Switzerland - Epicenter Of Global Corruption

While Swiss citizens still like to believe that their country's foreign reputation is made of chocolate, cheese and the Red Cross, Switzerland is actually best-known as a safe haven for the ill- gotten wealth of elites around the world. The Shah of Iran, Ferdinand Marcos, "Baby Doc" Duvalier, Sese Seko Mobutu and Nicolae Ceaucescu are just a few of the global villains who have hidden their assets in Swiss bank accounts and have cast a dubious light on the mountain republic.

International scrutiny of Switzerland's banking practices is increasing. In 1990, for example, Philippine activists formed a "Swisswatch" group to protest the Swiss courts' uncooperative handling of the Marcos deposits. To the dismay of Swiss authorities and business circles, the activists picketed the Swiss embassy in Manila for weeks and brought the issue to the attention of the international media.

Now, urging their nation to shed its association with the fortunes of deposed dictators, a network of Swiss citizens is pushing for banking law reform to eliminate incentives to relocate flight capital in Switzerland.

Capital flight

"Are Swiss bank accounts only for the very wealthy?" asks an advertisement placed by a Hong Kong-based money analyst in South, a now-defunct magazine once widely read by Third World elites. The answer reads: "Not at all. But they may be one of the reasons why the very wealthy got that way - and stay that way. ... If you're after financial privacy, a Swiss bank account is the world's greatest bargain."

Switzerland today does more foreign private banking than any country in the world - not in per capita, but in absolute, terms. Private banking is the most important service which Switzerland offers to global elites, and arguably its biggest contribution to the impoverishment of the Third World. Given the secretive nature of the business, it is not possible to definitively state the amount of Third World flight capital residing in Swiss bank accounts. Data compiled by the McKinsey consulting firm on the role of the Swiss financial center, however, suggest that private Third World deposits in Swiss bank accounts total roughly 250 to 300 billion Swiss francs. (At present, 1.3 SFr. equals U.S. $1.00.) The Berne Declaration, a non-governmental organization, estimates the inflow of capital flight at 47 million Swiss francs per day.

According to the Economist magazine, "International private banking and tax evasion border on the synonymous." In other words, wealthy private citizens who bring their fortunes to Switzerland will usually not declare these assets to tax authorities. Furthermore, since many countries in the Third World do not allow free export of capital, Third World private deposits are often exported illegally - through private messengers or through illicit business practices such as the underinvoicing of exports or the overinvoicing of imports.

Tax evasion and illegal export of capital are the two most common practices which constitute capital flight. Assuming that the McKinsey studies are correct, approximately one out of every three flight capital dollars from the Third World is handled by Swiss banks. Credit Suisse banker Hans Mast, meanwhile, estimates the Swiss share of worldwide flight capital at 8 to 10 percent.

Banking on reputation

"The police should fulfill their mandate and confiscate unlawfully collected money twice a day," says Hans J. Baer, a well-known Zurich private banker. But let there be no misunderstanding: Baer is referring not to unlawful bank deposits, but to beggars in downtown Zurich. "The beggars and the drug addicts in the middle of the city are a gigantic competitive disadvantage. Our clients notice that Zurich has become less secure and dirtier than any other banking city," he says.

The concerned banker has a point. Heroin addicts in downtown Zurich mar Switzerland's image of financial security which is preferred by wealthy foreign clients. Depositors are attracted to the Swiss financial center because of its social stability, banking know-how, location and legal foundations.

Switzerland's political and social stability is unmatched anywhere in the world. The country is ruled by a coalition government in which all four major national parties, including the Social Democrats, are represented. Since 1959, there has not been a single shift in the party composition of the government. A neutral country, Switzerland has also succeeded in keeping all foreign wars, including both World Wars I and II, outside its borders for almost 200 years. And social unrest is almost unknown. Since the 1930s, business has negotiated agreements with Swiss trade unions that have prevented most strikes. So Swiss banks are probably still the safest place on earth for ill-gotten, or untaxed, dollars.

Swiss banks also benefit from a reputation - built up over more than 200 years - for unique expertise in private banking. Certain banking families in Geneva have personally handled the fortunes of their client families for many generations. Their discretion and security is probably unequaled worldwide.

And these bankers know the business of investing private deposits. Foreign clients walking into a Swiss bank can speak English or Spanish without any problems. Swiss bankers' expertise is complemented by Switzerland's technical infrastructure, ranging from airports to telex communications, which usually run efficiently. And Switzerland's location in the center of Europe allows typcial foreign clients to visit their Swiss bank once a year, on the way to skiing vacations in St. Moritz or Zermatt. This is a comparative advantage with which Luxembourg and other financial centers cannot compete.

Keeping secrets

A legal system which places a premium on banking secrecy is yet another attraction to depositors looking to hide their money. Swiss banking secrecy laws are not stricter than those of their competitors in Austria or Luxemburg - for example, Swiss bankers are required to know their clients, and their Austrian competitors are not. But Switzerland's secrecy rules are more than sufficient to satisfy depositors seeking to conceal their accounts. A few legal clauses play a crucial role in protecting the Swiss banks' interest in the capital flight business:

1. Strong sanctions. Violations of Swiss banking secrecy are punished more severely in Switzerland than in other countries. In practice, however, such violations almost never occur.

2. Aiding and abetting. There are no legal provisions in Switzerland on the handling of flight capital. Instead, a "gentlemen's agreement" monitored by the Federal Banking Commission prohibits banks from actively aiding and abetting capital flight. A Swiss banker is not allowed, for example, to organize a messenger service for private fortunes from, say, Lagos or Manila to Geneva. But the gentlemen's agreement does not prohibit so-called passive aiding and abetting of capital flight. In practice, Swiss bankers are legally allowed to accept foreign deposits even if they know that appropriate taxes have not been paid on them and that they have been exported illegally. As long as the active part in the deal is played by a Hong Kong analyst, by a dubious foundation in offshore Liechtenstein or by a Swiss lawyer, the Swiss banks are not held legally accountable.

3. International legal cooperation. Saudi arms dealer Adnan Kashoggi was brought to trial in New York in 1990 after being arrested in Switzerland and extradited to the United States. Switzerland maintains a good international reputation in relation to extraditions, but a very mediocre one in the case of financial derelicts. In fact, a state judge in Geneva who was supposed to deliver bank documents on Kashoggi's illegal business practices to the New York court simply refused to do so for over seven months. "I would like to send some troops to Geneva to confiscate these documents, but unfortunately I can't," Pierre Schmid, director of the Swiss office of international legal assistance, told Multinational Monitor.

In cases of fraud and corruption, Swiss authorities are slow to accomodate international legal proceedings. Swiss banks and the Marcos family, for example, have been able to block the release of the infamous Marcos deposits to the Philippines for more than six years now. Switzerland does not lend international legal assistance at all in cases of normal capital flight - Swiss law explicitly excludes tax evasion and illegal export of capital from such assistance.

Source - Multinational Monitor