Biographical Note Swiss Banking Confidentiality:

Spero C. Peppas, Ph.D., Perceptions vs. Reality

is Professor of
International Business by Spero C. Peppas
and Director of the
Center for International
Business Relations at
Abstract
Mercer University in
Atlanta, Georgia, USA. Switzerland has long been known as a world leader in the financial services
He has taught in the US arena. However, in recent years the Swiss banking industry has come under
and Europe and has considerable attack, in particular with regard to money laundering, Holo-
received numerous caust accounts and European Union tax evasion issues. This article exam-
awards for teaching and
research. He has served
ines Swiss banking confidentiality, reports perceptions of a sample of US
as Marketing Specialist Americans with regard to banking secrecy, and compares and contrasts per-
for the United Nations ceptions with reality. The results of this study indicate that the general pub-
and the ILO as well as for lic holds negative perceptions of Swiss banking practices. This article
the governments of
Senegal and Benin in
should serve to correct misperceptions of Swiss banking held by the public
developing small and at large and should be of particular interest to those involved in Swiss bank-
medium-sized businesses. ing and the marketing of financial services.
His research and
consulting focus on Keywords: Banking, Confidentiality, Numbered Accounts, Secrecy, Swit-
international marketing zerland
and management issues.
Introduction
James Bond aficionados and fans of spy thrillers the world over are familiar
with the concept of “secret” Swiss bank accounts where bad guys anony-
mously open numbered accounts in Switzerland, deposit their dirty money,
make withdrawals using numbered codes with no questions asked, and rest
assured that their identities and transactions are safe from the prying eyes of
the law and from anyone else with an interest in their activities. At least so
the story goes…
To determine whether US Americans believe this scenario to be based
in fact and to see whether perceptions regarding Swiss banking are consis-
tent with current Swiss banking practices, this article examines Swiss bank-
ing confidentiality, reports perceptions of a sample of US Americans with
regard to banking secrecy, and compares and contrasts perceptions with re-
ality. For many years, banking has been an important contributor to the
Swiss economy. In 2000, banks alone employed over 116,000 people, and
value added by the financial sector as a whole accounted for over 10.5% of
the country’s GDP (Swiss financial centre: a summary of important topics
and developments in the financial sector, 2003: Annexe au communiqué de
presse: les banques suisses 2001, 2002). Bank client confidentiality has
done much to contribute to Switzerland’s success in banking and in making
this nation one of the world’s largest banking centres. With approximately
$1.2 trillion in cross-border client assets, Swiss banks hold approximately
one-third of global transnational assets (Fleck, 2003; JP Morgan on the

14 Management Research News

value of Swiss bank confidentiality for the new generation of rich, 2001).
Table 1 depicts local and foreign assets under management by banks in
Switzerland. Swiss Banking
Confidentiality:
Perceptions vs.
Table 1: Assets under Management in Switzerland Reality
(in CHF b)
Foreign Clients Swiss Clients Total
1998 1,862 1,417 3,278

1999 2,136 1,629 3,765

2000 2,358 1,715 4,074

2001 2,316 1,552 3,869

2002 2,005 1,318 3,323

Source: Swiss National Bank in swissmoney research

(http://www.swissmoney.net/aumtabl.htm)

Yet, much to the chagrin of the Swiss, the Swiss banking industry has
come under considerable scrutiny of late, in particular with regard to money
laundering, dormant Holocaust accounts and European Union tax evasion
issues. As a result, Swiss bankers, government leaders, and the Swiss public
at large have been forced to re-examine their country’s stance with regard to
banking confidentiality. Interestingly, despite the negative press and the po-
sition taken by governments of some nations (see, for example, Swiss bank
laws attacked, 2001), according to a poll published by the Swiss Federal De-
partment of Finance in July 2003 (Sondage 2003 du DFF: la tendance reste
la même, mais le scepticisme augmente, 2003), the majority of Swiss con-
tinue to support banking confidentiality and believe that it should be main-
tained.

