The Swiss Scapegoat

The Swiss Scapegoat 
September 2, 2009
Alvaro Vargas Llosa

GENEVA—Repercussions continue to mount here over the deal by which Switzerland will give the names of presumptive tax evaders to the U.S. government.

I’m referring, of course, to Bern’s decision, under colossal pressure from Washington, to hand over the names of 4,450 clients of banking giant UBS, the institution accused of hiding money for American taxpayers. The U.S. wanted to confirm the identities of 52,000 suspects (it had managed to obtain about 250 names from UBS in February), but settled for fewer in order to avoid a diplomatic escalation. The Swiss government had warned that UBS would violate Swiss law if it gave in to the IRS.

Swiss public opinion is divided between those who believe that UBS betrayed the country by engaging in monkey business and others, such as Damien Cottier, from the Radical Democratic Party, who think that Washington is using UBS as a scapegoat for its unpopular rescue of U.S. financial institutions. The Swiss public is critical of UBS but resentful of outside meddling with its secrecy laws.

What is at stake transcends the Swiss legal code. Although the secrecy law dates back only to 1934, it is based on an ancient practice—one of many liberal traditions that make up this admirable confederation born to preserve free trade and peace among its rural communes.

Blaming bank secrecy for the illegal origin of funds that find their way to Swiss banks is like advocating press censorship because deceitful politicians give TV interviews to win votes. Governments that blame foreign banks for tax evasion and money laundering are whitewashing their own incompetence. Incidentally, not a few dictators—Robert Mugabe comes to mind—with Swiss bank accounts obtained their cash from foreign aid provided by the very governments that accuse those banks of harboring illegal funds.

Bank secrecy, whether in Austria, Luxembourg or Singapore, is part of the fundamental right to privacy. It is fiercely valued in Switzerland, a country founded, much like the United States, on ideas rather than on an ethnic or national mystique.

Swiss bank secrecy is less impenetrable than people think. Although the law does not condemn tax evasion, it does make an exception for tax fraud. If a foreign state wants the identity of a bank client, it can get its wish as long as it has proof of tax fraud—and the backing of the courts. Every Swiss account has a known identity behind it. Numbered accounts simply mean that the bank’s top managers, but not the rest of the employees, have access to the identity of the owner.

In the 1990s, Swiss banks were forced thanks to international outrage to backtrack on their refusal to recognize that accounts originally opened by Jews fearing Nazi persecution rightly belonged to their heirs. That issue had to do with private property, not with bank secrecy. The Swiss banks were simply appropriating what belonged to Jewish families under the pretext that the accounts had been dormant for years. Using that scandal as a precedent to demand the end of secrecy is to confuse apples and oranges.

It is not true that bank secrecy is the foundation of the Swiss economy or that its reversal would ruin the country. Yes, the financial sector represents about 14 percent of GDP and offshore accounts about 3 percent. But, although Singapore has been slowly eating away at Switzerland’s position as the world’s financial magnet for wealthy foreigners, the reason behind the country’s pre-eminence goes well beyond secrecy and has to do with political stability, financial expertise and the rule of law. Those values are not going away soon.

The Swiss government has made gradual concessions recently, the most important one being that it will, under the standards of the Organization for Economic Cooperation and Development, do away with the distinction between tax fraud and tax evasion. This may eventually mean that any foreign government will be able to confirm the identity of an account holder in Switzerland by alleging tax evasion.

It is not hard to understand why, under implacable pressure from ignorant forces, Bern would cave in. The Swiss will not give up their bank secrecy in the near future, but it will eventually happen. When it does, the world will continue to have as many tax evaders, money launderers and terrorists as it did when those banking freedoms were still protected.


Alvaro Vargas Llosa
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Alvaro Vargas Llosa is Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His weekly column is syndicated worldwide by the Washington Post Writers Group, and his Independent Institute books include Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America. 

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