Flight capital and the reputation of a financial centre

Flight capital, tax money and criminal money

Swiss law and Swiss banking practice drew for decades a sharp line between three kinds of foreign money. Criminal money, the proceeds of drug trafficking, fraud or corruption, was illegitimate, so that the banks claimed to refuse it. Tax money, undeclared in the client's home State, was a matter for that State, since Swiss law distinguished between tax evasion, which it treated as an administrative matter, and tax fraud, which it punished. Flight capital, money exported in breach of foreign exchange controls, was in the Swiss view the property of a free person who had chosen to protect it from a State that restricted his freedom to dispose of it. The tradition of refuge, which Chapter C.II traces back to the exiles of the Risorgimento and Chapter B.I to the Protestants of Locarno, gave this view a moral foundation that Swiss bankers invoked with conviction.

The lira economy blurred these lines. Italian money in Lugano was almost always flight capital and very often tax money, and it was in the nature of the system that the bank did not know which part of a given deposit was which. The same channels that carried the savings of a Milanese family also carried the proceeds of smuggling, kidnapping and, from the late 1970s, drug trafficking (Chapter D.IV). The courier who crossed at Ponte Chiasso did not declare the origin of his load. Nor did the bank in Chiasso that received it ask. When the Chiasso scandal broke in April 1977, the Federal Councillor in charge of finance, Georges-André Chevallaz, told the National Council that it was "a Swiss affair whose burden we must bear", while insisting that banking secrecy was "not the principal cause of the inflow of foreign currencies" and that the Confederation had taken measures to limit those inflows.¹ The statement captured the dilemma of the period. The authorities defended the system that had produced the problem while promising to correct its excesses.

How reputation was lost and rebuilt

The reputational cost of the lira economy accumulated slowly and was paid late. In Italy the image of Lugano as a place where money disappeared became part of popular culture and political rhetoric long before the Italian State had legal means to reach it. In the international debate of the 1980s and 1990s, the scandals of Chiasso, Weisscredit, the Banco Ambrosiano, the Pizza Connection and the Lebanon Connection associated Swiss banking in general and Ticino in particular with dirty money (Chapters D.III and D.IV). The legislative response followed the scandals: the bankers' due diligence agreement of 1977, the criminal offences of money laundering and lack of due diligence in 1990, the Anti-Money Laundering Act of 1997, the extension of the predicate offences to qualified tax fraud in 2016 and the automatic exchange of information with Italy from 2017 (Chapter E.II).²

The experience shows three things that are relevant for any financial centre. First, a business model that depends on the weaknesses of a neighbouring State's law is exposed to the day when that State reforms its law or obtains the cooperation of the host State. Italy's criminal law of 1976 left much of the flow intact. It was the amnesties of 2001 to 2009, the voluntary disclosure of 2014 and the exchange of information that ended it. Second, reputation is lost through the worst cases and judged by the strictest observers. A financial centre in which most clients were honest savers fleeing political risk was judged by the minority of cases in which the money was criminal. Third, the law of the time draws the line between flight capital and criminal money, and that law changes. The tax evasion that was irrelevant to a Lugano bank in 1965 became, in its qualified form, a predicate offence for money laundering in 2016.

Notes

1. La Liberté (Fribourg), 23 June 1977, "L'affaire du Crédit Suisse au Conseil national", https://doc.rero.ch/record/282825/files/1977-06-23.pdf ("Il s'agit d'une affaire suisse dont nous devons porter le poids ..."; "le secret n'est pas la cause principale de l'afflux des monnaies étrangères"). ↩
2. SCC Art. 305bis (as above) for 1990 and 2016; Federal Banking Commission, Jahresbericht 1977 (as above), 18–20, for 1977; on the Anti-Money Laundering Act of 10 October 1997 see the citation of the AMLA above. ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of August 2025.