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Ought to Know

Swiss Banks, Tax Havens and Hawala

By S.B. Dangayach


Swiss Banking/ Offshore Banking:

WHAT YOU ALWAYS WANTED TO KNOW BUT WERE AFRAID TO ASK

(A compilation from documents in the public domain)
 

History of banking secrecy in Switzerland


Switzerland’s tradition of financial discretion goes back to at least the 17th century. In the wake of World War I, as many European currencies became unstable, the stable (not to mention neutral) Swiss franc attracted depositors.

After France, incensed by its loss of revenue, raided a Swiss Bank’s office in Paris and revealed the names of its accounts, the Swiss passed a law in 1934 making such disclosures criminal. Years later, Swiss banks both sheltered the assets of German Jews and accepted looted Nazi gold (and later set up a $1.25 billion compensation fund for Holocaust victims). In more recent times, corrupt leaders ranging from the Philippines’s Ferdinand Marcos to Nigeria’s Sani Abacha have used Swiss banks to hide their ill-gotten gains.

Banking secrecy was introduced in Switzerland in the 1930s with the stated aim of protecting the privacy of bank depositors. According to Besson (2004, pp. 26- 27), the law was primarily a response to attempts by France to obtain information about deposits held in Switzerland by French nationals. The Swiss government was well aware of the economic importance of foreign funds deposited with Swiss banks.

A diplomatic dispatch from that period states that [Switzerland] has no interest in cooperating with French agencies as that would have highly adverse consequences for the important business in foreign deposits conducted by [Swiss] banks. Three quarters of a century later, , Swiss law continues to punish violations of banking secrecy with fines of up to 50,000 Swiss Francs and imprisonment up to six months.

Switzerland is landlocked. So how did offshore banking and tax havens emerge in the world?

Although taxation has existed since the times of the ancient Greeks, the British put into place a particularly strenuous tax code in the beginning of the 20th century. The first offshore banks cropped up on the Channel Islands, between France and Britain. These offered places to keep money without it being taxed.

The first offshore banks were so named after the Channel Islands banks. Later, it became a tradition for many places that offered offshore banking to be islands, in accordance with the name. Places like the Bahamas, Cayman Islands and Cyprus are all examples of this.

This became lucrative for small countries to attract capital and funds by offering either no or low taxes. Many of these were neither islands nor near a sea/ocean. These are referred to as tax havens because of their secrecy law and low taxes they levy on incomes.

What is the popular meaning of the term “Swiss Banks” or “Swiss Banking” and what are the most common services they offer?

Switzerland was the pioneer in permitting banking secrecy of a high order. Hence, it is synonymous with the concept and “Swiss Banking” has come to mean all types of surreptitious and opaque banking operations.

In this booklet, Swiss Banking is a term used for such banking transactions and operations whether they are carried out onshore, offshore or within the jurisdiction of an otherwise totally law abiding country.

What are the differences between regular banks and offshore banks in tax havens?

Banks in tax havens offer literally all the services that onshore banks provide besides some specialized services such as: Estate planning, Wealth management, Trust formation, Foundation formation, International business corporation formation, Personal investment banking and Numbered accounts.

Such banks offer lower interest rates than regular banks. In many cases, they collect a service charge for management of deposits made with them.

Spread of tax havens in developed countries

Switzerland was probably the first recognized country to master and market secret bank accounts. Following their success, many other countries like the UK and Netherlands created special centres that were their colonies and could be isolated from their mainland. With this logic in mind, many islands became centres for secret banking. Over a period of time, some countries like USA created special zones within their own jurisdiction where similar services are available.

List of centres that offer services that are similar to Swiss Banks

At the last count, there were nearly 80 recognized centres all over the world,  some very renowned and many risky. Singapore, Hong Kong and London have respectability whereas many lack credibility and trust.

