Switzerland: land of chocolate, cuckoo clocks and banking secrecy / FRFI 218 Dec 2010 / Jan 2011

FRFI 218 December 2010/January 2011

Internationally Switzerland is famous for its neutrality, for having the best chocolate in the world, its world-class skiing resorts, a long tradition of watch-making and, of course, banks that are more than ready to manage and protect the assets of its rich clientele.

The capitalist system works like an organism with its vital centres (or hubs), such as New York, the City of London and Shanghai. But organisms generate waste that is filtered and recycled by specialised organs. Although financial hubs tend to get all the attention from the public and the media, financial recycling centres such as Switzerland are often overlooked.

According to the Swiss National Bank (SNB), assets under management by Swiss banks and their subsidiaries at the end of 2008 amounted to CHF5,400 billion[1] (about £3,300 billion), which puts Switzerland right behind the US and the UK. As for private banking, the figure stands at CHF1,800 billion (£1,100 billion) or a staggering 28% share of the world market. Not bad for a country with a population (7.7 million) smaller than that of London!

The figures for the number of banks in Switzerland are quite interesting. As of 31 December 2008, there were 327 banks and 3,161 branches located in Switzerland, which managed assets of CHF3,080 billion (£1,900 billion). Additionally there are 293 branches abroad. Out of these 327 banks, 154 are foreign (11.5% of the total assets), 48 specialise in asset management and 14 are active only in private banking which serves very wealthy individuals, especially so-called HNWI (high net worth individuals) who hold at least US$1 million in financial assets and UHNWI (ultra-high net worth individuals) who hold at least US$50 million in investible assets.

Put together, two well-known big banks (UBS and Credit Suisse) have CHF1,885 billion in assets, or, in other words, 61.2% of the total assets invested in Switzerland. As one can easily imagine, this duopoly exerts an impressive influence on Swiss politics and even on the identity of the Swiss people. Any attack on Swiss banks is seen as an attack on Switzerland as a whole.

A brief historical overview

Before the industrial revolution, which only reached Switzerland in the late 19th century, the country’s main export was mercenaries who were considered to be among the best in Europe. In 1815 at the Congress of Vienna, where most of the European map was redrawn as a consequence of the Napoleonic Wars, Switzerland was regarded as a useful buffer zone (due to its alpine passes) between important European nations (France, the Austrian Empire, the German Confederation, the kingdom of Sardinia-Piedmont). Hence the historical association of Switzerland with ‘peacefulness’ and neutrality.

The frequent emigration of the Swiss people which resulted from the dearth of natural resources in the country was offset by late industrialisation, which was helped by Switzerland’s strategic location in the heart of western Europe and its control over major strategic routes across the Alps. Spurred on by the founding of the Federal State in 1848, the adoption of a single currency and much later the creation of the Swiss National Bank in 1907,[2] the local bourgeoisie saw its wealth increase rapidly. The bourgeoisie, taking advantage of the new pillars of Switzerland (freedom, neutrality, discretion), strived to attract the wealth of European aristocratic families and the growing industrial bourgeois class. It succeeded in doing so.

Evading taxes by stashing money in Swiss banks is not a recent activity created by astute city bankers. In 1896, the Swiss Banking Corporation (which merged with UBS in 1998 to become the second largest bank in the world at the time) created its first subsidiary in London. At the same time, many European bankers, frightened by an increasing tax burden, found havens in Geneva, Zurich and Basle in which to continue their activities. The decisive moment in the creation of the Swiss banking hub came after World War I with the devaluation of major European currencies (the French franc by 70%; the Italian lira by 75%; the British pound by 30%; and the value of the German mark collapsed due to hyper-inflation). In order to preserve the flow of foreign assets into Swiss banks accounts, Article 47 of the Banking Act 1934 enforced banking secrecy. This is still in force. Any employee found guilty of knowingly revealing banking secrets can be sentenced to up to three years in prison. Negligent or careless revelations can result in fines of up to CHF250,000 (£155,000).

