Secrecy as a business model

Flight capital and the Swiss turntable

The commercial logic of banking secrecy was established well before 1934. Guex shows that after the First World War foreign capital, especially from France, Germany, Italy and Austria, poured into Swiss banks on a scale hitherto unknown, as the belligerent states raised taxes to pay for the war and their currencies lost value. Switzerland became, in his phrase, a turntable for international capital. The same development changed the function of secrecy. It ceased to be primarily an instrument of domestic relevance and became a lynchpin in the strategy of attracting foreign capital to Switzerland.¹ In his article on the financial centre for the Historical Dictionary of Switzerland, Guex concludes that the banking secrecy anchored in law in 1934, whose violation was prosecuted under criminal law, together with political stability, the strength of the franc and other factors, enabled the Swiss financial centre to become one of the most important refuges for international capital.²

Zurich profited from this position more than any other Swiss city. The big banks of the Paradeplatz developed extensive private banking departments for foreign clients, around which a dense community of private banks, trust companies and lawyers grew up around them. The typical foreign client of the post-war decades was an entrepreneur or professional from a neighbouring country who distrusted his own government’s fiscal and monetary policies, who remembered inflation, expropriation or war, and who kept part of his wealth in Switzerland as a reserve. Many of these clients did not declare the Swiss assets or their income at home. Banking secrecy guaranteed that the bank would not tell, and Swiss law guaranteed that the Swiss authorities would not help the foreign tax authority to find out.

The numbered account became the emblem of this business. Contrary to a widespread belief, it was never anonymous for the bank itself, which always knew the identity of the account holder. The number replaced the name only within the bank’s internal processes, so that the identity of the client was known to a small circle of employees.³ The confusion between discretion and anonymity, which Die Zeit displayed in 1984 when it called Article 47 the famous article on the introduction of anonymous numbered accounts, contributed much to the international image of Swiss banking. It also overlooked the fact that the obligations of Swiss banks to identify their clients were tightened step by step from the late 1970s onwards, a development that chapter F.V traces from the Chiasso affair of 1977 to the Anti-Money Laundering Act of 1997.

Tax evasion and tax fraud

The legal key to the business model lay in a distinction of Swiss tax law that foreign observers found hard to understand. Ruedi Brassel-Moser describes it in the Historical Dictionary of Switzerland as a peculiarity of the Swiss legal order. Tax evasion, the intentional or negligent failure to declare income or assets to the tax authorities, was treated as an administrative matter. Tax fraud, which requires the deception of the tax authority by means of forged or falsified documents, was a criminal offence. Because foreign tax authorities received information about assets held in Switzerland only if they could prove tax fraud, the distinction favoured the flight of taxable capital into Switzerland.⁴

The distinction had a domestic rationale. Swiss tax assessment rested traditionally on the self-declaration of the taxpayer and on a relationship of trust between citizen and state, in which the tax authority had no direct access to bank records in the ordinary assessment procedure. The withholding tax on interest and dividends, introduced during the Second World War, secured the fiscal interest of the state by taxing investment income at source and refunding the tax only to those who declared the underlying assets.⁵ For Swiss residents this system created a strong incentive to declare. For foreign clients of Swiss banks it did not, since the withholding tax was often reduced under double taxation treaties or avoided by investing in instruments not subject to it.

The same logic governed international cooperation. The Federal Act on International Mutual Assistance in Criminal Matters of 1981 excluded mutual legal assistance in fiscal matters, with the exception of tax fraud, in its Article 3 paragraph 3. The Federal Office of Justice summarises the consequence plainly: in cases of mere tax evasion, legal assistance was not available.⁶ The double taxation agreements concluded by Switzerland followed the same line. When the OECD Model Tax Convention provided for the exchange of information in Article 26, Switzerland entered a reservation to paragraphs 1 and 5 of that article, so that its treaties provided for information exchange only for the application of the treaty itself and, where agreed, in cases of tax fraud.⁷

