Secrets of the Swiss Banks

For people with tax problems, Swiss banks have always been an attractive solution, and it is no secret that many film stars, prosperous businessmen, and political potentates use the Swiss “numbered accounts” in order to protect their financial resources from tax collectors, fiscal catastrophe, and the shifting winds of political favoritism. T. R. Fehrenbach, whose book on the Swiss banks will be published in the fall by McGraw-Hill, is a lieutenant colonel in the Civil Affairs branch of the USAR. His history of the Korean War, THIS KIND OF WAR,published in 1963, was a book-club selection and best seller.

THE ATLANTIC

BY T. R. FEHRENBACH

AFTER World War I, when European currencies generally collapsed, and inexperienced, often socialistic. and inherently panicky governments retreated into a new mercantilism trying to keep their gold at home or retain an umbilical cord to the monies they printed, the flight of capital in all its forms to Switzerland was not only predictable but irresistible. And in 1965, when there is still uneasy money and uneasy government in many places, the staid Swiss banks are the only ones operating precisely as most banks did in the golden age preceding 1914.

Switzerland upholds international law exactly as it was written at the Hague; it has a legal system in which private property always has dominant rights over government, a fiscal system with minimal controls, and a representative democracy in which there have been no significant shifts in party strength through two world wars and a worldwide depression. Switzerland has carried over the evils of the 1890s, modified not by war passions or social pressures, but by increasing prosperity and time. Switzerland is still smothered by cartels and trusts; taxes on corporations rarely exceed 25 percent; and personal income-tax rates do not rise proportionately after the first $5000.

This nest of reaction, however, still enjoys the highest standard of living in Europe after Sweden; and Swiss workers, thoroughly unionized, exact the highest wages on the continent. Switzerland is more industrialized than Belgium or Britain, and its industry is far more modern, too. Stability and social conservatism have not been applied to techniques and artifacts.

It is the complete financial freedom of Switzerland, more than its fabled bank secrecy, which accounts for the continuing flow of capital. Bank secrecy, which was first written into Swiss law in 1934 to help foil Nazi efforts to ferret out expatriate German money, applies to government as well as to credit managers. But in a country where tax evasion is an administrative matter, not a criminal offense, and where the constitution states that no governmental agency, domestic or foreign, may confiscate private property without full and prior compensation for any reason, government has no need to invade bank vaults. The facts that no government, including the Swiss, will ever get into a bank vault without a court order and that court orders are next to impossible to obtain (in some bankruptcy cases, litigation has continued for eight years) please most Swiss, rich and poor, and fascinate many foreigners, too.

The fact that the Swiss protected Jewish deposits in a Nazi sea, then later extended the same privacy to Nazi assets in an Allied age disturbs outsiders, who reject the Swiss notion that they are not their foreign brothers’ keepers. In a struggle between Washington and Bern over German assets in 1945— 1946, the U.S. government, after great pressure, got the Swiss to disgorge some $60,000,000 of a claimed $750,000,000 in German capital. What is less well known, and hardly palatable in America, is the fact that the Swiss government, feeling both its honor and its cherished neutrality at stake, saw to it that all German individuals so despoiled were repaid in full.

A few years ago the Franco regime got its hands on a list of Spanish depositors at the Société de Banque Suisse, complete with names and numbers. In Geneva some bankers say flatly that someone was paid off, though there are more charitable answers: a traveling bank agent may have been criminally careless, or the Spanish police may have arrested one and used certain pressures, such as the threat of a long jail term. At any rate, the Spaniards involved were assessed $2,900,000 in capital levies, and fined $2,900,000 more. There was an immense scandal. The depositors ranked high in Falangist or Royalist circles, and no Swiss bank is ever supposed to let this sort of thing happen. It almost never does.

Not only does the Swiss government stand behind the letter of international law fin which private property rights are dominant), but it has seen to it that the Swiss franc is backed by gold to the tune of 135 percent. And every sophisticated investor in the world is aware of both facts.

