have decreed.
Roland: Because the US dollar still denominates most international trade—be it in energy or whatever—nobody can live without the US dollar. I mean, no bank can live without the US dollar, and therefore the US has a very easy task to bring down any non-complying bank wherever it does business.
This actually happened to the oldest Swiss bank, Wegelin. That bank thought they could survive without the US dollar because they had no assets in the United States. They were making a terrible mistake, because the US government warned all banks: Any bank that deals with Wegelin is in violation of US law. As a consequence, no bank dared to deal with Wegelin anymore, and Wegelin, the oldest Swiss bank, finally went out of business. The Bank Wegelin case was an extreme example that taught a lesson to the industry: Every bank targeted for violating US law abroad has no chance to survive US prosecution.
Nick: I think that’s a very important point that you make. We’re looking at a bank—Bank Wegelin—that had no branches in the United States, no physical presence in the US. But the fact that the US dollar is critical to not just to US banking, but also for international trade, gives the US government enormous power. The reality is that any bank that wants to do any sort of international business needs to use the US dollar—and it can only use the US dollar if it has the US government’s blessing. If they take away that blessing, it’s an economic kiss of death to a bank—even a bank that has no physical infrastructure in the US. I think that’s the lesson from Bank Wegelin.
It’s just astounding that the oldest bank in Switzerland was shut down by a foreign government. The oldest bank in the US is the Bank of New York. Just imagine if the Chinese were able to shut down the Bank of New York with the snap of their fingers because they didn’t comply with Chinese law.
Do you see other countries in view of what the US is doing—abusing its role as the custodian of the world’s premier reserve currency—and pushing them to create a system that isn’t fraught with political risk coming from the US government?
Roland: This is blackmail, and unfortunately, Switzerland cannot afford to resist it. This is because we have major global corporations such as Nestlé, Roche, Novartis, and many more. Because Switzerland is so internationally exposed, the Swiss government actually had no option except to submit to the blackmail and issue an emergency order requiring UBS to reveal the names of many of its clients.
FATCA, the Foreign Account Tax Compliance Act, is now in force not only for Swiss banks but actually for any foreign banking institution that wants to deal with US clients. That means banks worldwide must become watchdogs for the US government and become FATCA compliant.
(Editor’s Note: Read this article to understand what FATCA is and why it’s so horrible.)
So, the US government gets what they want, and the OECD learned from this. A new standard within the OECD for the automatic exchange of financial information—based on the US’s FATCA—will come into place around 2018. Switzerland has agreed to this new OECD standard. I think the one country that has not given its full agreement is the US, because the US would have to give the same financial information to foreign governments, and they don’t want to do that.
I think it is known that the US is one of the best countries to hide money, whether that is a corporation in Delaware or whether that is real estate in Florida. It is well known that Delaware is the best place to register a corporation, because nobody can find out who the beneficial owner is. It is well known that Miami was built by Latin American money, but the US government does not care about that. They like the money. They certainly would hate the money to leave the United States and therefore, the US does not really want to join this OECD standard. It wants others to join, but it does not want to follow the new standard itself.
Nick: You raise some important points here. We’ve talked about FATCA a lot on the International Man site. Unfortunately, the battle for FATCA was lost when Vladimir Putin signed a FATCA agreement. After Putin signed FATCA, China also signed FATCA. When you have China and Russia signed up, pretty much every country in the world is onboard. The only countries that will not sign onto FATCA will be ones like North Korea, Iran, and Cuba. Good luck if you want to bank in those countries.
As you mentioned, the OECD is looking at the success of FATCA and wants to emulate that “success” with its global standard. And that global standard has been dubbed GATCA. FATCA pertains to Americans, but GATCA pertains to people of 50 nations, and it is going to grow. It’s a very scary thing.
Imagine if there was something like GATCA when the Nazis were around. The whole point of having Swiss banking secrecy was to provide a safe haven for those under persecution. This is precisely why there is a strong moral argument to be made against GATCA and other privacy-killing schemes.
I have two questions for you. First, is GATCA going to be the endgame because FATCA itself wasn’t (it just paved the way for GATCA)? What comes after GATCA?
If the US does not sign up to GATCA but still effectively forces the rest of the world to sign on to a standard that they themselves will not comply with—a huge example of hypocrisy—does that jeopardize the success of GATCA? That’s the second question. …