An illustrative list of offshore banking centres:

Caribbean

Anguilla, Antigua, Barbuda, Aruba, Bahamas, Belize, Bermuda, The British Virgin Islands, Barbados, Cayman Islands, Dominica, Carenade, Monts

Central America

Panama, Costa Rica

South America

Uruguay

Europe

Isle of man, Channel Islands of Jersey, Guernsey, Cyprus, Malta, Switzerland, Austria, Liechtenstein, Luxembourg, Belgium

Africa

Mauritius, Seychelles, South Africa, Liberia 

Asia 

Hong Kong, Singapore, Macau, Bahrain, Dubai, Lebanon


If there are around 80 recognized centers, why do people mostly talk of Swiss Banks?

It is believed, even though correct figures are not available, that Switzerland had a dominant share in the illicit financial transactions going on in the world. Many of the world renowned banks and private investment firms are known for efficient sanitization and management of illicit funds. In short, Swiss Banks have higher credibility as against banks and institutions in other centres even now.

What types of banks or financial institutions or entities are covered under the umbrella of “Swiss Banks”?

“Swiss Banking” centres are havens for the biggest and the best of the banks/insurance companies/financial institutions. For example, Cayman Islands is a paradise for banks and 90% of the biggest of the banks of USA and other countries have their headquarters or major offices here.
Bermuda is the preferred choice for all the major corporates in the shipping business.

Delaware state in USA is the headquarters for all credit card companies as the state allows levy of interest rate without limits on credit card related defaults in payment.

MNC’s use subsidiaries and shell companies in tax havens for mispricing, suppression of profits or diversion of wealth.

Who controls various financial centers and what laws apply to them?

Countries like Switzerland, Singapore and others are very rich and important sovereign nations. However, other centres fall in two categories: Island nations like, Cayman, Jersey, Isle of man, etc., are under the total control and jurisdiction of developed nations like the UK and Netherlands.

Enclaves like, Delaware are part of powerful nations like the USA. The motive behind such favoured areas or zones is to facilitate retention of ill gotten wealth or to keep profits within the respective countries.

In short, these centres are all protected, controlled and promoted by developed and powerful countries.

In addition there are smaller nations such as Mauritius, Singapore and Malta which have no such links with developed countries.

Is it correct to surmise that the creation of Swiss Banks is in itself meant to encourage ill gotten wealth creation in other parts of world to support economies where Swiss Banks are based?

Yes. Switzerland had a tradition of safeguarding and protecting wealth of others for centuries. To ensure that wealthy people from UK did not take their wealth to Switzerland, the former created offshore banking centres. With the same objective, USA has allowed Delaware many tax concessions and China has permitted Hong Kong and Macau to offer similar formats for attracting and retaining illicit money from all over the world.

Please name top 10 tax havens and offshore centres (Swiss Banking centres that protect wealth, predominantly illicit and help evasion of taxes).

Following are the topmost centres (Taken from `Top Ten Tax Havens’http://www.cpachina.com.hk/offshore/StockNews/eng_index.html, updated on Wednesday 21 July 2010)

Delaware
If you want corporate secrecy, staying at home is best.

Luxembourg
An aggressive small government defending tax secrecy from within the European Union and attracting massive inflows of funds through its low-tax corporate structures.

Switzerland
It is the archetypal tax heaven and in many ways the grand daddy of them all, created banking secrecy to help tax evaders (not to assist Jewish refugees as they often like to claim) and until a few years back, thought to be impregnable.

Cayman Islands
The world’s biggest small island financial centre has a reputation for secrecy and low tax, but no one has yet answered the question, “does anything really happen there apart from affixing brass plates on doors”.

The City of London
The epicentre of the largest network of secrecy jurisdiction in the world – all focused on channeling anonymous money into London, which is done on an enormous scale.

Ireland
Set out to make itself the low-tax entry point for Europe. It all seemed to go so well for so long – until the economy keeled over as bank after bank failed, revealing a situation where a blind eye had been turned to all regulation.

Bermuda
The favorite location for US corporate inversions, i.e. companies that move their headquarters to a tax haven while retaining their material operations in higher tax America and any offshore insurance company.

Singapore
Doing everything it can to take over Switzerland’s mantle. Is Singapore the new ‘S’ in UBS!