What kind of people need, or think they need, a Swiss bank? Four broad classes can be defined.

1. People who love their country and would die for it, but who have lost all confidence in their government where their own money is concerned.

2. Men who hold offices which pay well but have uncertain tenure.

3. People in areas where there is constant fear of war, revolution, or inflation,

4. Men and women with tax problems.

Group one includes almost all moneyed Frenchmen from 1789 up until De Gaulle; Italian industrialists from the end of World War I until Mussolini and beginning again in 1963; most Germans in the 1920s who held liquid capital or foreign exchange, and many Germans who have gold in 1965; Spaniards, Levantines, and a host of Africans and Latin Americans.

Group two includes the heads of state, or powers behind the throne, of a majority of the modern hundred-odd nations. These people are not concerned with the tax collector; in some places they are the tax collectors, or at least the beneficiaries of the national revenue system. But for various reasons their heads lie uneasy.

Group three can be said to cover most Europeans from time to time, as between 1929 and 1939, and again during the periodic crises of the cold war. It would include in 1965 almost all Latin-American oligarchs and even some small businessmen, and Near Eastern or Arab capitalists who see some kind of handwriting on the wall.

Group four is the most comprehensive, yet most select in the Atlantic world. Anyone who receives a large, liquid, and movable income has an immediate tax problem.

All four groups sleep better if they can transfer at least a portion of their holdings into Switzerland. Syrian merchants know that political upstarts may shoot them, but there is some satisfaction in the knowledge that socialistic regimes cannot get hold of their money.

The Swiss nation has always been hospitable to both persons and money. In the seventeenth century the Swiss gave refuge to Huguenots and their money; here Swiss banking in the modern sense began. Later, the Swiss accepted fleeing aristocrats from France. In time, the nobles went home — but left a significant part of their wealth in Geneva. Each world revolution has brought in a new set of refugees, from anarchists to deposed royalty. Swiss hospitality was broad enough to give asylum both to Elizabeth, Empress of Austria, and to Luccheni, the anarchist who murdered her at Geneva. There was room for Algerian rebels, and ex-King Farouk too.

BECAUSE so many of the people from abroad who deposit at Swiss banks are ipso facto delinquent at home or are breaking criminal statutes against the removal of capital, an air of conspiracy and even illegality has settled over what are really quite staid Swiss institutions. In the world of international finance, where all these foreign deposits give them considerable importance, Swiss bankers are known as sharp, hardheaded, but utterly conservative, completely honest, and eminently respectable. They deal continually with and make loans to the most responsible corporations and national governments on earth. What causes a certain unpleasantness, and creates an undeniably bad image of Swiss banking, is the fact that many things which are illegal all over the world are still perfectly permissible in Switzerland.

The Swiss have no laws against personal corporations or holding companies (which are not taxed, either) or the transfer, sale, or manipulation of gold or assets or foreign exchange. The Swiss, collectively, have never seen any reason why they should try to abide by or enforce other nations’ codes or prejudices. As a Bernese banker put it: “Long ago we gave refuge to Protestants, when Protestantism was illegal in much of Europe. Later, it was illegal to be a Jew. We consider a man’s financial affairs to be just as sacred, and as important, as his soul or body. Why should we not give sanctuary to persecuted money, as well as souls?”

The fact is, simply, that the Swiss ethic, born of Calvinism and Zwinghism, does attach as much importance to private property, including money, as it does to formal religion. “We do not reconcile Christ and mammon,” a Zurich banker once remarked, smiling. “We have never seen any conflict.” In 1964 a retired vice-chairman of the Swiss Banking Commission, a Vaudois, was asked about the Swiss gods. He thought a moment, then replied, “There is only one. Catholic or Protestant,” and he made a rubbing motion between thumb and fingers. The Swiss do not love money. Any fool can do that, they say, and millions of Spaniards and Italians do. The Swiss respect money, so much that even rich Swiss can hardly bear to squander it.

