Ronald Holland is a real estate agent with Wolf's Crossing Realty and he lives at Wolf Laurel Resort in the NC mountains near Asheville.  He also writes articles and edits financial newsletters and economic reports designed to help Americans preserve their wealth and financial security. Click Here To E-mail Your Questions or Comments  or request a listing of mountain lots at Wolf Laurel where prices begin at under $20,000 per lot.

 

The Mystique of Switzerland & the Swiss Gnomes
by Ronald Holland

Note, Ronald now lives at Asheville NC's Wolf Laurel Resort, where he markets ski property, homes and real estate in one of the highest elevation 4-season mountain resorts in the eastern United States. He is an internationally known financial & marketing consultant & author of 3 books and over a hundred articles & reports, a leading speaker at financial conferences in the US and abroad and editor of several internet based news sites. He invented several financial products & services including the first gold IRA account and the first Swiss franc denominated variable annuity portfolio in the US and was president of a Swiss owned investment firm licensed in 47 states.

"Since 1515, when Swiss policy turned to political neutrality, guaranteed by all great powers again in 1815, its neutrality has been, figuratively speaking, its hottest export item. In a war-torn world, Switzerland became a storehouse for treasure and Fortunes"   - Walter Sorell "¹

Switzerland is known the world over as the ultimate safe haven for wealth and the only representative democracy confederation in the world today.  When one begins to discuss the Gnomes of Switzerland there is often a reticence to speak frankly and openly about this small group of Swiss bankers that guard so much of the world's private wealth. The purpose of this report is to break through the mystique of Switzerland and Swiss banking for international investors and high net worth individuals.

In discussing Switzerland and Swiss banking, we must first begin with the dark period of European history during the 1930's. Always known for the discreet confidentiality of financial affairs, Swiss bankers put even more restrictions on what could be revealed about depositors in their banks during this perilous Nazi era in Europe. Since then people from all over the world have continued to turn to Swiss banks to preserve their personal property in privacy. This reputation for quietly handling large and small private fortunes has earned for the Swiss banks and the financiers who operate them an aura of mystery and intrigue.

This group of Swiss bankers is known as the Gnomes of Switzerland. In public perception they share many characteristics with the mythical woodland persons they are named for: they seem mysterious, they are seldom seen, and appear to have great power. Their  existence and their monetary dealings are spoken about in a hushed tone, whether the conversation is taking place in Zurich and Geneva, or outside Switzerland in the financial centers of London and New York.

It is as if the confidentiality and privacy of Swiss finance extends to those that would breach the veil of Swiss secrecy anywhere in the world. The mystery and allure surrounding the Swiss Gnomes is not difficult to understand. Anything, which is as unimaginable  as Swiss financial arrangements, tends to emit an air of subterfuge. However, remember that Swiss banking does not exist in an independent vacuum, but is rather a reflection of the history and values of Switzerland and the traditions of the Swiss people.

Mark Skousen, noted investment advisor and financial privacy expert, writes:

 "Switzerland has a long tradition of financial freedom and confidentiality. It has always been the Swiss attitude that your money is your business and no one else's, not even the government's. The Gnomes have learned over many centuries to respect hard work and the economic blessings of capitalism. The Swiss revere honesty, private property, political neutrality, a stable currency, and the inalienable right to privacy. "²

Take a moment and consider a world today in which Switzerland did not exist. Private citizens of substantial means would be unable to count on the privacy and stability of Switzerland as a safe haven for their wealth. The international benefits of a truly neutral location for nations to arbitrate national disputes would be lost.

Most governments would be delighted at the prospect of being able to more closely monitor their citizens' wealth and global financial transactions. Financial service competitors to the Swiss banking establishment would jump at the opportunity to invest the 40% of the world's private wealth which is now managed by the Gnomes of Switzerland.

It appears, then, that the Swiss Gnomes and their private banking, allowed and augmented by the country's political neutrality, fills a need in the world economic market. Author Robert Roethenmund points out: "Unquestionably, a world without a Switzerland would considerably complicate the lives of many, while simplifying regulation and surveillance by governments. The fact that Switzerland does exist is proof that people, and governments, have a need for it, where it Is and as it is. The Swiss have a saying, If there were not a country like Switzerland, one would have to be created."³

Switzerland exists as the premier banking center for private wealth in the world today. For over 250 years, the Swiss have served as investment bankers to all of Europe, both to commoners and to kings. Since the 1930's, investors from all over the world have chosen to invest with the Swiss Gnomes. Such investors often cite secrecy, privacy and the world's strongest currency- the Swiss franc, as reasons for depositing their assets in Switzerland.

While it may seem that only criminals need this kind of secrecy, and in fact, criminals are those the media or Hollywood recognizes as having such accounts, most Swiss accounts are owned by average private citizens and major corporations.

