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Event Milan 15 October 2001
The Swiss Financial Centre: Achievements and Challenges
Joseph Deiss, Federal Councillor, Head of the Swiss Federal Department of Foreign Affairs
Is there a more historically relevant place to discuss financial and banking issues than northern Italy? As far back as the eleventh century, the Lombards, whose name was to become synonymous with 'lender', succeeded in reviving the ancient traditions of this activity. In their heyday, they financed kings and princes in return for pledges, a type of loan which still carries their name.
We started planning this "Swiss Plus" event in Milan over a year ago. In view of all the pain and suffering the terrorist attacks caused, we debated long and hard over whether to go ahead. After much consideration we concluded that we should not give in to violence but make a stand for democracy, freedom and a free economic order. Open and transparent communications are an important step towards this, and that is precisely why we are in Milan today. We want to ensure the continuity of such communication and dialogue, although I must say that in the shadow of the events of 11 September it is difficult to switch over to "business as usual".
The Swiss economy has always benefited from the dynamism of Lombardy. The rapid development of the Gotthard pass since the twelfth century has had a direct relation with this. Today, 54 per cent of all Swiss goods and services exported to Italy - our fourth most important trading partner - go to this very prosperous region of Europe.
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However, the Swiss have also shown themselves capable of learning. History does not reveal whether it was the Lombards who taught us the art of banking. But the fact remains that the Swiss have mastered the art to a degree that, today, Swiss banks provide their services throughout world. Their contribution to the world economy is one based on openness and exchange.
Providing the means of payments, providing loans, and organizing foreign exchange, the three traditional activities of banking are sources of value added. However, it must be borne in mind that those who earn a revenue from an activity also carry a responsibility. Switzerland understands this well and knows the consequences. And here again, we can draw from vocabulary which comes from south of the Alps: the word 'bankrupt' originates from the term 'banca rotta' and refers to a time when it was the custom to smash the counter of the banker who became insolvent.
From the earliest times of banking, money and banks have been the object of abuse. Babylonian bankers, for example, were obsessed by the fear of ruin at the hands of unscrupulous customers who tried to cheat them by filling the interior of gold ingots with inferior metals. Nowadays, the scourges are money laundering, organised crime and the financing of terrorism. The world has changed and with it the challenges in international relations. Technological progress and the dismantling of institutional barriers have increased by an exponential factor the flows of capital around the world. With the many advantages that progress has brought, hitherto unknown dangers have appeared, which have created new responsibilities.
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1. The ethical responsibility of banks
A bank is a commercial enterprise, and as such it is subject, like other enterprises, to the hard laws of economic survival. Either it makes money or it disappears. Its use derives from the needs of an economy based on exchange: transactions in relation to its current position and its demand for liquidity, including foreign exchange, and transactions with a longer-term horizon and the demand for a store of value and the capacity to anticipate (credit). The quality which is common to all the various banking activities is trust. This is why banks face particularly serious consequences when they fail to abide by the law of economic survival. It also explains the outrage of the injured parties, which can go as far as driving them to "banca rotta".
A bank can only be successful if it gains the confidence it seeks. Hence, the clear interest of banks to conform to those rules which enable it to avoid the agony of insolvency. This is the responsibility of the management of an enterprise.
In addition to the responsibility that the banking system has towards itself, it is also answerable to society and the national economy not only because of its strong macroeconomic role but also because of its exposure to the dangers of abuse. Although ethics are an issue more frequently discussed in the medical world, banks must also subject themselves to a set of rules and professional obligations. Bankers are in some ways the surgeons of the economy and, like medical surgeons, they are aware of operations which are technically possible but morally unacceptable.
Many years of experience allow us to ensure a client-oriented approach and make it possible for Swiss and non-Swiss banks to offer a world-beating range of financial services.
The tragic events in New York and Washington on September 11th show that terrorists are abusing the achievements of globalisation in transport, in information technology and in financial services. Countries with major financial centres are therefore called upon to share in making an appropriate contribution to the ongoing investigations.
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At the moment, no major financial centre can exclude the possibility of abuse of its system by terrorists. All competent authorities in the field of financial services have to contribute in an unbureaucratic way to a world-wide thorough inquiry into the financial dealings of identified terrorist suspects. Financial institutions in both the banking and nonbanking sectors are responsible for scrutinising their business relationships for suspicious factors, and to co-operate fully with competent authorities in the search and blockage of assets linked to terrorist activity.