Belgium
A surprise entry, but Belgium has for many years been quietly working away at operating a low-tax regime for corporations and not exchanging information on bank accounts held in the country. It’s changed its spots of late though.

Hong Kong
Yet another former British tax haven. Low taxes, high secrecy and vast amounts of real trade help hide the illicit flows its secrecy assists.

What are the types of illicit money that are brought into Swiss Banks?

There are broadly 3 (three) types of illicit money:
Commercial
Corruption
Criminal

Commercial activities have a sizeable illicit part ranging from transaction to transaction. There are several avenues of generation through false pricing, overbilling, composition of payment, comprising the following:
• Under invoicing/over invoicing of exports and imports and getting the balance
stashed abroad.
• Kick backs from major defence/civilian contracts.
• Not bringing the earnings abroad.
• In the olden days smuggling of Gold and illegal money.
• Transactions done abroad and not reported here/hawala funds.
• Funds earned by artists/entertainment industry /sports people and stashed abroad.
• When you want to indulge in Adharma

Corruption money is omnipresent in all major transactions worldwide and minor transactions in most developing nations. Opaque resource allocation and license/permit administration are also connected with illicit money through corruption.

Criminal component is probably the biggest. It consists of narcotic drugs, human trafficking, terrorism, etc., all generating large tranches of cash.

Do any agencies collect data on flow of illicit funds?

There are several organizations. Washington based Global Financial Integrity collects and publishes its own assessments.

There are think tanks like Tax Justice International (TJI) that do their own evaluation and estimates. India has been a very significant member of the group that loses big amounts through illicit means. The opportunity cost of funds that have left India since Independence amounts to around 500 billion (CBI director) on the lower side to $ 1.2 trillion dollars on the higher side. Source – Global Financial Integrity (GFI)

Do “Swiss Banks” solicit deposits on their own and if so what are the methods and
means?

 

Banks, institutions and organizations in “Swiss Banking” Centres follow many routes – some direct and many indirect. If you see a respectable magazine like ‘Economist’, you can find several small classified advertisements soliciting deposits for offshore banks.

Switzerland has some celebrated banks like Credit Suisse and UBS with worldwide network of branches and agents. Under the label of “wealth management function” such services are canvassed and offered.

Leading banks like, Citibank, J.P. Morgan, etc., also offer similar services. For high net worth individuals, both onshore and offshore services are appropriately structured and offered.

Thus, deposits and customers are attracted through all available channels and of course directly.

Who are the other partners of “Swiss Banks” in the world?

“Swiss Bank” have several channel partners like:
Offshore consultants
Wealth management firms
Wealth management departments of established banks
Partner banks that generate illicit funds
Insurance companies like AIG that are willing to open several subsidiaries and trusts that are dedicated to specific causes or investors
Large audit firms that are needed to help corporates in tax planning
Small boutique audit firms that can connect with high net worth individuals
Hawala operators

 

What is the role of offshore tax consultants and what is the broad range of services that they offer?

Offshore tax consultants have the prime role of helping clients to secure best returns on the money routed through them while ensuring safety as well as ease with which money can be moved or withdrawn. They enlighten, guide and facilitate all the transactions for an agreed fees. Like in other fields, they may charge fees from either side or both sides.

There are many complexities in structuring financial arrangements/entities like, trusts, companies, partnerships, etc., for proper management and administration of such funds. Offshore consultants also offer requisite services for such formalities.

Is there any involvement of big audit firms in the mobilization of deposits?

Big audit firms have several arms. Audit is the front part but there are many back end services that they provide in consultative or advisory roles. Efficient and cost effective tax planning is one of the important services. Likewise, project conception, project financing, etc., are also undertaken by them. Though not apparent, there are close interconnections of associates of audit and consultancy firms with “Swiss Banking System”.

So what is the common method of opening and operating accounts in “Swiss Banks”?

Different centres follow different rules. In several centres, you can also demand modification of rules to suit you as long as you have attractive levels of wealth to deposit.

What are the different types of accounts available in “Swiss Banks”?