In his book, Switzerland, Wealth and You, Alex Sutter points out the difference between the myth and the actuality of Swiss banking. "Mystery seems to surround Swiss banks. The media and movies conjure up images of stolen money hiding in secret accounts. Yet, the truth is that most of the world's large companies, including other banks and hundreds of thousands of individuals, bank with the Gnomes of Switzerland. Even the bankers' bank, the Bank for International Settlements, is located in Switzerland."⁴

To discover why the Gnomes of Switzerland now manage and control such a large percentage of the world's private wealth, first we have to go back in recent history to about 1933. There is an old German proverb that states: "Money alone does not make you happy; you must have some of it in Switzerland too."⁵ This adage was never more true than in 1933 Germany after Hitler came to power.

In that dark time of German history, tens of thousands of Germans, concerned about the future of their freedom and wealth, were sending funds abroad, and much of this wealth went to Switzerland. To counter this asset drain, the German government enacted a new law ordering all citizens to declare their foreign investments. Failure to comply with this requirement was punishable by death.

Even under the threat of death, most Germans did not report their Swiss accounts. Hundreds of Gestapo agents were then ordered to Switzerland in search of these secret accounts. They used bribery, fraudulent inquiries for account balances, wire tapping, opening mail, and even posing as the supposed account owner to request funds. This Nazi onslaught against the Swiss banking traditions of respect for privacy and property prompted the Swiss government to enact the Bank Secrecy Act of 1934.

As paraphrased by a Swiss banker, "The Act makes it a crime for a bank officer or employee to reveal any information about the customer's account to a third party without the written permission of the customer. Bank officers or employees are further prohibited from disclosing, even to the Swiss government, the existence or contents of any Bank account. Bank employees are covered under the law, even after they have left the bank or the banking business. A violation is punishable by a prison term of up to six months And/or a fine of up to 50,000 Swiss francs. Even if the disclosure Is by negligence, the fine ranges up to 30,000 Swiss francs."⁶

This law, in conjunction with accounts identified solely with numbers and not with the depositor's name, offered wealth protection and bank secrecy for thousands of German nationals and Jewish depositors.

This concept of investment secrecy combined with the security of Switzerland and the strong Swiss franc made Switzerland famous as a safe haven for wealth. While secrecy has attracted many clients of questionable integrity and intentions, the basic premise of Swiss secrecy remains intact.

Despite attempts by the governments of other countries, such as Germany in the 1930's and the United States and other nations in the twentieth century, to limit Swiss banking privacy, it still continues.

Some exceptions to the 1934 act have been made. Swiss secrecy has been lifted in the criminal areas of drug trafficking and money laundering, as well as in high profile political cases such as those of Noriega in Panama and Marcos in the Philippines. Still, Swiss privacy remains largely intact. Many investors see their Swiss deposits as a bulwark against individuals, institutions, lawyers and governments that may wish to unjustly confiscate their wealth.

There are limitations on banking privacy in Switzerland. In the booklet, ""The Truth About Swiss Banking", states the following: "Contrary to popular belief, there are limitations on banking secrecy in Switzerland. Banks are obliged to furnish pertinent information when the higher interest of the public or the state are involved, particularly in cases defined as crimes by Swiss law. The purpose of banking secrecy is to protect the innocent, not to shield the guilty, and history has demonstrated its usefulness."⁷

The benefits some of these German citizens received from Swiss banking secrecy laws can be seen in the following example, where wealth safeguarded in Switzerland was used to rebuild a family's future.

"In 1934, Hans Lubich, a prosperous German Jewish businessman, understood what kind of future the Nazi government was preparing for him. He decided to take his family to Switzerland for a "vacation." But before leaving, he converted some of his savings into the largest banknotes available. Since Hans was a shoemaker, he hid the banknotes in the soles of the family's shoes. So, despite the severe penalties for taking money out of the country, he smuggled 20,000 German marks into Switzerland. After they arrived in Switzerland, Han's children went skiing while Hans went to a bank. The Lubich family returned to Germany after the vacation, but the oppression of Jews continued to worsen. When Hans was given the opportunity to leave the country again, he took it; but he was not allowed to take any property out of Germany with him. He booked himself and his family aboard a cruise ship to Hong Kong, buying first class passage and every available extra, using up as much money from his German bank account as possible. Hans and his family made it to Hong Kong, and eventually, to the United States. After he arrived in the U.S., he cabled his Swiss bank, instructing it to send his money to America. This new money enabled him to buy a business and to begin his new life without financial hardship."⁸

Why has Switzerland, almost alone in the world, maintained it's tradition of banking privacy and independence while other nations have gone the opposite direction?  What makes Switzerland so different?

The answer lies in its history and its people. 

The rights of the individual Swiss citizens are further protected by three safeguards built into the Swiss political system which are designed to make sure the people rule the government instead of the other way around. A weak chief executive and the practice of the referendums and the initiatives severely limit the power of the central government in Berne.

The Federal Assemblies meet only four times a year, in sessions that last only two or three weeks. In fact, the Swiss central government has been described as being "in permanent recess."

With their Right of Referendum, the Swiss people have an opportunity to oppose any law passed. If 50,000 voters, a little more than one percent of the electorate, sign a petition questioning a particular law passed by the government, the law must be submitted to a vote of the people for final approval. If more than 50 percent of the voters oppose the law in a general election, it is rescinded. Any changes in the Constitution is automatically subject to a referendum.