Consequently, they give anyone who comes calling the exact respect his money is due. This is irritating to governments determined to keep Caesar’s fingers on what they consider to be Caesar’s, but outside governments can do very little about it. The Swiss in the 1920s invented underground banking: the plain manila envelope, the carrying of letters in bulk across the border to mail with local stamps, the coming by night of the discreet bank agent, the complicated cable code, and finally, the numbered account.

Money comes openly into Switzerland whenever national law allows. At various times, and in various places, millions in gold, cash, or securities have also been smuggled across the border. French and Italian customs agents have played hide and seek with their nationals for generations, but it is as impossible to keep capital out of Switzerland as it is to keep heroin out of New York.

Inside the Confederation, many people have felt there is always a danger that the Swiss government may bow to pressure and publish a list of foreign holdings, or may tax, regulate, or administer foreign deposits in some way. Even the mere revelation that accounts exist would be disastrous for many depositors, such as the Spanish or Czechs or Rumanians, and politically embarrassing for many heads of state. The late King Alexander of Yugoslavia, shot in Marseilles, left no records lying about, a fact which has made it next to impossible for his son Peter, living in unroyal circumstances in Monaco, to claim the money he maintains is his. King Feisal’s and Trujillo’s alleged heirs have complained of the same problem, but this is another story — Swiss banks do demand that a beneficiary be named; what usually happens is that someone gets the money and keeps his mouth shut.

The fear of possible exposure has led foreign capital to seek a protective Swiss coloring in the form of a Swiss personal corporation, a thing of flexibility and beauty in the financial world. First a good Swiss bank is needed, which will secure the services of a clever and honest lawyer in the right sovereign canton. Charters are easily obtained, and legal fees in Switzerland are laughably small compared with those in London, Paris, or New York.

All that bank and lawyer need to know are the client’s wishes, problem, and the nature of his assets. The lawyer’s office can qualify as a corporate address, and bank and law office combined can easily dig up sufficient qualifying Swiss directors. The directors may hold stock, but it can be limitedvoting stock: or even better, a number of corporations may be formed, all owned by Swiss citizens, and the whole consortium wholly controlled at the end of the trail by the shares of one holding company, the sole property of one foreigner. The intermediate companies can be produced to show legal Swiss ownership, as in the notorious Interhandel — General Aniline and Film case, but the real beneficiaries, protected by bank secrecy, need never be revealed. It must be emphasized that none of this is illegal under federal or cantonal law; and the very attempt of any government agency to investigate would raise hackles all over the Confederation — and has.

And in this way, over the years, many immense German, French, or Italian fortunes have been strategically transferred to Swiss control, managed for years, and even passed on to secret beneficiaries without payment of inheritance taxes, which are often steep at home. The fifty top fortunes of France have been managed out of Geneva for generations. The seven leading private banks of Geneva, the famous Groupement, manage or control at least $3 billion worth of securities on the New York Stock Exchange, not a tenth of which could be owned by bona fide Swiss.

SWISS banks, unlike American, act as both security underwriters and stockbrokers. Hans Bär, of the largest private bank in Zurich, J. Bär and Company, estimates that Swiss banks all together manage or control 140 billion francs in marketable securities on private account. The amount is probably closer to $40 billion, and an equal amount in currency and gold is probably also held in Swiss vaults. The three biggest banks (Swiss Credit Bank, Union Bank of Switzerland, and Swiss Bank Corporation) handle the bulk of this. According to their admitted assets, these big banks rank only about fiftieth in size among the world hierarchy ot big banks — but money on private account does not show up on balance sheets. In this way Swiss banking is like an iceberg; seven eighths of it is underground and never shows. But it is this private money which gives the Swiss their real importance in the financial world.

This $80 billion is not invested in Switzerland. Too much foreign investment there, in fact, has been an acute problem, resulting in both overheating and inflation in the sixties; and since January. 1964, no foreign monies may be invested within the Confederation, and no interest may be paid on foreign deposits.