In 2008 the SNB estimated that 5.9% of the entire Swiss workforce (196,400 people) were employed in the financial sector and another 4.04% worked for the banking sector (136,000 people). 10% of the working population of Switzerland, therefore, depend on banks, insurance companies and other financial institutions for a living. The gross value added (GVA) by these sectors accounts for nearly 12% of the Swiss GDP or CHF63 billion (£39.6 billion) and about 15% of federal, cantonal and municipal tax receipts derive from them.

Tax fraud or tax evasion?

Swiss legislation excels at splitting hairs. According to Swiss law, tax evasion or avoidance is not considered to be a criminal offence. For instance, if you ‘forget’ to fill out your tax form, the sanction will be regarded as an administrative matter and therefore, any breach will be dealt with in the civil courts. When it comes to evading taxes, the Swiss people do not live up to their reputation for probity. In fact, according to a 2006 study conducted by Feld and Frey, 22.3% of Swiss GDP in 1995 was thought to be tax evaded.

The federal structure of the country enables communes (town councils) and cantons[3] (states) to set their own tax rate. As a result, local councils and states use this as a mechanism to attract wealthy residents and multinationals. By creating tax havens inside Switzerland (such as the cantons of Zug and Nidwald or the communes of Cologny and Anières in the canton of Geneva), competition between cantons to set the lowest tax rate is considered normal. It is little wonder that inequality has grown. In 2004, 3.9% of taxpayers owned 54% of the total wealth in Switzerland; 0.4% nearly 27% and the wealthiest 0.15% of taxpayers (people who declared more than CHF10 million or £6.2 million in assets) almost 20%.

The parasitic role of Swiss capitalism in the world economy

According to the Oxford dictionary, a parasite is ‘an organism which lives in or on another organism and benefits by deriving nutrients at the other’s expense’.

The parasitic role of Switzerland in the capitalist system is hard to refute when we consider, on top of the obvious reason (ie, banking secrecy), that multinationals consider Switzerland to be a top location for installing regional or worldwide headquarters (55% of multinationals are headquartered in Switzerland). Geographical position is often mentioned as the main criterion for moving to Switzerland, but, in reality, there are many factors that help the country to rank amongst the ‘friendliest places to do business’. For example, the canton of Zug has a 0% tax rate on profits made by holdings and 0.24% on capital.

On 24 February 2008 a national referendum rewarded the largest shareholders. The Swiss bourgeoisie, always keen on fighting for its own rights and privileges, succeeded in convincing the citizenry that by granting a tax credit on dividends, the Swiss fiscal system would become ‘fairer’. As a result shareholders who own at least 10% of a company’s shares are richer because only 60% of dividends are taxed (down from 100%).

For ordinary workers, staying ‘business-friendly’ entails having labour laws that are amongst the least progressive among the OECD countries. In fact, the Swiss authorities promote the country as an idyllic location for employers, where it is possible to hire and fire with ease and with few social costs. The total tax ratio (which includes social security and other social insurances) as a percentage of GDP stands at just under 30%. As a comparison, the US is at 28%, Ireland just above 30%, Germany and the UK at 36%, France and Italy at 44% and finally in the top ranks, Sweden at. 47.1% and Denmark at 48.3%.

The Swiss bourgeoisie is determined to maintain its role as a fiscal loophole for the capitalist system. The bourgeois class of all countries can protect its assets legally in Switzerland. Thus, the fiscal question is an essential element of class struggle and the working class should not be deluded by the bourgeoisie when it talks about cutting taxes because in the end, it is the working class that will suffer.

Dario Chiaradonna

1 The Swiss franc (CHF) is the currency and legal tender of Switzerland and Liechtenstein.

2 The SNB is peculiar for being a public limited company whose shares can be traded on the stockmarket and are owned by the cantons, their banks and a third by individuals.

Switzerland has 23 cantons which are the federal states of the Swiss confederation.

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