Even after numerous changes in banking laws and codes of conduct to

help clamp down on and curtail the use of banks for criminal activity (Mo-
ser, 1995), Swiss private and commercial banks, as well as organiastions
such as the Swiss Bankers Association, believe that false perceptions con-
tinue to perpetuate the myth of the Swiss “secret” account and are at pains to
set the record straight. A review of publications and of the official Web sites
of the Swiss Bankers Association, the Swiss Private Bankers Association,
the Swiss Embassy in Washington, DC, and the Swiss-American Chamber
of Commerce points to an ongoing effort to educate the general public in
terms of the realities of Swiss banking confidentiality. With this in mind, the
present study seeks to determine what US Americans believe about Swiss
banking confidentiality, also referred to as banking secrecy, by examining
perceptions with regard to numbered accounts and the effects of banking
confidentiality on legal efforts to bring money launderers and other crimi-

Volume 27 Number 7 2004 15

 nals to justice. To put these perceptions into historical perspective, the study
also probes into beliefs as to the roots of Swiss banking confidentiality.
Swiss Banking
Confidentiality: The Swiss Banking Landscape
Perceptions vs.
Reality Unlike the banking system most prevalent in the English-speaking world
and in Japan, the Swiss banking system is based on the concept of universal
banking. The basic premise of universal banking is that banks can offer a
wide range of financial services, e.g. deposit, lending, asset management,
and brokerage, thus serving the needs of individual and corporate customers
while spreading risk across a broad array of offerings. Despite this possibil-
ity, limited-purpose or specialty banks have nevertheless developed over
time.
The Swiss landscape today is dominated by two well-known “big”
banks: UBS AG and the Credit Suisse Group (Credit Suisse and Credit Su-
isse First Boston). Accounting for over half of the balance sheet total of all
banks in Switzerland, these banks jointly provide asset management, invest-
ment advice, and comprehensive financial services to individual and corpo-
rate clients around the world. Switzerland also has 24 Cantonal (State)
banks, semi-govenmental organisations that focus business activities on de-
posits and lending. There are similar regional banks that voluntarily limit
activities to particular regions of Switzerland, thus building a competitive
advantage by responding to local circumstances and regional business cy-
cles. A fourth category includes Raiffeisen banks, local rural credit coopera-
tives that raise funds locally and lend to members in their region (Swiss
financial center: bank groups, 2003).
Perhaps the least understood category is comprised of the oldest
banks in Switzerland, i.e. the private banks, with names such as Pictet et
Cie., Lombard Odier Darier Hentsch et Cie., and Bank Sarasin & Cie. These
banks are individually owned or owned in partnership, are known for dis-
creetly managing the financial affairs of the world’s wealthy and, as a rule,
do not openly offer to accept savings deposits. The specific status of “pri-
vate banker” requires the presence within the bank of at least one individual
with unlimited liability for the bank’s commitments (Members, 2002).
There are also numerous other banks such as foreign banks (foreign-
controlled and branches of foreign banks), stock exchange banks, and con-
sumer credit institutions that specialise in small loans. See Table 2 for a
breakdown of the number of banks by category.

Table 2: Structure of the Swiss Banking System

Numbers of Banks at Year End
Type of Bank 1997 1998 1999 2000 2001 2002
Cantonal banks 24 24 24 24 24 24

Big banks 4 3 3 3 3 3**

16 Management Research News

Regional banks and savings 117 108 106 103 94 88
banks
Swiss Banking
Raiffeisen banks* 1 1 1 1 1 1
Confidentiality:
Other banks: 214 203 200 204 205 200 Perceptions vs.
Commercial banks 18 15 16 13 12 11 Reality

Stock Exchange banks 53 52 54 57 61 62

Consumer Credit banks 4 3 2 2 - -

Other 5 5 5 5 7 5
Foreign-controlled banks 134 128 123 127 125 122
organised under Swiss
law
Branches of foreign banks 18 21 21 23 25 25

Private bankers 16 16 17 17 17 15

TOTAL 394 376 372 375 369 356

Source: Die Banken in der Schweiz, Swiss National Bank, 2002
** UBS AG; Credit Suisse; Credit Suisse First Boston
* An association with 493 affiliated institutions in 2002 (519 in 2001)
Methodology