The result was a legal architecture in which the protection of foreign tax evaders did not require any breach of Swiss law by the banks. The bank that accepted an undeclared deposit from a French or German client committed no offence under Swiss law, because the client’s tax evasion was a matter for his own state and did not constitute tax fraud under Swiss standards. The foreign authority that asked for information met the double barrier of Article 47 and of the exclusion of fiscal matters from mutual assistance. This architecture explains why Swiss bankers could maintain, for decades and in good faith as far as Swiss law was concerned, that they did nothing illegal. It also explains why the architecture collapsed so rapidly once the international community decided that the distinction between evasion and fraud was no longer acceptable.

Vogler’s warning against monocausal explanations applies here too. Political stability, the neutrality that kept Switzerland out of two world wars, a currency that remained convertible when others were not, and a competent banking system were at least as important for the growth of Swiss private banking as the protection of undeclared money. The franc’s role as the only freely convertible currency of Europe during the Second World War, which the Historical Dictionary of Switzerland emphasises, belongs in this list.⁸ What secrecy added was the assurance that the client’s decision to place money in Switzerland would remain unknown to his home state. For a significant part of the clientele, that assurance was the decisive one.

Notes

1. Guex, “Origins of the Swiss Banking Secrecy Law” (2000), on the inflow of foreign capital after 1918 and on the transformation of banking secrecy into an instrument with external functions (“a lynchpin in the strategy of attracting foreign capital to Switzerland”). ↩
2. Sébastien Guex, “Finanzplatz”, HLS, version of 2003, edited 27 September 2017, https://hls-dhs-dss.ch/de/articles/045549/2017-09-27/. ↩
3. Swiss Bankers Association, “Praxis der Aufsichtskommission zur Sorgfaltspflicht der Banken 2005–2010”, section V/2.2.1, pp. 28–29, stating that the agreement of 1977 already required identification of the “wahrer Berechtigter” (Article 3 VSB 1977), https://www.swissbanking.ch/_Resources/Persistent/a/6/c/f/a6cf3bd5e977aaf369ca224c3aa0f9f23b57bf77/T%C3%A4tigkeitsberichte%20der%20Aufsichtskommission%20zur%20VSB%202005%20-%202010%20%28PDF%29.pdf. The identification duties are discussed in chapter F.V. ↩
4. Ruedi Brassel-Moser, “Steuerhinterziehung”, HLS, version of 2002, edited 21 February 2012, https://hls-dhs-dss.ch/de/articles/013773/2012-02-21/. ↩
5. Federal Tax Administration, “Steuerarten – Verrechnungssteuer”, https://www.estv2.admin.ch/jubi/steuerarten-vst-d.htm: the withholding tax was introduced by decree of the Federal Council with effect from 1 January 1944, placed on a statutory footing by the federal act of 1965 (Federal Act on Withholding Tax of 13 October 1965, SR 642.21) and levied at 35 per cent, refundable to domestic residents who declare the income. ↩
6. Federal Office of Justice, “Ausdehnung der Rechtshilfe bei Fiskaldelikten”, https://www.bj.admin.ch/de/ausdehnung-der-rechtshilfe-bei-fiskaldelikten, on the exclusion of mutual legal assistance for mere tax evasion under Article 3 paragraph 3 IRSG and on the abandoned plans to extend it. ↩
7. Peter V. Kunz, “OECD-Musterabkommen und die Schweiz: Wie den Vorbehaltsverzicht umsetzen?”, Die Volkswirtschaft, 1 June 2009, https://dievolkswirtschaft.ch/de/2009/06/kunz/, quoting the reservation “Switzerland reserves its position on paragraphs 1 and 5”. ↩
8. Guex, “Finanzplatz”, HLS (2003/2017), on the Swiss franc as the only internationally freely convertible currency during the war. The monetary side of this story is told in chapter F.I and the wartime gold transactions in chapter F.III. ↩

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 September 2025.