The underground money goes mainly to Wall Street; if Wall Street should turn sour, it will go somewhere else. The Swiss bankers wear no blinders and play no favorites unless there is a profit in it. In 1963, more than $4 billion in lire assets were carted off to Lugano, symbolic evidence of Italian instability; the Swiss shoveled most of it back into Italy. But by then it was “Swiss,” and went back to Italy almost tax free.

Switzerland does have withholding agreements with many countries on interest and dividends. The United States is one. Fifteen percent is withheld on American securities held through a Swiss bank in the United States, and by treaty the Swiss withhold another 15 percent if the beneficiary is an American. Refunds can be applied for, if due, in the regular way. However, there is no tax applied to capital gains made in selling through a bank, and no way any government can discover if such gains exist. Of course, any American who has failed to report such gains has filed a fraudulent tax return, and the U.S. Treasury has traced considerable money to Swiss banks — where the trail, of course, ends abruptly. If repatriation occurs, the Treasury can step in with all kinds of penalties, including those for criminal evasion. But it is against Swiss civil law for any Swiss bank to cooperate with any foreign (or even the Swiss) government on fiscal, financial, or tax matters of any kind unless the matters investigated are also crimes within the Confederation.

Therefore, since the U.S. government slapped a tax lien on Billie Sol Estes’ reportedly missing money, if the cash should be in Switzerland, no Swiss agency may act. Swiss banks do not take stolen money, however, if they can identify it. Proceeds from a recent Canadian bank robbery were reported and turned over to Interpol, permitting the case to be solved. Tax evasion is not a crime in Switzerland, but bank robbery is considered a very serious offense.

While a certain number of what the Swiss frankly call American “shysters” do try to deposit in Switzerland, usually to avoid taxes, the American trade is small. The real reason money goes to Switzerland is instability at home, and the number of Americans who believe a social revolution is at hand, or that confiscation or runaway inflation is just around the corner, is minute.

The American with a numbered account is likely to have children in one of the Swiss preparatory schools, or to be a genuine tax expatriate or one of that small group who like to keep 10 percent of their portfolios outside Wall Street. Except for the tax expatriate, these people are not trying to avoid taxes; good New York law firms have already shown them how to do so profitably at home.

THE bulk of foreign money in Switzerland always has been French. No matter what the French do with their money, France itself is an immensely rich land. Significantly, a few years ago French money began returning home; De Gaulle’s stabilization had paid off. At the same time that De Gaulle took power, a new source of Geneva deposits opened up — this time, with the Iraqi revolution, from the Middle East. As Edouard Pictet, of Pictet & Cie, an old and elegant private bank, says, the Middle East has more than taken the French place. Also, some Latin-Amcrican money, which once went mostly to Miami, New Orleans, and New York, now flows to Europe. Trujillo and Batista, by actual record, always kept more dollars in North American banks than in Swiss banks, but in recent years the United States has shown itself less hospitable to dictators’ money. In cases like that of Rolando Masferrer, the Batistiano “tiger,” the United States has impounded, frozen, or otherwise interfered with certain kinds of foreign assets, and since 1961 the United States has not, in the ruling circles of Hispanic America, exactly inspired trust. Switzerland, where it sometimes takes almost ten years or more to get a court ruling to open a bank vault in a bankruptcy proceeding, seems more simpatico.

Among the Latin “elite” with verified Swiss accounts have been Trujillo, Batista, the Peróns of Argentina, and Jacobo Arbenz of Guatemala, the last of Swiss descent. The amounts are always exaggerated, but even so, are considerable. Batista deposited at least $3,000,000; the Peróns a probable $15,000,000, mostly in the late Evita’s name. Amusingly enough, she seems not to have named husband Juan Domingo as beneficiary before she died, much to his annoyance. Actual figures which could be put in print are, of course, not available, but the moves, such as buying or loaning in world money marts, made by certain banks known to have been contacted by prominent parties, as in the case of the Banque Genevoise de Commerce and Rafael Léonidas Trujillo, are indications.