Objective of the study

The purpose of this study was to examine perceptions of Swiss banking and
to determine whether such perceptions were consistent with reality. More
specifically, the aim of the study was to examine what respondents knew or
thought with regard to the following five questions related to banking confi-
dentiality:
Question 1: Have you heard the phrase Swiss numbered accounts,
referring to Swiss bank accounts identified by number,
rather than name?
Question 2: Are depositors obligated to reveal their identities to the
bank when opening Swiss numbered accounts?
Question 3: Do you think that Swiss banking confidentiality limits the
efforts of law enforcement to bring criminals to justice?
Question 4: Do you think that Swiss banking confidentiality helps to
protect money launderers?
Question 5: Historically, what do you think was the main reason for the
practice of Swiss banking confidentiality?
• to provide a safe repository for funds from criminal activities

Volume 27 Number 7 2004 17

 • to protect the identities and accounts of German Jews from the
Nazi party
Swiss Banking
Confidentiality: • to increase deposits from non-Swiss persons wishing to protect
Perceptions vs. assets and/or earnings from taxation in their home countries
Reality • other (please specify).
Sampling

The sample used in this study consisted of individuals working for domestic
companies or foreign affiliates in a large metropolitan area in the Southeast-
ern US. As the study focused on the perceptions of US Americans, only the
responses of US citizens were considered. For the purposes of this study, the
survey yielded 145 usable responses. Non-usable responses included 11
from non-US nationals and two from respondents who failed to identify
their nationality.

Measurement Instrument and Methods of Analysis

The survey instrument consisted of a demographic information section and

a section containing the questions reported above. A pilot-test was con-
ducted and a follow-up focus group was used to refine the survey instrument
and eliminate ambiguities. The intent of the survey was to examine percep-
tions and, as such, respondents were instructed to answer all questions based
on what they knew or what they thought. Questions 1 and 2 referenced Swiss
numbered accounts; questions 3 and 4 sought to examine perceptions re-
garding possible negative effects of banking confidentiality; and question 5
queried respondents as to their beliefs in terms of the historical roots of
Swiss banking confidentiality. The demographic section included questions
on nationality, sex, age, and work experience.

All data were gathered in the Fall of 2003. The demographic data
were analysed to provide frequencies. For questions 1 through 5, crosstabs
analysis was used. To see if demographics had an influence on responses,
chi-square analysis was employed to test for relationships at the .01 level of
significance.

Demographics

Of the 145 respondents, 45% were male and 55% female. Ages ranged from
20 to 55 (mean age = 32) with over 70% of the respondents between the ages
of 25 and 39. For the purpose of analysis, ages were grouped into the follow-
ing categories: 20-29 (49.3% of respondents), 30-39 (35.3% of respon-
dents), 40-49 (13.2% of respondents), and 50 or over (2.2% of respondents).
All respondents were currently working and had an average of 9.9 years of
experience. Approximately 6% described their position as upper-level man-

18 Management Research News

agement, 30.5% as mid-level, 30.5% as lower-level, and 33% as other non-
management. All were enrolled in evening programmes at a major South-
eastern US university. Swiss Banking
Confidentiality:
Swiss Numbered Accounts Perceptions vs.
Reality
Results
In reference to Question 1, two-thirds (66.2%) of the respondents replied
that they were aware of Swiss numbered accounts, referring to Swiss bank
accounts identified by number, rather than name. Responses to Question 2,
Are depositors obligated to reveal their identities to the bank when opening
Swiss numbered accounts?, indicated that 66.4% of the respondents be-
lieved that Swiss numbered accounts were anonymous.
A crosstabs analysis of Questions 1 and 2 responses by demographics
is depicted in Tables 3 and 4, respectively. Chi-square analysis showed no
significant relationship between any of the demographic variables and the
responses to Questions 1 and 2. That is, neither sex, age, nor position in the
company significantly affected whether respondents were aware of Swiss
numbered accounts or their perceptions regarding the anonymity of such ac-
counts.

