Swiss miss: the future of banking secrecy laws in light of recent changes in the Swiss system and international attitudes.

 I. INTRODUCTION                                                    540  II. THE HISTORY AND ORIGINS OF SWISS BANKING LAW                   541    A. Threats of Seizure by France's Herriot Government             541    B. Economic Espionage by Nazi Germany                            542    C. The Historical Tradition of Swiss Neutrality                  543  III. SWISS BANKING BEFORE 2009                                     543    A. Social Motivations for Swiss Banking Secrecy                  543    B. Economic Motivations for Swiss Banking Secrecy                545  IV. COMMITMENTS TO CHANGES IN SWISS LAW AND THE 2009     PROSECUTIONS                                                   546    A. Switzerland's Modifications to Its Banking Secrecy Policies   546    B. International Agreements Creating Pressure on Tax Havens      548    C. Switzerland Assists the United States in Prosecuting      U.S. Tax Evaders                                              550    D. International Repercussions of the United States' Tax      Evasion Prosecutions                                          550  V. THE FUTURE OF BANKING SECRECY                                   551  VI. THE CONSEQUENCES OF THE PROBABLE DEMISE OF BANKING     SECRECY: WILL ITS LASTING EFFECT BE POSFTTVE OR NEGATIVE?      553    A. Future Effects on State Sovereignty in Light of Tax Haven      Reform                                                        554    B. Economic Protectionism and the Role of the Global Economic      Crisis on Tax Haven Reform                                    556    C. The True Nature of Tax Havens and Their Role in Preventing      Taxation Monopolies                                           558  VII.  CONCLUSION                                                   560 

I. INTRODUCTION

For decades, Switzerland has been one of the world's staunchest advocates of the right to privacy in the area of banking secrecy. The Swiss government has long maintained a policy of professional banking secrecy and has imposed strict penalties on those who violated that confidentiality. (1) As a result, the Swiss government has historically refused to assist the governments and tax authorities of other nations in prosecuting individuals under suspicion of hiding their taxable wealth in Swiss numbered bank accounts. (2)

This policy of sovereign secrecy is changing. On August 20, 2009, the Swiss government cooperated with the U.S. government in the indictment of two Swiss citizens for their roles in assisting Americans in transferring funds into Swiss banks to avoid detection and taxation by U.S. authorities. (3) The Swiss government's support in these recent prosecutions indicates a significant shift in Switzerland's official policy toward banking secrecy.

The Swiss government's assistance, combined with an increased international effort to shut down tax havens worldwide, is a harbinger of significant changes in the treatment of international banking secrecy laws in tax havens. Swiss banks are renowned worldwide for their traditions of financial protectionism and confidentiality, and other tax havens often mimic the Swiss system. Therefore, any policy shift by Switzerland leading away from their traditional ideals will have a wide-reaching impact on international financial systems, most notably on other tax havens. In light of both the unified international movement toward the removal of banking secrecy and the major tax havens' reluctant acquiescence to international proposals, the policy shift toward more open banking procedures will likely remain a permanent fixture of international law and not just a short-term reaction to global economic circumstances.

Section II of this Note will outline the history and origins of Switzerland's banking laws to provide a background for how the unique Swiss system developed over the course of the country's history. Section III will discuss some of the social and economic motivations that formed the foundation for Switzerland's banking secrecy laws before the country's recent change in policy. Section IV will discuss Switzerland's shift away from banking secrecy protections in 2009, the national and international sources of that shift, and Switzerland's recent commitment to help other nations prosecute tax evaders. Section V, taking into account Switzerland's status as the world's leader in banking secrecy protection, will discuss the possible future for account secrecy laws in other countries in light of the Swiss abandonment of its traditional approach to banking. Finally, Section VI will analyze whether the probable lasting effects of the current shift in attitudes toward banking secrecy laws (both in Switzerland and internationally) will have an overall positive or negative impact when considered in terms of how the decision relates to preserving state sovereignty, combating economic protectionism, and preventing taxation monopolies.

II. THE HISTORY AND ORIGINS OF SWISS BANKING LAW

In 1934, Switzerland passed the Federal Banking Act, imposing criminal penalties on bankers if they violated their professional duty of confidence. (4) Switzerland was able to enact this strict penalty because of several historical incidents that threatened the privacy and stability of both the Swiss banking system and the Swiss economy. Two of these ideal-shaping events were the French Herriot Government's seizure of funds located in Swiss banks and the acts of economic espionage (and subsequent executions) conducted by Nazi Germany.