Not all Swiss banks will touch “blood money,” though it is perfectly legal money. Pictet, for example, refused to bank Trujillo’s. But those banks which do take it have no trouble disposing of it at a profit within the financial world. As one elegant, aristocratic Genevan stated: “Pecunia non olit.” And after it has gone through the fumigating process of a staid Swiss bank, money indeed retains no smell. The significant thing about Trujillo’s and Batista’s and Moise Tshombe’s cash (he arrived in Geneva in 1963 with what was left of the Katanga National Treasury) is that it provides Switzerland, and thus all Europe, with a unique mobile pool of liquid capital. Without such deposits, it would be much harder for such respected European companies as Sweden’s Telefonaktienbolaget Ericsson to raise $10.5 million as it did in 1959, and, in 1962 and 1964, for the democratic governments of Holland, Denmark, and Great Britain to float needed loans.

In 1962, Swiss banks arranged $200 million for the World Bank, in a shoring operation on the dollar. They participated heavily in the recent three-billion-dollar resuscitation of the pound. In a slightly different vein one Swiss bank official remarked with a smile: “The Americans cannot really lose on much of their foreign aid. It comes to Switzerland, but ends up in Wall Street.” In fact, it is quite interesting to find out from New York brokers — those who will talk — where their foreign trade comes from. One admitted that at least one third of his 1964 volume came from Swiss Lugano alone.

The Swiss take money freely, then, from the socalled undeveloped world, which even more freely sends it out. In 1961, Mexico, supposedly stable, sent $125 million in fright capital abroad; Venezuela in 1963 exported two thirds of its entire foreign exchange. Another significant thing about this bleeding is that the dictator’s money gets all the publicity, but most of it is sent abroad by private citizens. Even the oligarch money accounts for only a part; every businessman and shopkeeper in such countries as Venezuela and Brazil, beset by governmental chaos and rampant inflation, sends abroad all the money he can. There was a time when the little people did not think it mattered who sat in the presidential palace. Since the advent of Castro, and of his imitators, such notions have changed.

But the Swiss are no source of capital to the poor nations. Swiss banks, through backing Belgians, dropped some $120 million in the Congo fiasco. The Swiss, who once were extremely important in certain industrial financing in Africa and Latin America, are closing that door, or rather, feel it is being closed on them. The Swiss money goes increasingly only into the Atlantic world; the rich get richer, and the poor poorer. Swiss bankers, pressed on the sociological implications of this, say bluntly that nothing is given to man in this world, and people deserve only what they earn. They point out that Switzerland is a tiny country completely without mineral resources of any kind, and that it got where it is today largely through an ethic and hard work.

The cases of Italy and France recently, with money flowing back to France and again leaving Italy, seem to prove that stable government must come before stable economics. Meanwhile, certain blood-and-sweat money is very useful to the Atlantic community as a whole, through Swiss banks.

THE Swiss tax expatriate is something slightly different from the frightened depositor. A few years ago a Swiss lawyer worked out a hypothetical schedule for an anonymous movie star, who earned $1,000,000 per year, and who at pre-1964 U.S. rates might be liable to as much as $870,000 in income taxes. British and Swedish rates were even more ghastly. However, if the star bought a Swiss villa and established residence in the right canton, he could then form a personal corporation and have his entire income paid into it tax free. The corporate name does not matter the corporation can be called the William Holden Company, the Noel Coward Corporation, Elizabeth Taylor & Cie, or Joe Blow, Inc. It is not necessary to be a movie star; writers like Georges Simenon or Irwin Shaw, even a Swede who happened to be heavyweight champion of the world qualify. A large and liquid income is the criterion. Patent and license millionaires, a new and important breed, can use a personal corporation too.