Table 3: Crosstabulation of Responses to Question 1 by Demographic Variables

Have you heard the phrase Swiss numbered
accounts, referring to Swiss bank accounts
identified by number, rather than name?
No Yes
Total Responses to Question 1 49 96
Responses by Demographics:
Sex
Male 20 45

Female 29 51

Position
Upper-level Management 3 6

Mid-level Management 15 29

Lower-level Management 14 30

Other Non-Management 17 31

Age
20-29 27 40

30-39 16 32

Volume 27 Number 7 2004 19

 40-49 3 15

Swiss Banking 50 and over 1 2

Confidentiality:
Perceptions vs. Table 4: Crosstabulation of Responses to Question 2 by Demographic Variables
Reality
Are depositors obliged to reveal their identi-
ties to the bank when opening Swiss num-
bered accounts?
No Yes
Total Responses to Question 2 95 48
Responses by Demographics:
Sex
Male 44 21

Female 51 27

Position
Upper-level Management 5 4

Mid-level Management 29 14

Lower-level Management 32 11

Other Non-Management 29 19

Age
20-29 43 23

30-39 30 17

40-49 12 6

50 and over 1 2

It was also of interest to see if respondents who were familiar with the term
Swiss numbered accounts, as opposed to those who were not, held different
perceptions as to whether holders of such accounts were required to reveal
their identities to bank officials when opening these accounts. An examina-
tion of responses showed that for both groups, approximately two-thirds be-
lieved that depositors could open such accounts anonymously. Table 5
shows a crosstabs of responses to Question 2, based on whether respondents
had heard of Swiss numbered accounts before this survey. Chi-square
analysis showed no significant relationship. In other words, prior knowl-
edge of the existence of numbered accounts did not affect perceptions.

20 Management Research News

 Table 5: Crosstabulation of Responses to Question 2 by Responses to Question 1
Have you heard the phrase Swiss numbered Are depositors obligated to Swiss Banking
accounts, referring to Swiss bank accounts reveal their identities to the Confidentiality:
identified by number, rather than name? bank when opening Swiss Perceptions vs.
numbered accounts?
Reality
No Yes Total
No 30 17 47

Yes 65 31 96

Total 95 48 143

Discussion

Contrary to common depictions in films, etc., and to the perceptions of the

majority of respondents in this study, the legendary Swiss numbered ac-
count is not an anonymous account. Before 1991, it was possible for lawyers
and trust administrators to open accounts on behalf of their clients if they at-
tested that they knew the client’s identity and that criminal activity was not
being concealed behind the anonymity of the client (Braitman, 1991; Gau-
tier, 1991). With the subsequent adoption of “know-your-customer” rule
applicable to all Swiss bank accounts, this is no longer possible (Self regula-
tion: bank groups, 2003). Today, when opening numbered accounts, de-
positors must provide the bank with the same information as when opening
regular accounts. That is to say, the bank requires the identification of the
account holder and the beneficial owner of the funds. The distinguishing
feature of numbered accounts is that access to the name of the account
holder and beneficial owner is restricted to a limited number of senior bank
officers (Arpagaus, 1997: Bank client confidentiality – frequently asked
questions, 2003). Despite Switzerland’s notoriety in this regard, other Euro-
pean countries, such as Austria and Luxembourg, offer depositors the op-
tion of opening numbered accounts.

Effects of Swiss Banking Confidentiality

Results

Question 3, Do you think that Swiss banking confidentiality limits the efforts
of law enforcement to bring criminals to justice?, elicited positive responses
from 76.4% of the respondents, indicating that negative perceptions of the
Swiss banking system with regard to law enforcement were held by the vast
majority of those queried. In terms of Question 4, Do you think that Swiss
banking confidentiality helps to protect money launderers?, an overwhelm-
ing majority (81.9%) of respondents replied in the affirmative, again indi-
cating their negative perceptions.