In this context, the know-your-customer rule plays an essential role. This principle has now been firmly set in law. According to the Swiss Money Laundering Act, which came into effect on 1st of April 1998, any financial intermediary - and not only banks - which suspects a customer is involved in money laundering is obliged to inform the competent authorities and to freeze the funds in question immediately. The Swiss financial centre has a long tradition, dating back to the 1970s, of exercising due diligence in accepting and safeguarding financial assets. Therefore, it should be in the self-interest of all financial intermediaries to apply the know-your-customer rule strictly and not to do business with criminals.
Another dimension of the moral and macro-economic responsibility of the commercial banks was recently illustrated by the collapse of Swissair. On the one hand, the banking system has the capacity to provide a rapid injection of liquidity in order to overcome a crisis which is threatening the national economy as a whole. On the other hand, this experience showed very rapidly - also to the public - the limitation of this course of action. It is the point where the banks are forced to remember their prime obligation not to place their own existence at stake. At that moment, even in an economy dedicated to market principles, state intervention for the purpose of safeguarding public interest becomes the instance of last resort. However, this is only possible if there is close co-operation between the decision-makers in the private sector and the public authorities. In the absence of a legal framework set up for this purpose, we must be able to count on a moral obligation to co-operate.
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2. The responsibility of the state as regulator
The state has always been aware of the essential, but also lucrative, business of dealing in money as well as of the activities of the banks. This is why it is often directly involved, in particular when it comes to accepting its seignorage. Today, in most market economies the role of the public authorities remains that of issuing money via the central bank. With regard to the activities of the commercial banks, the state's activities are primarily confined to setting very rigorous rules on procedures and surveillance. In Switzerland, the state is not completely absent at the regional - via the cantonal banks - and local levels. However, the trend is in the direction of non-involvement, in particular following some unhappy experiences which showed the risks of over-involvement by the state.
In the past, governments have concerned themselves with the activities of the commercial banks for reasons of gain and in order to protect the depositors. Nowadays its role is much more complex. In light of the opportunities offered by an international financial centre, the regulatory role of the state has at least two dimensions. Firstly, a moral one, because we cannot tolerate criminal activities of any kind. Secondly, one of credibility, because it is not possible to be a leader in financial matters without being a leader in tracking down illegal activities. This is why the Swiss financial centre cannot afford just to meet international standards in combating financial crime, it must go beyond them, and Switzerland must be a driving force.
The arsenal of measures in place is both very varied and rigorous. We have already mentioned the Money Laundering Act of 1998 and the essential role of the know-your-customer rule. In addition, according to the Swiss penal code, both membership of and support for criminal organisations and money laundering are criminal offences. Any funds used for such purposes are frozen and confiscated.
In compliance with the law on mutual legal assistance and with international treaties it has signed, Switzerland provides comprehensive international co-operation in criminal matters. By law, banks are obliged to disclose all information without exception in connection with a criminal investigation when asked to by the judicial authorities. Expressed in simpler terms, Swiss banking secrecy protects neither terrorists nor those who support criminal organisations, nor indeed any form of criminal activity. For such matters, Switzerland provides immediate legal assistance and freezes the corresponding funds.
Switzerland will not tolerate any kind of abuse by terrorists of its financial centre and it is determined to take all necessary measures to prevent its financial centre from being used as a channel for financing terrorist attacks in other countries. The existing tools reflect the great importance that Switzerland has always attached to the fight against both terrorism and abuse of its financial centre.
In addition to the existing measures against terrorism, organised crime and money laundering, Switzerland has also launched three initiatives at the international level to counter more efficiently financial flows of criminal origin:
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- The first initiative aims at improving the fight against money laundering. It has to be assumed that international terrorist organisations have highly developed financial networks, which include the use of trusts and shell companies. It is therefore essential that the financial sector exercises special care in dealing with customer funds. Switzerland considers that all financial intermediaries throughout the world must be able to identify the economic beneficiaries of the assets deposited with them. The use of shell companies or other corporate vehicles for criminal purposes must be completely stopped. Switzerland therefore aims to raise international standards, in particular in the area of know-your customer rules.
- In connection with the current revision of the recommendations of the Financial Action Task Force against Money Laundering (FATF), Switzerland has submitted and promoted concrete proposals for improving the effectiveness of know-your-customer rules. Specifically, we believe that banks' customer-identification procedures must focus more sharply on the actual economic beneficiary than on the customer. Banks world-wide must go further than limiting their information on customers to formal documents such as entries in the commercial register of legal persons or trusts; rather they must have adequate information on those persons which exercise actual control of the assets. This is especially relevant in the case of customers who conduct their business with banks via professional intermediaries such as lawyers or fiduciaries. Switzerland's proposals set out clear procedures with regard to the exercise of due diligence in implementing FATF recommendations. They include, for example, precise guidelines on accepting or rejecting business relations on the basis of a risk assessment.
