Why Swiss banks are no longer so private

Further to the previous two entries about Swiss Banking (the settlements of the Knights Templar and the Protestant Reforms), we move into the 16^th century with Switzerland proving an attractive ground for migration of the Protestants persecuted overseas.

As mentioned, this period created the strong movement towards neutrality from any wars or hostilities overseas – there were still many hostilities over the years between the cantons (states or counties, if you prefer) of Switzerland – and also three other key differences in Swiss life to those of other European nations.

The first is that Switzerland is a decentralised society, ruled from the bottom-up rather than top-down.  Because Switzerland experienced reform in the way they did – with Zwingli’s Protestant charge with the sword replaced by Bullinger’s thrust with the pen – the Swiss became a society that fiercely rejected government state controls. 

The Swiss never wanted to be governed by a central authority, let alone a central bank, and were far happier to run through their individual city governments. The people of Basel did not have an affinity with the people of Zurich, and vice versa, but they also realised that they were stronger as a united group than by running individually.  Hence, the cities created peace treaties with each other and, in so doing, aimed to keep as much personal freedom as possible.

This led to the country becoming one where self-reliance was the key.  Unlike France, Germany and Britain that were being led by monarchs, governments and rulers, Switzerland was led by their citizens in a city and canton based agreement structure.  This is in part why the country has maintained its independence and neutrality, as a society controlled by its citizens rather than its leaders.

A second major difference is privacy.

Switzerland’s policy of bank secrecy is well-known, although it has changed over the past few decades as the central bank has enforced KYC (Know Your Client) rules.  The origins of the individual being sacrosanct relates to the point above, as the instinctual Swiss desire is to protect the private information of the individual from state oppression.

This is why Switzerland became a land where the persecuted could find sanctuary.  From the Knights Templar being eradicated by the French King in the 14^th century to the Huguenots escaping religious persecution in the 16^th century, Switzerland became the place where they could settle safely.

In other words, individuals settled in Switzerland to escape state oppression, and that is why individual privacy is sacrosanct.

As the private banks of Switzerland began to emerge in the 18^th century, it is for this reason that the banks did not have large entrances with logos, but discrete back door entrances with just the banks’ initials on the door.

Hans Baer, a key member of the post-Second World War Swiss private banking scene, said in his biography: “It could happen that a client introduced himself by presenting a bottle of cognac. ‘My name is Hennessey. I don’t want to say anymore. Here is $300,000.’ We accepted the money gladly, thankful for the trust placed in us.”

Unfortunately, this led to the darker side of secrecy, with the Nazis and various dictators using Swiss banks to hide and some would say launder their monies.  This is changing.

The Swiss Bankers Association enforced KYC policies since 1978 that stated that, even if an account is numbered, they must know who the beneficial account holder is.  In 2004, this became a regulatory requirement and, in 2009, the Swiss government abandoned its distinction between tax fraud and tax evasion for foreign account holders.

The historic secrecy from state intervention has still been in play however.  For example, the Swiss joke that the only number that can be found in Roche’s annual report is the year!

This clip is from the brilliant Wolf of Wall Street, which I blogged about six years ago in February 2008

However, in the age of instant real-time communication, even the Swiss are finding it hard to keep anything secret.

“With the increasing intrusiveness of the internet, the only privacy we can protect is what is in our pockets and what is in our minds.”

Georg Krayer, former chairman of the Swiss Bankers Association

This is also why the U.S. government has sought to crack down on US citizens using Swiss private banking and succeeded.

From Forbes just this week:

“Kathy Keneally, Assistant Attorney General for Tax recently told tax lawyers at a Phoenix conference that the U.S. government gave more than 300 Swiss banks until Dec. 31, 2013 to seek non-prosecution agreements if they had “reason to believe” they violated tax laws. Some 106, about 1/3 of the banks, sought to join the initiative, which requires participants to disclose how they helped Americans hide assets, hand over data on undeclared accounts and pay penalties.”

So the Swiss may still be known as a washing machine for overseas assets but this previously held view is no longer valid.

Nevertheless, when discussing Swiss banking, there is a third and final piece of the Swiss bank puzzle and that is the view of money itself.

For years, due to the fierce independence of each City in Switzerland, the Swiss had many differing currencies.  When Switzerland was formed as a Republic in 1848, there were 319 types of coins issued by just as many banks.  This could not work in the newly unified Republic, so the Swiss Franc was introduced in 1850.

The Swiss Franc followed the way the French minted money, using the French standard for silver as the value commodity to book the issuance.  The challenge continued of how to operate a viable currency however.  For example, coins were replaced by banknotes, due to inconsistencies in measuring coins, but each bank could issue its own notes and the viability of the currency depended on the credibility of the issuing bank. 

That is why the Swiss National Bank was founded in 1907.  That was another massive change in Swiss mentality, as giving so much authority to a central power is inconsistent with their fierce sense of independence and decentralisation.

Nevertheless, the Swiss do have some unique quirks as part of this, such as the oldest and most successful surviving community currency in the world: the WIR.

From Real Currencies by Anthony Migchels for Henry Makow

For eighty years a major not for profit, private currency has been operating in the heartland of Europe. In Zurich, almost next door to the Bank of International Settlements in Basel, there is the WIR, turning over the equivalent of almost 2 billion CHF per year.

WIR was founded by businessmen Werner Zimmerman and Paul Enz in 1934. It was a direct response to the Great Depression. They built on the legacy of Silvio Gesell, whose thinking also was the basis for the famous Wörgl Scrip and today’s German Regional Currencies, like the Chiemgauer.

Silvio Gesell is in fact the Patriarch of what I suggest should be called ‘German Economics’ or ‘Interest-Free Economics‘, the theoretical basis for the anti-usury movement. His analysis of Usury inspired both Gottfried Feder and Margrit Kennedy, two other leading lights of the European anti-usury movement. He also had interesting and much needed ideas about land reform.

Where the Wörgl and the Chiemgauer were/are backed by national (banking) currencies, the WIR goes where nobody before dared to go: it is basically Mutual Credit. Mutual Credit based currencies are nowadays used in Barter organizations world wide. Barter in this sense is a misnomer, they do use a means of exchange but not the national currency. WIR is undoubtedly one, if not the first Mutual Credit facility in the world and most certainly the longest surviving one.

Nowadays WIR turns over a little less than 2 billion WIR (1 WIR = 1 CHF) per year. Because many transactions involve maybe 25 to 50% in WIR while the rest is settled in CHF (Swiss Francs), real turn over generated by WIR is maybe up to three times higher. It has 1 billion of WIR in credit outstanding.

Transactions are settled with the use of debit cards or with their on-line banking system.

WIR is operated for the common good and not for profit. About 62,000 small and midsized businesses participate. There are six regional offices through the Swiss republic.

This is the thrid in a five-part series on Swiss Banking:

1. The Knights Templar (1300s - 1400s)
2. The Protestant Reformation (1400s - 1600s)
3. Medieval Independence (1600s - 1800s)
4. Industrialisation (1800s - 1900s)
5. The Modern World  (1900s - 2010s)