Volume 27 Number 7 2004 21

 Tables 6 and 7 present a crosstabs breakdown of Questions 3 and 4 re-
sponses by sex, age, and position in the company. Once again, chi-square
Swiss Banking analysis showed no significant relationship between any of the demo-
Confidentiality: graphic variables and the responses to Questions 3 and 4.
Perceptions vs.
Reality Table 6: Cross tabulation of Responses to Question 3 by Demographic Variables
Do you think that Swiss banking confidential-
ity limits the efforts of law enforcement to
bring criminals to justice?
No Yes
Total Responses to Question 4 34 110
Responses by Demographics:
Sex
Male 18 47

Female 16 63

Position
Upper-level Management 5 4

Mid-level Management 6 38

Lower-level Management 11 32

Other Non-Management 12 36

Age
20-29 23 43

30-39 9 39

40-49 2 16

50 and over - 3

Table 7: Crosstabulation of Responses to Question 4 by Demographic Variables

Do you think that Swiss banking confidential-
ity helps to protect money launderers?
No Yes
Total Responses to Question 4 26 118
Responses by Demographics
Sex

22 Management Research News

 Male 13 51

Female 13 67 Swiss Banking

Confidentiality:
Position Perceptions vs.
Upper-level Management 4 4 Reality

Mid-level Management 5 39

Lower-level Management 8 36

Other Non-Management 9 39

Age
20-29 15 52

30-39 9 39

40-49 1 16

50 and over 1 2

Discussion

In Switzerland, the right to privacy is fundamental under the Federal Consti-

tution and is protected under the Swiss legal system (Bank client confidenti-
ality – frequently asked questions, 2003). This right to privacy is extended to
one’s relationship with one’s bank and is viewed as analogous to doctor-
patient and lawyer-client confidentiality. The Swiss Civil Code, the Federal
Banking Law, and the Code of Obligations dictate that bankers have a con-
tractual obligation to protect the privacy of their clients (Dunant and Wass-
mer, 1988). Simply stated, banking confidentiality is the obligation of
banks, their representatives and staff to keep details of clients’ financial and
personal affairs private (Arpagaus, 1997; Swiss banking secrecy, 2003).

A breach of banking confidentiality is a criminal offence, punishable

by up to six months imprisonment and/or up to CHF 50,000 in fines. More
specifically, Article 47 of the 1934 Federal Banking Law prohibits any bank
officer, employee, agent, liquidator or auditor from divulging any informa-
tion that a bank customer has entrusted to them while handling the cus-
tomer’s business.

Despite the perceptions of the majority of the respondents that bank-

ing confidentiality impedes law enforcement efforts and protects money
launderers, it should be noted that banking confidentiality is not absolute. It
can be lifted in all serious criminal legal proceedings and most civil litiga-
tion cases involving, for example, tax fraud, inheritance or divorce proceed-

Volume 27 Number 7 2004 23

 ings, debt recovery and bankruptcies, suspicion of money laundering,
membership in a criminal organisation, theft, and blackmail (Dunant and
Swiss Banking Wassmer, 1988; Aubert, 1998; Nobel and Anderfuhren-Wayne, 2002). To
Confidentiality: this end, Switzerland is a party to numerous international treaties and agree-
Perceptions vs. ments under which bank confidentiality may be lifted. These include, for ex-
Reality ample:
- The Convention of May 24, 1951 between the USA and
Switzerland for the Avoidance of Double Taxation with Respect
to Taxes on Income (revised 1996);
- Treaty of May 25, 1973 betwen the USA and Switzerland on
Mutual Assistance in Criminal Maters;
- The European Convention of April 20, 1959 on Mutual Assistance
in Criminal Matters;
- The European Convention of November 8, 1990 on Money
Laundering and Detection, Seizure and Confiscation of Gains
Resulting from Criminal Activities; and
- The Council of Europe’s Convention No. 141 on Money
Laundering and Search, Seizure and Confiscation of Proceeds
from Crime of May 11, 1993 (Arpagaus, 1997; Roth, 2003).
Under the Swiss Federal Law on International Mutual Assistance in Crimi-
nal Matters, banking secrecy is lifted and legal assistance given to other na-
tions provided the following conditions are met; the act for which a
government requests assistance is also punishable as a criminal offence in
Switzerland; the information provided by Switzerland must not be used for
any purpose other than that for which the original request was made; the
government making the request agrees that it will reciprocate if the need
arises; and, the “punishment” to be rendered by the requesting government
must be deemed proportionate to the offence by Swiss standards (Swiss fi-
nancial centre: a summary of important topics and developments in the fi-
nancial sector, 2003).