- The second initiative is intended to improve the effectiveness of financial sanctions against states that sponsor terrorism. In the aftermath of the shocking terrorist attacks in the USA, it is of the utmost importance that the international efforts to combat the financial sources of terrorism are consistent. Targeted financial sanctions are one of the most appropriate instrument for cutting the sinews of war without causing casualties among the civilian population.
- In the last few years, Switzerland has taken the initiative to develop the concept of targeted sanctions with a view to both strengthening their impact and avoiding unwanted effects. In 1998 and 1999, Switzerland organised seminars with experts from different countries on this issue in Interlaken, which has since become known as the "Interlaken Process". In addition, it has sponsored academic research into this issue. Through these efforts and concrete proposals we intend to promote international co-operation as well as improved implementation and monitoring of sanctions. This initiative is conducted in close co-operation with the secretariat of the United Nations and members of the Security Council.
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- Switzerland has systematically implemented UN sanctions in the last few years. Its actions underline its willingness to contribute to international security and peace as well as to ensure compliance with international law. The sanctions against the Taliban (resolution 1333 (2000)) were implemented by Switzerland fully and promptly. As a result, a number of bank accounts of several Afghan banks were blocked.
- The third initiative is directed at improving international co-operation with regard to the issue of illegal assets of politically exposed persons. The financing of terrorism is closely connected with various forms of financial crime. At the beginning of this year, Switzerland led an international initiative to prevent and combat the inflow of illegal assets of politically exposed persons. Central to this initiative are high international standards regarding identification of and surveillance of politically exposed customers, their milieu and their business activities. Switzerland has already tabled motions to this effect within both the Basel Committee for Banking Supervision and the Financial Action Task Force Against Money Laundering. In order to go deeper into this question, Switzerland is organising in November a further international meeting with representatives of important financial centres.
- The question that remains, however, is why, despite these far reaching measures, is the Swiss financial centre criticised time and again abroad for harbouring assets of dubious origin. Undoubtedly, there is a maze of misconceptions regarding Swiss banking secrecy, in particular the supposedly anonymous numbered accounts. The plain fact is, there are no anonymous accounts in Switzerland. The reason might also be the result of a lack of information. Take the case of former Nigerian president Abacha, a part of whose funds were first discovered in Switzerland. Initially, public opinion was alerted to the fact that this money had been discovered in Switzerland. Only later, did people realise that it was the investigation carried out by the Swiss authorities which showed that many other countries were highly involved. Although no other country acted as swiftly and comprehensively as Switzerland to block Abacha's accounts, much of the criticism by the international media was directed against Switzerland.
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3. The collective responsibility of the international community
In order to combat terrorism effectively, a common approach at the international level is essential. To break the financial backbone of international terrorism, we need co-ordinated and decisive measures by all financial centres. International co-operation and information sharing between different national authorities is crucial to get the whole picture. That is why we are appealing to other countries to support the creation and implementation of higher standards in this field.
The first step takes place at a bilateral level. In recent years, Italy and Switzerland have established close and effective bilateral co-operation in fighting international financial crime. With the aim of further streamlining and easing the process of legal assistance, three years ago Switzerland and Italy signed a bilateral protocol to the European Convention on Mutual Assistance in Criminal matters. The protocol has recently been approved by the Italian Parliament. However, some controversy has arisen with regard to a modification in Italian criminal procedure law. The Swiss Authorities do hope that the law approved by the Italian Parliament won't make the enforcement of the protocol more difficult. It would be regrettable if the aim of the agreement were jeopardized by legislative measures which could narrow its enforcement and make the mutual assistance in criminal matters more difficult.
Switzerland also favours forceful multilateral action against the abuse of financial centres world-wide by criminal organisations. It participates fully in international co-operation and for this reason welcomes Security Council resolution 1373 on fighting terrorism. We have also signed and plan to ratify expeditiously the United Nations Convention for the suppression of the financing of terrorism.
International organisations such as the OECD, the United Nations, the Basel Committee, and the Financial Action Task Force against Money Laundering (FATF) are responding to the challenge of fighting criminal money movements.
