As U.S. banks scramble to comply with the USA PATRIOT Act, which imposes tough sanctions for failure to identify sources of foreign assets, foreign banks are starting to feel the pressure too. Nowhere is this more evident than in Switzerland, home of the fabled "Swiss bank account."
The concept of financial privacy is firmly entrenched in Swiss laws, regulations and culture. "I believe in a quite universal concept of privacy which includes financial privacy," said Urs Roth, CEO of Swiss Bankers Association, an industry advocacy group. "I see it in place for a long, long time to come, and I hope it survives me."
In an instance of profit following principle, financial privacy also provides a competitive advantage for Swiss financial institutions. However, standing on principle has not quite endeared Switzerland to its European Union neighbors, whose citizens can evade taxes using Swiss bank accounts. Tax evasion is not a crime in Switzerland.
Now, the USA PATRIOT Act poses a new threat to the relative inviolability of Swiss financial institutions. That's by design. "The point of the financial services provisions in the USA PATRIOT Act was to take a whack at bank secrecy," said Elise Bean, deputy chief minority counsel to the Senate Permanent Subcommittee on Investigations.
Speaking at an international money laundering conference in Miami, Bean said, "Are we going to compete on the basis of services and providing the best return, or are we going to compete on the basis of who can provide the greatest secrecy for clients?"
"U.S. banks cannot compete on secrecy," continued Bean. "We have foreign banks coming into our country and then when somebody asks them for their records they say, 'We can't tell you that because of the bank secrecy rules in my jurisdiction.'"
Certainly, Swiss banks aren't what they used to be. Since the 1977 Due Diligence Agreement, Swiss banks have been required to know the identity of their customers and sources of funds. These days, the Swiss "numbered account" primarily ensures that bank employees only discover customers' identities on a need-to-know basis-a practice that U.S. banks might be wise to emulate. "Any idea of an impenetrable wall of Swiss banking secrecy, or 'bank customer confidentiality' as we call it, behind which criminals can take shelter is a myth," said Roth. "In Switzerland, when a crime punishable under our law is being investigated, bank customer confidentiality simply does not exist."
Still, if U.S. regulators ask for customer information, foreign banks will have to choose between violating the USA PATRIOT Act or abrogating their financial privacy laws. The Swiss would prefer to avoid the quandary altogether by asking regulators to work through established treaties and agreements. "There's no need for the U.S. to take recourse to unilateral enforcement powers," said Roth. "That would obviously lead to conflicts of law between the countries involved."
Aside from sharing information about its customers, Switzerland stands ready to provide assistance in the war on terrorism. "Armed with lists of names of suspect individuals and organizations, Swiss banks have been combing their customer databases," said Roth. "As of March 6th, Switzerland has frozen 67 accounts with total assets of around CHF 34 million (USD $20 million) on the basis of sanctions imposed by the United Nations against the Taliban regime." Other accounts have also been blocked since September 11 based on the efforts of Switzerland's Money Laundering Reporting Office in cooperation with U.S. authorities, said Roth.
Just don't expect Switzerland's banks to open their records willingly as part of what some in Europe consider a quixotic effort. Said Roth, "No major financial center is able to exclude the possibility that terrorists are using its services for illegal purposes."