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The Wall Street Journal Europe

March 15, 2001

International Commentary:
The Case for Swiss Bank Secrecy

By Benedict Hentsch,
the chairman of the Swiss Private Bankers Association.

     GENEVA -- The Swiss said "no" to opening negotiations to join the European Union -- by 77% to 23% on March 4 -- largely because they wanted to preserve bank secrecy. They wanted to save their country's distinctive freedom, a right to privacy in one's personal affairs.

     Of course, bank secrecy is not the only reason that the Swiss voted overwhelmingly against rapid integration with the EU. There were many that claimed that an independent-minded little country like Switzerland had nothing to do with the bureaucratic behemoth born in Brussels. Then there is the famous Swiss inertia and conservatism.

     But the defense of bank secrecy is what tipped much of the Swiss financial community from "neutral" to "opposed" to EU membership. If Switzerland had been bullied into becoming a member of the EU as a consequence of a positive vote on March 4, bank secrecy would essentially have been abolished under EU law. Without making any special provision to preserve Swiss banks' policy of protecting its clients, the mountain republic would be put at a competitive disadvantage. Luxembourg, Austria and Belgium have the right to retain confidentiality for their banks' clients until at least 2010. By contrast, the Swiss would have to surrender that right upon joining the EU. As a new entrant, Switzerland would not be eligible for the temporary exemptions enjoyed by several current EU members. Inevitably, Switzerland would have lost its competitive edge to these three countries -- and some deposits would move from Zurich to Luxembourg.

     Ideological Opposition

     Much can be demanded of the Swiss, but scuttling their financial industry is not on the list. Most bankers favor Switzerland's entry into the EU -- after all, there are many economic advantages -- but they do not want their financial industry hobbled. Consequently, many voted "No" on March 4.

     Partisans of immediate entry into the EU do not like bank secrecy, period.

     Their opposition is partly ideological. Together with French socialists, Swiss socialists campaigned for its elimination. In the wake of Che Guevara's infamous 1968 statement that "Switzerland is the true heart of the capitalist monster," many left-leaning intellectuals still dream of slaying this monster with a stroke of the pen. In many Swiss television programs and editorials, the subliminal message was that getting rid of bank secrecy would pave the way to a world free from corruption. That means ending bank secrecy and ushering in an era of immaculate transparency.

     The argument for eliminating financial privacy sounds simple-minded as soon as it is stated: Without secret bank accounts, money laundering would cease to exist. Perhaps criminals would dissolve into thin air when they learned that governments could scrutinize their transactions. Of course, this view overlooks that money laundering and other illegal dealings occur in every nation, whether or not it has confidential banking. Besides, Switzerland has one of the world's toughest anti-money-laundering laws on the books. It is hard to believe that ending bank privacy would yield any significant improvement in law enforcement.

     Realism in the approach to banking secrecy teaches three lessons that many would do well to learn.

     First, the elimination of bank-privacy policies would only aid Brussels' Big Brother impulses.

     Second, ending bank secrecy would not make the world more virtuous, unless it were applied simultaneously all around the globe. That is extremely unlikely. In reality, once the secrecy of Swiss bank accounts is eliminated, those who desire privacy -- and many law-abiding citizens do -- would simply transfer their money from Zurich to some offshore center.

     Third, eliminating the effect of crime and corruption is unlikely to eliminate its cause. Criminals are a crafty bunch. More regulation will not remove vice from human nature. Focussing on Swiss banking secrecy is a diversion. The public's attention should be centered on improving police and law-enforcement agencies, which do have the power to reduce crime.

     The entanglement of moral and economic issues is striking in the case of banking secrecy. The expression in itself is unfortunate, since it suggests some dark labyrinth filled with stolen gold, while banking secrecy is there to protect confidential dealings between bankers and their lawful customers.

     With hardly any natural resources and not unlike the Jews who, in the Middle Ages, were confined to jobs that involved them in financial networks, the Swiss have developed a remarkable level of banking skills and connections around the world. Was this development unfair because it was made possible only through the privilege of bank secrecy? More likely, bank secrecy is a natural outcome of solid growth in the banking sector.

     Tremendous Popular Support

     Whatever the cause, bank secrecy is part and parcel not only of the financial community, but also of Switzerland's political culture. Banking secrecy certainly enjoys tremendous popular support. As a land where people have the right to accept or refuse by referendum any new tax or tax increase, the Swiss have overwhelmingly and explicitly voted in favor of banking secrecy.

     Banking secrecy is part of a much larger debate about the protection of privacy. Privacy is an integral part of individual freedom. To get rid of it, even in order to promote "justice" or "transparency," would undermine this freedom. To be sure, unscrupulous individuals might use privacy to conclude illegal deals, as every banker everywhere in the world knows.

     That is one reason the Swiss banks have put in place a rigorous law on money laundering. They do not want dirty money, but do not want to throw the baby out with the bath water. The use of confidentiality by a handful of crooks does not warrant any government's order to eliminate privacy for everyone else. Who would agree to give up confidentiality when examined by his doctor under the pretext it has been used to stop fraudulent health-insurance transactions?

     Confidentiality is a necessary ingredient in a free society. An individual can only be free to the extent that he is safe from the prying eyes of his government and his neighbors. Those who wish to do away with privacy for account holders in Swiss banks may rue the day when illiberal precedents are turned against them.

     -- From The Wall Street Journal Europe

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