A source of international tension regarding the lifting of confidential-

ity revolves around tax evasion (e.g. failure to report income) and tax fraud
(e.g. the use of forged or falsified documents in order to deceive tax authori-
ties). In Switzerland, tax fraud is a criminal offence and, as such, banking se-
crecy may be lifted. In cases of tax evasion, which is not considered a
criminal offence but is punishable through administrative measures, bank-
ing confidentiality remains in place (Bank client confidentiality – legal ba-
sis, 2003). In a January 2003 Memorandum of Understanding with the US,
negotiated within the framework of the long-standing Convention for the
Avoidance of Double Taxation, Swiss authorities agreed to provide admin-
istrative assistance to US tax authorities for “tax fraud and the like,” i.e. abu-
sive acts that are not considered criminal offences in Switzerland but which

24 Management Research News

are judged to be equally as serious as tax fraud (Le secret bancaire en Suisse,
2003).
Swiss Banking
Confidentiality:
Switzerland’s efforts to deter money laundering and criminal use of
Perceptions vs.
its banking system are based primarily on the Due Diligence Agreement
Reality
(DDA) and the Swiss Federal Money Laundering Act. First created in 1977
and revised periodically, the DDA is a banking code of conduct that contains
the “know-your-customer” rules. The DDA obliges banks to verify the iden-
tity of customers and of the beneficial owners of the funds, not to provide ac-
tive assistance in the flight of capital, and not to provide active assistance for
tax evasion (Arpagaus, 1997; Money laundering – frequently asked ques-
tions, 2003).

Adherence to the DDA is monitored by an independent Supervisory

Commission established by the Swiss Bankers Association. In cases of
breaches, the Commission may impose fines of up to CHF 10 million. The
International Committee of the Red Cross and Red Crescent (headquartered
in Geneva) is the named recipient of such fines, minus any administrative
costs (Roth, 2003). The Swiss Federal Money Laundering Act of 1998
obliges all financial intermediaries to adhere to the “know-your-customer”
rule, report any cases of suspected money laundering, and freeze the rele-
vant accounts and assets. Further, the Act sets forth specific documentation
requirements and introduces structural measures such as mandatory staff
training (Roth, 2003). Efforts to combat terrorism, of particular interest
since the events of September 11, 2001, fall under the DDA and the Federal
Money Laundering Act. Contrary to the perceptions of the respondents in
this study, the Swiss banking system has received considerable praise from
key US government figures in terms of the financial fight against terrorism
and money laundering (see, for example, Ashcroft, 2002; Aufhauser, 2003).

Historical Reasons for Banking Confidentiality

Results

With regard to Question 5, Historically, what do you think was the main rea-
son for the practice of Swiss banking confidentiality?, 11.8% of the respon-
dents believed that banking secrecy was established to provide a safe
repository for funds from criminal activities, 27.8% believed the main rea-
son to be the protection of the identities and accounts of German Jews from
the Nazy party, and the majority of respondents, 56.3%, thought that bank-
ing secrecy was practiced to increase deposits from non-Swiss persons
wishing to protect assets and/or earnings from taxation in their home coun-
tries. A small percentage, 4.2%, listed other factors (Swiss neutrality, at-
tempts to boost customer confidence) as historical reasons for Swiss
confidentiality.