There are many types of accounts in Switzerland. Following are some of the accounts for different usage:

Current account: Used for salary deposit and for daily usage. They also offer small amounts of interest.

Saving account: Used for saving purpose. They offer a good rate of interest and offer limited transactions.

Numbered accounts: These accounts offer more privacy. Banks allot a number as the account title instead of a name. No one can find the details of the account, like who owns that account. Such accounts are also known as anonymous accounts.

What is relationship between “Swiss Banks” and Non Swiss Banks?

It is unfortunate but true that onshore banks have normal business relationships with offshore banks and “Swiss Banks”. There is hardly any restriction in the free flow of funds – legal or illicit and thus deposits made in offshore/Swiss accounts are easily sanitized and made a part of the financial system worldwide.

How long and difficult is the process of laundering and sanitizing illicit funds that
come to “Swiss Banks”?

Not at all difficult. Web of consultants, audit firms, banks, private equity firms, venture capitalists, etc., have ensured that through careful planning and structuring, the complexion and color of money can be changed. To illustrate, let us assume that there is a collection of corruption money of the order of Rs.100 crore. This amount can be transferred to favoured destination through hawala. In the said place it can be converted and deposited into legal entities, like companies, trusts or outfits controlled by the individual or a syndicate. This money can then be invested by the individual in the manner as deemed fit or as advised by the consultants. This money can even be brought back as FDI or FII or private equity investment or venture capital.

What are the common practices of routing and laundering?

As mentioned above, money transfer is easy through Hawala or illicit channels. Once deposited in the selected account and favoured centre, it can be utilized in the manner found suitable. Further to it all the options are available thereafter.

 
In the initial or placement stage of money laundering, the launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location.

After the funds have entered the financial system, the second –or layering– stage takes place. In this phase, the launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channelled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not co-operate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance. 

http://www.bstdb.org/about-us/key-documents/corporate-documents/Anti_fraud_corruption_and_money_laundering_policy.pdf
 

Who is more corrupt/culpable – rich developed countries hosting the deposits and reaping the harvest or victim poorer countries from where the loot
originates?

It is known that in any crime all the stakeholders are equally guilty. In the process of collection, movement, deployment and utilization of illicit money, all the collaborators are equally culpable. However, “Swiss Banking” system has to take higher blame as it tempts and prompts people and corporates to perpetrate several types of crimes to generate and deposit illicit wealth. In the absence of such shelters and havens, criminals would have difficulty in hiding the proof of their crimes helping the world at large to bring down the extent of criminality. Without such safe destinations, it will become very difficult for the corporates to carry out many of the measures used to suppress or divert their profits. A similar impact will be felt in regard to corrupt deals.

In view of the above, it can be said that the rich destinations of ill gotten wealth as well as tax havens can be thought of as more corrupt/culpable .

What is the cost benefit of “Swiss Banking” for wealthy and powerful individuals and corporates?

Wealthy and powerful people gain a lot by the existence of “Swiss Banks”. Corporates and individuals are in a position to evade taxes that they ought to pay legitimately. The wealth coming into offshore accounts becomes available to the rich and wealthy after suitable laundering. The situation is identical to that of moneylenders who are able to have control over the destiny of poor borrowers. The moneylender has the lien on the property of borrower, has the privilege of collecting hefty interest and at the same time possesses power of taking full control of the property on smallest of the pretext.

Money available in “Swiss Banks” is converted into several types of advances to other banks or private equity institutions. As the developing countries lose capital through such drainage, they become increasingly weaker. The better credit rating of the rich and powerful nations and individuals results in their attracting more capital from “Swiss Banks” or derivative outfits at lower interest rates and thus overall clout and strength of the richer group increases at the cost of the poorer nations.

The cost of the illicit transfers is nominal to the wealthy and powerful. By respectable window dressing, they are able to enjoy better fruits with less labour. A place like Davos attracts the best of them every year to discuss global poverty and problems while knowing fully well the foundation of their pleasures.

 

What is the cost benefit of Swiss Banking for rich and wealthy nations?

