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The phrases “tax haven” or “offshore funds” often make one think of Swiss Banks. Originally infamous for gold laundering during World War II, Switzerland is now known for its money laundering and tax fraud. Funds originating from abroad constitute a whopping 48% of the money in Swiss bank accounts. But why is its banking industry so ill-famed, when did it all start, and what has its role been over the decades?

World War 2: Nazi gold Switzerland was one of the few countries that claimed “neutrality” during World War 2. Nevertheless, there has been incriminating evidence that the country profited heavily from this neutrality, that is by purchasing vast amounts of gold from the Allies as well as the Axis powers. At a time when most of the world refused to trade with Germany, Switzerland became the primary asset manager for the Nazis, enabling Germany’s catastrophic acts during the war. 79% of all the gold transferred by Germany to foreign countries was acquired by Switzerland, majority of which was held in the Swiss National Bank. This gold came from two sources- individuals persecuted during the Nazi oppression like victims of the concentration camps, including corpses; and gold reserves from the countries occupied by Germany.

Swiss banks continued to launder stolen assets and benefit from this profitable trade. As the war ran its course and when survivors of the holocaust attempted to restitute their assets, they were refused. Bureaucracy prevailed due to the absence of customary documentation, or death certificates by heirs of the rightful owners of the gold in dormant accounts. Moreover, Allied powers were reimbursed with merely 12% of their stolen assets. To retain the gold, the Swiss Government enforced the Banking Act of 1934 which first codified the famed secrecy law. This move was influenced partly by the Nazi investigation and partly by a French scandal that exposed undeclared accounts of notable people.

Secrecy Laws enforced Article 47 of the Federal Act on Banks and Savings Banks passed in 1934 made the disclosure of client identity a criminal offence. This means that the true identity of an account holder will be known to only a few employees, and each depositor will be given certain codenames in order to carry out transactions. Furthermore, the source of cash or other wealth entering the country has often remained unquestioned. This has allowed wealthy individuals to hold unaccounted funds and assets even while residing outside Switzerland.

Swiss bank secrecy was contested twice and measures aimed at its suppression were rejected both times, initially by the public in 1984, and then by the parliament in 1998. The provisions of the act have been amended and revised multiple times, and are additionally enforced by civil code and other banking laws.

Scandalous Tax Haven Although the term “tax haven” might suggest an absence of tax obligations for individuals and/or businesses, it is not precisely how pop culture references make it seem. The federal government merely sets a base level for income and corporate tax leading to cantonal banks (Government-owned commercial banks) competing with each other and offering the most favourable tax rates to foreigners. Consequently, Switzerland’s tax rates are substantially lower than those in most countries. There are also certain perks when it comes to paying taxes including low cost, lump sum payment options, the possibility of being taxed as a family as opposed to an individual, and certain tax breaks and special statuses provided to multinational companies.

Changes and Control Regardless, these banking laws that ensure anonymity and security have also made Switzerland notorious for tax evasion cases. Swiss banks have had to pay millions and sometimes even billions of dollars for settlements and penalties. The Tax Justice Network claimed that the country is responsible for 5.1% of global tax avoidance losses. The United States, as well as the European Union, have been consistently pressuring the country to lift its secrecy laws, and finally in 2018, Switzerland cracked. The Swiss Federal Tax Administration started sharing international customers’ financial information with tax authorities in other countries. It is much more difficult for foreign nationals to open bank accounts here now as they have to comply with the new money laundering rules. Additionally, multinational companies have been scrapped off the preferential tax statuses which allowed them to pay less taxes than Swiss companies, and greater controls have been implemented on residency attained by foreigners.

The sophistication and secrecy provided by the banking system mingled with favourable tax rates created a discreet tax haven attracting wealthy foreign individuals and businesses. Switzerland has profited from these offshore deposits for decades. Nonetheless, the persuasion by other world powers to counteract tax evasion and money laundering has significantly reduced these “benefits” to the country and to the customers.

By Khushi Kapoor




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