One important and complex issue in this field concerns international co-operation with respect to taxation. Switzerland actively participates in the efforts of the OECD. In our view, the best means to prevent tax evasion is a system combining moderate taxation, efficient and appropriate use of government resources, an efficient method of collecting withholding tax and effective co-operation in combating tax crimes, including of course suitable sanctions. On the other hand, we do not favour the establishment of a system of total surveillance by the state of all financial transactions of each individual citizen. Our system ensures an adequate balance between the protection of the private sphere and the state's interest.
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We think that our arguments have been heard at the international level. The OECD's intensely negotiated report on "improving access to bank information for tax purposes" explicitly recognises the legitimacy of financial privacy and proposes a number of measures aimed at reinforcing the struggle against tax crimes. Switzerland has accepted this report. It lifts banking secrecy in judicial assistance procedures in cases of tax fraud. It is even ready to provide administrative assistance in such cases through amendments to our bilateral double-taxation conventions.
I would also like to mention the European Union's efforts to fight terrorism. The treaty of the European Union specifically refers to terrorism as one of the most serious crimes; further, it states that terrorism must be prevented and combated by means of common action. The European Union has quickly reacted to the attacks in the United States and has decided on a package of measures. These include closer co-operation between police forces, including Europol, and judicial authorities. In this context, the new round of bilateral negotiations between the EU and Switzerland provides an opportunity for substantially improved co-operation in the larger context of justice and home affairs based on the "Model Norway and Iceland". Switzerland is ready to take up the "Schengen Acquis" and is convinced that this is not only in the interest of Switzerland but of all EU member states.
We are also following with interest the European Union's aim, expressed at the meeting of the European Council in Santa Maria da Feira in June last year, of introducing a system of automatic exchange of information concerning the taxation of savings. Like our EU counterparts, Switzerland's authorities think that savings income should be adequately taxed. This is why Switzerland introduced many years ago a 35% withholding tax on interest and dividends based on the debtor principle. This tax applies to residents and non-residents, as well as to natural persons and legal entities. It has thus a broader scope of application than the EU project.
At the request of the EU, Switzerland has entered into a dialogue concerning these issues. If the EU and the dependent and associated territories of its member states establish a system of taxing savings income, Switzerland would be willing to co-operate within the framework of the current provisions governing withholding tax and financial privacy. An automatic information exchange is, however, not an option for Switzerland. To be effective, the tax system to be introduced by the EU should also involve the main financial centres outside Europe.
Another issue concerning our relations with the EU is the problem of customs fraud, in particular cigarette smuggling which costs many states a great deal of lost tax revenue. Switzerland has in the past been criticised - especially in the Italian media - on the grounds that some of these unlawful practices are organised and carried out by persons living in Switzerland. I can assure you that Switzerland has absolutely no interest in allowing its territory to be used for such activities. For this reason, we are willing to seek solutions with the EU and its member states to combat fraud in goods movements. We have therefore proposed to the EU that mutual administrative and judicial assistance should be strengthened in cases of subsidy fraud, organised smuggling and possibly other organised offences involving indirect taxation or subsidies in relation to international goods movements. Both the EU and Switzerland agree that direct taxation is not an issue in the negotiations on customs fraud.
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Conclusions
Switzerland is fully aware of its responsibilities as an international financial centre. In my opinion, the task must be accomplished at three different levels:
- the moral commitment of the private financial intermediaries themselves;
- the provision of a strong and effective regulatory framework by the public authorities; and
- efficient international co-operation among all countries concerned.
We will only be assured of success if we combine these three components in an overall effort.
National efforts to fight financial crime and the financing of terrorism must be based on high international standards that are developed by competent international organisations such as the United Nations, the Council of Europe or the Financial Action Task Force (FATF). These standards have to be reviewed in the light of the recent terrorist acts. Efficient, clearly focused and broadly accepted standards as well as their complete implementation and international monitoring have to be the guidelines for future action.
Switzerland is seriously interested, I can assure you, in further adjusting and strengthening its regulatory framework to meet the challenges of globalisation and technological progress. Switzerland will continue to co-operate actively in the relevant international institutions and organisations with a view to contributing to enhanced financial market stability and to fighting abuse of the international financial system.
Only in this way will Switzerland be able to maintain and further improve the operating conditions of its financial market, taking into account the need of the international community for security and the customer's legitimate desire for privacy. I am convinced that on the basis of these efforts the Swiss financial centre has all the qualities needed to succeed in the 21st century and that it will seize the future opportunities offered by technological progress and globalisation.
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