Illicit or dirty money brings billions/trillions of dollars out of non-Western and developing countries into developed and Western world. Actually, most of the money deposited in the secrecy jurisdiction in Caribbean islands or parts of Asia and Africa is immediately transferred through different channels to the entities controlled or administered by the Western countries. On the last estimate every year around 1.2 – 1.5 trillion dollars comes into the illicit channels. Such a large amount of cash into the hands of rich and powerful nations gives them leverage and clout to subjugate, suppress and control the fate of poor and developing nations. This illicit wealth available to the Western world enhances lifestyle and consumer spending while causing greater hardships and impoverishment in the developing nations.

The costs to the advanced nations in general are through:
Narcotic drugs, increased global crime, terrorism, growing corruption, increasing poverty, impact of failure of several states and countries, unrest in many parts of the world and corporate crimilisation.

What are the damages to the citizens in countries from where illicit funds are extracted and taken away?

There are several problems created for countries that lose their precious wealth such as:
Increase in poverty and inequality
Lower government tax revenues
Lower health and education expenditures
Lower rate of economic growth
Lower levels of investment
Failure of policies
Higher levels of inflation
Increase in the debt burden on poorer countries

Developed nations like the US have been talking about anti money laundering laws. What are the recent developments?

Anti-money Laundering (AML) is a term mainly used in the financial and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent or report money laundering activities. Anti-money laundering guidelines came into prominence globally after the September 11, 2001 attacks and the subsequent enactment of the USA Patriot Act. 

Source : http://en.wikipedia.org/wiki/Anti-money_laundering_software

Today, most financial institutions globally, and many non-financial institutions are required to identify and report transactions of a suspicious nature to the financial intelligence unit in the respective country. For example, a bank must perform due diligence by verifying a customer’s identity and monitor transactions for suspicious activity. To do this, many financial institutions utilize the services of special software and use the services of companies such as C6 to gather information about high risk individuals and organizations. United federal law related to money laundering is implemented under the Bank Secrecy Act of 1970 as amended by anti-money laundering acts up to the present. Many people have confused Anti-Money Laundering (AML) with Anti-Terrorist Financing (ATF).

 

Under the Bank Secrecy Act of USA, Money Laundering and Terrorist Financing are classified when financial institutions file Suspicious Activity Reports (SAR) to Financial Crimes Enforcement Network (Fin CEN) which is a U.S. Government agency. To effectively implement AML and ATF measures, the US government encourages financial institutions to work together for AML and ATF purposes in accordance with Section 314(b) of the US PATRIOT Act. However, since financial institutions are required by law to protect the privacy of their clients, Section 314 (b) cooperation has not been generally adopted by financial institutions. To overcome this obstacle, the United Crimes Elimination Network (UCEN) has been established by AML and ATF professionals to achieve this global cooperation goal in compliance with the privacy laws of most countries.

Different countries, depending on the activity, demand different actions. For example, in the U.S. a deposit of US$ 10,000 or more requires a CTR (Currency Transaction Report), in Europe it is EUR 15,000 and in Switzerland it is CHF 25,000. In some countries there is no CTR requirement. Suspicion of ML activity in the U.S. requires the submission of a SAR, while in Switzerland a SAR will only get filed if that activity can be proved. As a result, thousands of SARs are filed daily in the U.S. while in Switzerland the rate is much lower.

The United Nations Office on Drugs and Crime maintains the International Money Laundering Information Network, a website that provides information and software for anti-money laundering data collection and analysis. The World Bank has a website in which it provides policy advice and best practices to governments and the private sector on anti-money laundering issues.

As per U.S. anti-money laundering laws what types of crimes are considered liable for action?

 

There are some crimes that when committed outside U.S.A. are not considered punishable in U.S.A.

In Switzerland, the situation is similar. Only a few serious crimes are deemed to be worthy of punishment.

Thus, practically all the illicit money generated worldwide can be suitably packaged and declared under categories that are beyond the purview of the criminal law of the said centre or nation.

What is the success rate of anti-money laundering laws in the topmost open countries, like the US?

Only 0.01% in USA.

The dismal rate is due to fact that all the money transactions can be hidden under one or the other legitimate activities.

