ZURICH - 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 reputable 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 unmatchedanywhere 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:
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.
Call for reform
A growing number of Swiss citizens, hoping to promote justice and improve their country's reputation, are calling for reform of the country's banking system. In May 1984, Swiss citizens voted on an initiative which proposed legal measures to curb tax evasion in Switzerland, along with restricting the role of Swiss banks in promoting international capital flight. The initiative was resoundingly defeated, by a margin of 73 to 27 percent. Later, official polls found that 60 percent of the voters actually supported measures against capital flight, but had rejected the initiative because of its internal provisions. Nonetheless, after the vote, the capital flight issue fell out of the Swiss political debate for several years.
In 1991, the Berne Declaration and the Action Group Financial Center Switzerland issued a manifesto for a "Switzerland without flight capital," a motto which echoes the 1989 initiative for a "Switzerland without an army." The manifesto addresses the main flaws of the legal situation in Switzerland, charging that "Swiss banks support corrupt elites and governments in the Third World and contributes to the increasing poverty of their people." The manifesto demands that Switzerland no longer shelter financial derelicts from international legal proceedings; that all aiding and abetting of capital flight by banks be prohibited by law; and that the Swiss government support international legal coordination on the issue so that imposing measures against capital flight in Switzerland will not simply shift the capital flows to other financial centers.
In the following months, the manifesto was signed by close to 200 non- governmental organizations from Switzerland and the Third World. Support came from across the political spectrum, from the Swiss Social Democratic Party to the Catholic Women's Federation.
A Christian Democratic Congressperson has introduced a bill in parliament that reflects the manifesto's demands. In October 1992, non-governmental groups staged a national action week to demonstrate popular support for measures against the inflow of flight capital to Switzerland. An expert hearing, local public meetings and a campaign newspaper spread critical information on the issue. Grassroots campaigners distributed fake flight capital bills on the streets in order to raise public awareness.
The campaign promoters are also working to reform Switzerland's international reputation, which plays such a large role in sttracting flight capital to the country. They have sent letters to finance ministries around the world informing them about Swiss NGOs' campaign for legal changes. And advertisements in foreign newspapers, for which the funds are being secured, should have the same effect. Switzerland, the ads will say, might not be such a safe haven for flight capital in the future.