A. Threats of Seizure by France's Herriot Government

The first historical explanation for Swiss privacy laws traces the roots of the Federal Banking Act to pressure that France placed on Swiss banks to turn over funds that French citizens held in Swiss banks during the early 1930s. (5) In 1932, the Herriot government, supported by the Socialist Party in France, sought to increase state control over private financial activity. (6) After arresting the president and vice-president of a Swiss bank during a raid on the bank's Paris office, French police discovered a list of 2,000 French clients who had deposited their financial holdings in Swiss banks confidentially. (7) The French government subsequently demanded the return of those assets. (8) Although the Herriot government was overthrown in December 1932 before the resolution of the matter, the French interference with private Swiss banks strongly influenced the Swiss citizenry's attitude toward banking secrecy and the protection of the country's economic interests. (9) The Swiss became very protective of their rights, not only in the area of banking, but also in maintaining a stance of overall neutrality in their dealings with other countries. (10)

Voters in Switzerland have consistently preserved the historical roots of banking secrecy despite regular attacks (originating from both within and outside their country) on their privacy laws. (11) The same values of privacy and confidentiality that formed the foundations of Swiss banking law over seventy-five years ago are still an integral part of the Swiss system today. (12)

B. Economic Espionage by Nazi Germany

The second historical explanation for Swiss banking secrecy traces to the circumstances surrounding the passage of the Federal Banking Act of 1934. The passage of the Act demonstrated Switzerland's independence and neutrality in response to the growing power of Nazi Germany. (13) In June 1933, the Nazi government enacted legislation that required German citizens, under penalty of death, to declare all of their assets held in foreign banks. (14) After three Germans were executed for their failure to disclose bank accounts in Switzerland, the Swiss government determined that they needed to install significant security and privacy measures to protect the German nationals who were depositing funds in Swiss accounts. (15) As a result, the Swiss legislature passed the Federal Banking Act in 1934. (16)

C. The Historical Tradition of Swiss Neutrality

Switzerland has long valued independence and privacy both in and beyond the banking sector. Switzerland is perhaps best known for its longstanding policy of political neutrality, which it has maintained for almost five hundred years. (17) Even when World War I and World War II swept through Europe, Switzerland staunchly remained neutral and refused to waver from its traditional national values of noninterference and independence. True to its traditions of neutrality, Switzerland maintains a banking system that protects individuals and their assets from "attacks" by those seeking to access funds located in Swiss banks. (18) This feature is the trademark of the Swiss system of banking secrecy.

III. SWISS BANKING BEFORE 2009

A. Social Motivations for Swiss Banking Secrecy

Switzerland has historically emphasized the values of freedom and independence in all areas, and banking secrecy is no exception. (19) Traditionally, Switzerland only aided other governments in pursuing those committing tax fraud (defined as tax evasion combined with other criminal activities) and not mere tax evasion (defined as the failure to report or the underreporting of income and assets). (20) In contrast, many other countries without strict banking secrecy laws--the United States, for example--do not draw a distinction between tax fraud and tax evasion. Instead, they have adopted a definition of tax evasion that encompasses all efforts to avoid paying taxes. (21)

The protections of Swiss banking law do not apply in prosecutions for criminal offenses related to banking, including (but not limited to) terrorism, organized crime, money laundering, or tax fraud. (22) Switzerland therefore adopted comprehensive legislation to combat these potential problems. (23)

Contrary to popular belief, Swiss bank accounts are not "anonymous." Account holders must provide all of their personal information to the bank before Swiss banking laws can protect depositors through numbered accounts. (24) Numbered accounts improve security because only a limited number of bank officials know the account holder's identity. (25) Banking secrecy laws have not unreservedly protected any Swiss bank accounts or their owners, however. (26)

B. Economic Motivations for Swiss Banking Secrecy

Although the rationales for Switzerland's system have historically been grounded in the ideas of independence and freedom, the positive economic effects Switzerland accrued as a result of their strict banking secrecy laws have also been an instrumental reason for the country's maintenance of the current system. (27) The Swiss banks' secrecy protections have long conferred significant benefits to the Swiss economy. The secrecy and …