Volume 27 Number 7 2004 25

 Table 8 depicts a crosstabs of Question 5 responses by demographics.
Chi-square analysis showed no significant relationship between any of the
Swiss Banking demographic variables and the responses to this question.
Confidentiality:
Perceptions vs. Table 8: Crosstabulation of Responses to Question 5 by Demographic Variables
Reality
Historically, what do you think was the main
reason for the practice of Swiss banking
confidentiality?
To provide To protect To increase Other
a safe re- deposits of deposits
pository German from
for Jews from non-Swiss
criminal Nazis
funds
Total Responses to Question 5 17 40 81 6
Responses by Demographics
Sex
Male 4 17 41 3

Female 13 23 40 3

Position
Upper-level Management - 2 7 -

Mid-level Management 2 12 26 4

Lower-level Management 10 16 18 -

Other Non-Management 5 10 30 2

Age
20-29 10 16 38 3

30-39 5 10 30 3

40-49 - 10 7 -

50 and over 1 - 2 -

Discussion

The aim of banking codes and regulations in Switzerland is to protect cus-

tomer privacy, while at the same time, preventing the use of Swiss banks for
criminal activity. The Swiss have taken allegations in this regard seriously
and much has been done to prevent the use of Swiss banks for such purposes.
While isolated cases of criminal misuse of the Swiss banking system have

26 Management Research News

been reported in recent years, according to some, the fact that such abuses
have been discovered “underlines very clearly that the system in Switzer-
land, with its strong supervision and practical self regulation, is functioning Swiss Banking
perfectly” (Roth, 2003). The Swiss response to the much-publicised Abacha Confidentiality:
scandal of the 1990s, in which $2.2 billion was taken from the Nigerian Perceptions vs.
treasury by that country’s former dictator and deposited in foreign banks or Reality
offshore companies (Usher, 2000), is evidence of Switzerland’s commit-
ment to this effort. Of the many banks worldwide implicated in this scandal,
Switzerland was the only country to publicly name and denounce its own
banks. In this “name and shame” operation, public attention was turned to
19 offending banks, including the banking giant Credit Suisse (Morais,
2001). In addition, the Swiss responded with a new provision in the Federal
Banking Commission’s Money Laundering Ordinance, stipulating that only
top bank management may make decisions to establish banking relations
with politically exposed persons from abroad (Roth, 2003).

Much has been written regarding the origins of banking secrecy for
the purpose of shielding deposits made in Swiss banks by German Jews and
others during the Nazi regime (Arpagaus, 1997; Ferguson, 1998; Guex,
2000; Krayer, 2003; Olsen, 1998). Historically, forms of banking secrecy
had existed in Switzerland for centuries and by the beginning of the 20 cen-
th

tury, banking confidentiality had been firmly established. However, prior to

1934, breaches of banking confidentiality were considered civil, not crimi-
nal, offences and it was not until the Federal Banking Law of 1934 (Art. 47)
that violations were criminalised (Ferguson, 1998). Without doubt, this
change was a result of an attempt to better protect deposits of individuals be-
ing persecuted for racial, political, or religious reasons. However, other fac-
tors also played a role in the enactment of this law.

During the politically and economically unstable WWI era, charac-

terised by increasingly high taxation rates, many Europeans looked to Swit-
zerland as a stable country. Attracted by its neutrality, the solidity of the
Swiss franc, relatively moderate taxation rates, and the practice of banking
confidentiality, foreigners found the Swiss climate ideal for banking invest-
ments (Guex, 2000). As Switzerland’s reputation as an international bank-
ing centre grew, so did efforts on the part of its European neighbours, in
particular Belgium, France, and Nazi Germany, to gain information on the
sources of the flow of capital from their countries. In addition to the reasons
discussed above, Switzerland’s long-standing belief that banking matters
should remain private, coupled with a concern for its own economy in this
difficult period, prompted the Swiss government to enact Article 47 of the
Federal Banking Law of 1934. The new, more severe penalty for breaches of
confidentiality was intended to discourage bank employees from yielding to
increasing pressures to divulge information about their clients (Ferguson,
1998; Guex, 2000).