In Switzerland it is impossible to get anybody charged on the criminal conduct in these matters by similar logic.

Other centres are a lot more welcoming and lenient. Some of the island nations change their laws to accommodate various illicit operations. Thus, in such centres
it is impossible for anybody to get convicted. 

What is the governing principle behind “Double Tax Treaty”?

Many countries have come to a mutual agreement with each other via treaties to limit taxation of incomes in both countries. A double taxation treaty is usually an agreement that tax would be levied only in one of the countries and not in both. It is a well settled and well known fact that companies or corporates can have their headquarters in one country and operate their units in another. For illustration, let us assume that Coca Cola wants to have its manufacturing and marketing units in India. It can have its Coca Cola Asia H.Q. in Mauritius or Cayman Islands or any other tax haven and operate its units in India or China. It can exercise the option of discharge of income and corporate tax either in India or Mauritius. It can state that it will pay its taxes in Mauritius as long as there is a double taxation treaty between India and Mauritius. By this option, Coca Cola can maximize profits in India. As income tax in India is around 30% and is only 1% in Mauritius, it accumulates all the profits in Mauritius and evades payment of taxes in India. This practice is widely prevalent and is the cause of dirty or illicit money through commercial transactions encompassing fake pricing, mis-declaration, franchising fees, management fees, etc.

A treaty allowing an individual to become a non-resident in his country but a resident in one of the “Swiss Banking” jurisdiction gives similar tax benefit to him depending on the contents of the treaty. 

It is through such treaties that investment in developing countries like India is channelized. It is no secret that Mauritius occupies highest place in the Foreign Direct Investment (FDI) or for Foreign Institution Investment (FII) into India. Singapore is also gaining the momentum again due to favourable tax treaties.

Another fallout of such treaties is that illicit money generated in one country can be sanitized and brought back as legitimate investment through the “Swiss Banking” centre with which the country has a double taxation treaty. 


Is it possible to get much help or cooperation from “Swiss Banking” or Secrecy Jurisdictions?

As mentioned under 30 above, there are very few crimes that are listed as culpable offences by Switzerland or other tax havens. Even for the recognized crimes, like terrorism or narcotic drug peddling, all proofs and evidences have to be submitted along with letter of request by the country leveling the charges to get a basic response. The case of Hasan Ali Khan is fresh in the mind of Indians. Government of India has been unable to conclusively and cogently link deposits in UBS with crimes like, terrorism or narcotic drugs and has hence been unable to convince Swiss authorities to reveal any details.

To be realistic, it is going to be extremely difficult to secure much cooperation and support from “Swiss Banking” or secrecy jurisdiction centres since all such centres have been basically developed and promoted for hiding, disguising, sheltering, moving and accumulating unseen, unsheltered, unregulated and untaxed money.

What is the caliber and status of people involved in Swiss Banking processes?

Swiss Banking has attracted the best of banks, financial institutions, private equity and audit firms. Best brains are picked up by them at fanciful salaries to run operations smoothly. In several of these iconic companies, employees are made partners to perpetuate and promote the interest of the firms. Besides, relatives and friends of wealthy and powerful individuals including politicians and bureaucrats are hired for mutual support and gain.

If all top people, corporate and individuals are involved, what reforms can we think of?

Tax Justice Network/Global Financial Integrity and similar NGOs are demanding a level playing field. The present financial architecture is tilted in favor of rich and dishonest individuals/nations.

It is high time that some effective measures are put in place to restore peace, justice and equity. Brainstorming with the wizards should be the first initiative and top priority. Some good practices are already known such as those from Canada where crime committed within and outside the country receives the same treatment.

International Court of Justice, Human Rights Commission and UN need to be mainstreamed.

Mass awareness campaigns about menace of Swiss Banking and its affiliates on the lines of Anti Tobacco drive are also required to deal with this Societal Cancer.

Those persons who are interested in further reading may please read Raymond Baker’s Achilees' Heel of Capitalism and watch the movie :Capitalism –Love Story by Michael Moore which is available on Youtube.

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