Such a corporation, in the best of cantons, pays only two tenths of one percent corporate tax. Swiss income taxes have to be paid on the sums dispensed by the corporation (say $5000 to $10,000 per month living expenses), but Swiss income taxes are most moderate by Atlantic standards. No tax is collected on undistributed profits, and there is no requirement that profits ever be “distributed.” And after all Swiss taxes, if the American star or writer or millionaire has had to pay more than a tenth of what his U.S. tax would have been, he or she should consult new legal talent.

Nationals of some countries may have to change citizenship; for Americans and British subjects this is not required. The new U.S. tax laws are affecting this operation, especially the imposition of taxes on amounts over $25,000 earned by Americans domiciled abroad. Solutions, however, are being found; if necessary, some people, like Elizabeth Taylor, may run up the Union Jack. Parliament has been most reluctant to tax British subjects living overseas.

British domestic taxes, meanwhile, assure that Peter Ustinov and Noel Coward in Vaud, and Richard Burton in Geneva will go home only if necessary to fight for Queen and country. Orson Welles, Charlie Chaplin, Maria Schell, William Holden, Mel Ferrer, Audrey Hepburn, Sophia Loren, Deborah Kerr, Valenti, and a horde of lesser lights have all found the Swiss climate invigorating. Of all this group, only Maria Schell is actually Swiss.

Residence permits are tightly controlled. But in Ticino money draws respect, whether it is the Aga Khan’s, the Sheikh of Kuwait’s, or Fritz Thyssen’s. If they are “in,” the very rich can often also make a deal on taxes, which in some cantons are negotiable for foreigners. Swiss tax men have never seen any reason to be stuffy or conventional. One man who went through the process described it as follows: “You go in with your Swiss lawyer and tell them you have an income of five million Swiss francs. You will send it all to a Swiss bank. Then you promise to spend at least two million in the canton — and with lake yacht, autos, servants, villas at $250,000 an acre, and all the hangers-on and girlfriends, they believe you. Then you say frankly you want no trouble over taxes, and are prepared to pay, say, fifty thousand a year. If you have real substance, you can make a deal.” The cantonal authorities feel that they come out ahead when they settle for what is offered, since, instead, the customer could always go on safari, or to Jamaica, and could take all his money with him.

Many of the rich favor numbered accounts. The numbered account, which assures secrecy inside the bank as well as abroad, came into vogue when in the 1930s Swiss banks first began to undergo independent audits. Even auditors, who come under Swiss bank secrecy laws and would go to jail if they talked, have no idea whose accounts they are working on. With a numbered account, only two or three bank officials know who the client actually is — but someone in the bank must know; there is no such thing as an “anonymous account.” The numbered account gives a certain added protection against inadvertent or bribed betrayal; a Jewish depositor in 1934, or a Rumanian exporter in 1964, slept better if few people knew his name. The Gestapo was once active in Switzerland, using bribery on bankers, and in 1958 a Rumanian attaché was expelled for taking money around from bank to bank, to see whether any would accept it if he offered it in certain names.

No Swiss bank advertises numbers, but all give the service, legally and without question, if requested. The decision has no bearing on whether the customer is acceptable as a client or not. As everywhere, there are banks and banks, and some, admittedly, are not fastidious. But even the most notorious of Swiss banks, like the old Banque Commerciale of Basle, which once helped smuggle assets over the border for clients (and which failed from too much German investment), has never been accused of being controlled by the Mafia, as some American National banks have been.

The game, then, goes on. Men still write out digits in longhand as their normal banking signature, or disguise a number in a complicated cable code. And while new tax treaties between nations are under negotiation, it is safe to assume that Swiss banks will stay ahead of all attempts to keep money at home. The only thing which could end the Swiss position in world banking is the arrival of worldwide stability in politics and economics and sound money everywhere: a world in which money could How freely wherever it was needed, without fear of regulation, restriction, or confiscation, and a world in which there is limited, reasonable taxation even of the rich.