Volume 27 Number 7 2004 27

 Recently, Switzerland’s banking secrecy laws have come under re-
newed pressure. That is, over the past decade, there has been considerable
Swiss Banking publicity with regard to Switzerland’s non-EU status and possible attempts
Confidentiality: by EU citizens to use Swiss banks and paying agents to protect assets and
Perceptions vs. earnings from taxation in their home countries. In Switzerland, the Federal
Reality Tax Administration has, for many years, levied a 35% withholding tax on
certain types of passive income, including dividends and interest on bank
deposits. Depending on the terms of the applicable double taxation treaties
between Switzerland and a depositor’s tax domicile, depositors may file a
claim for a partial, and in some cases, full refund of the taxes withheld (Swiss
withholding taxes, 2003). However, the European Commission, working
through issues of tax harmonisation, took the position that Switzerland
should lift banking confidentiality for its EU clients and essentially follow
tax policies on transparency agreed to by the majority of EU members. Swit-
zerland, while realising that it must co-exist with the countries that surround
it, has resisted what it feels is coercion to accept policies that would compro-
mise a basic right to privacy and undermine an important sector of its econ-
omy.

After lengthy negotiations, in early 2003 the EU and Switzerland

reached a tentative agreement under which Swiss paying agents would be
under the same tax obligation as EU paying agents and would impose, for
tax purposes, a “retention” on any foreign savings income (i.e. interest) they
pay to anyone resident in the EU. Seventy-five percent of the amount re-
tained would be passed on to the EU and its member states, without names or
other detailed account information. As Switzerland already levies a 35%
withholding tax on interest and dividends from Swiss-domiciled sources,
this agreement is specific to non-Swiss income paid to EU residents through
Swiss paying agents. Beginning in January 2005, tax retention would start at
15%, increase in 2008 to 20%, and after another three years to 35% (Taxa-
tion of savings income, 2003; Draft agreement between Switzerland and the
EU on the taxation of savings income, 2003). It should be noted that, al-
though 12 EU member countries have agreed to share information with re-
gard to the specifics of non-resident accounts, three other EU countries
(Austria, Belgium and Luxembourg) have negotiated tax retention arrange-
ments similar to the Switzerland/EU agreement, permitting these countries
to maintain client confidentiality at least until the year 2010 (EU clamps
down on tax evasion, 2003; Hentsch, 2001).

Conclusion

This article has presented what US Americans believe with regard to Swiss
banking confidentiality, has set forth what Swiss banking confidentiality
actually entails and has reported Switzerland’s stance with regard to this
controversial topic. The general public, as represented by the sample in this
survey, appears to hold strong negative perceptions with regard to Swiss
banking secrecy and its effects. Interestingly, as there were no significant

28 Management Research News

differences across the demographic variables examined in this study, it ap-
pears that gender, age, and level of career advancement do not mitigate these
negative perceptions. Swiss Banking
Confidentiality:
It is likely that misperceptions about numbered accounts have been Perceptions vs.
perpetuated by inaccurate portrayals in movies and books. Further, adverse Reality
publicity with regard to dormant Holocaust accounts, scandals resulting
from questionable bank deposits from political figures, and reports of the
EU’s attempts to have banking confidentiality lifted for its citizens have tar-
nished Switzerland’s banking image and have most probably contributed to
the beliefs held by the respondents in this study.
The review of the literature, set forth above, points out that Switzer-
land has indeed taken the harsh criticism of its banking sector seriously and
has tried to work within the constraints of its own laws to make reforms that
would strengthen its financial sector against real or imagined abuses. De-
spite this, 74.6% of the respondents in this study perceived that Swiss bank-
ing confidentiality interfered with the efforts of law enforcement to bring
criminals to justice and 81.9% believed that money launderers were pro-
tected by the system. The results of this study seem to indicate that US
Americans are either not aware of Switzerland’s bank rules and regulations
or not convinced of the efficacy of Switzerland’s efforts to curtail criminal
abuse of its banking system. It is a long-standing marketing axiom that it
takes considerable effort to improve negative images. In recent years, or-
ganisations such as the Swiss Bankers Association, Swiss Private Bankers
Association, etc., have worked to educate their financial counterparts in
other countries as well as key politicians across the globe with regard to
Switzerland’s position (Roth, 2002). While these efforts have no doubt been
beneficial with respect to these targets, there is still work to be done if Swit-
zerland’s banking sector is to be perceived in a more positive light by the
public at large.

Volume 27 Number 7 2004 29

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Volume 27 Number 7 2004 33