Harry Browne, a financial writer and former resident of Switzerland, discussed the practice of Swiss referendums. "When the parliament passed a law, Swiss citizens who get 50,000 signatures on a petition can force the new law to be put to a referendum of the people. These referendums are held frequently - not just every two years. Once a matter qualifies for a referendum, the vote will be taken soon afterward. So these votes are sprinkled throughout the year, and they happen not only at the federal level, but at the cantonal and city levels as well."¹²

The concept of the right of initiative is unique in the world today. It allows Swiss citizens to actually create legislation and to initiate a vote on a piece of legislation directly. When 100,000 signatures, or signatures from just 2 percent of the voting population, are obtained for a particular proposal, and the proposal meets certain legal standards, it must be put before popular vote in a national election. This allows Swiss citizens to help make their own laws. They also vote for their own teachers, judges and priests.

The political practices of referendum and initiative really have an impact on Swiss banks and their world wide banking clientele. Based on past results, Swiss voters will generally vote against most measures that increase the government's control or call for more fiscal spending.

Because the parliament can be so easily overruled by the people, politicians don't often try to enact any new legislation which does not have the support of the majority of responsible Swiss citizens. So Swiss banking and privacy laws have had, and probably will have, very little change over the years.

Walter Sorell described the general Swiss population in modern history this way: "For almost an entire century the bourgeois, somewhat right of center, has been the image of the Swiss. He is so strong that he has been able to absort all revolutionary movements, integrating socialism into his huge industrial program, paralyzing all communistic trends, and assimilating the fascist fronts in the late thirties, This "bourgeois" shows resilience and inner strength of his stubborn and level-headed forefathers, herdsmen and peasants of whom he never ceased to be proud. This incarnate of the "establishment" can perhaps be best tagged as an "arch conservative liberal." He is the guardian of the past with the mission of a liberal, forced upon him by history and geography, as much as by the word. "¹³

Another key element in Swiss history is their defense program. The Swiss people have guarded their national independence through a strict policy of armed neutrality. The Swiss code of neutrality, as first drafted in 1515, states, "We will attack no one, participate in no war, will make no alliance, and will defend ourselves. "¹⁴

This policy has produced the largest army (when mobilized) in Western Europe, a mostly civilian army, which has saved Switzerland from destabilizing involvement in two major 20th century wars. The Swiss believe neutrality is best achieved by a strong nation rather than a weak one. Within 48 hours, the country can mobilize an army of over 400,000 soldiers with hundreds of battle tanks and jet fighters plus missiles and artillery hidden in hundreds of defense positions and underground fortresses in the country. Switzerland has armed sentries at all border crossings, with 3,000 points of demolition on bridges and tunnels.

Most of this defense structure is totally invisible by air. Hewn into the mountainsides are arsenals, hospitals, and even fighter plane hangars, with the highways built to serve as emergency runways. An entire army division can fit inside some hidden mountain fortresses that otherwise appear as unsullied as a picture postcard. Many Swiss bomb shelters even contain fully equipped hospitals and food for a year. Underground cities are stocked with stores of gold and currency for the post-war reconstruction phase. While other nations (like the United States) provide such bunkers only for their political and military leaders, the Swiss provide this protection for all.

The commanding officer of the Swiss Tenth Mountain Division, Adrien Tschumy, describes Swiss defense to author John McFee, in his book entitled The Swiss Army: "You must understand that there is no difference between the Swiss people and the Swiss Army. There is no difference in will. Economic, military - it's the same thing. For seven hundred years, freedom had been the fundamental story of Switzerland, and we are not prepared to give it up now. We want to defend ourselves, which is not the same as fighting abroad. We want peace, but not under someone else's conditions."¹⁵

The Swiss refer to their defense philosophy as the Porcupine Principle: Roll yourself up and make your quills so hard and sharp that any potential predator will think twice about attacking. Because of Switzerland's military and civil defense capability, it is one of the most militarily secure nations on earth. This is another reason Switzerland is home to a large share of the world's wealth.

Now let's turn to some very controversial questions related to the conduct of Switzerland and the Swiss Gnomes regarding the disposition of Nazi gold looted during World War II and lost bank accounts after the war. Specifically, what did happen to the Nazi gold looted from conquered countries and holocaust victims? What was the role of the Swiss National Bank in all of this, and most importantly, who profited from the gold transactions?

There is no question, Switzerland is not without fault in this matter,  Jean-Christian Lambelet, professor of economics, at the University of Lausanne, wrote: "It is true that Switzerland's behavior during the conflict was far from blameless. The Swiss National Bank was naïve at best and an accomplice at worst when it accepted German bullion. The country could also have sheltered at twice as many refugees as it actually did, especially in 1940 to 1942."¹⁶

A second issue is the dormant lost bank accounts in Switzerland. The question remains, did the Swiss banks conspire to hold this money at the expense of the rightful beneficiaries and heirs after the war?  With Switzerland totally surrounded by Axis dominated territory, how closely did the Swiss government and industry cooperate with the Germans?

Was Switzerland hostage to German power and threat of invasion as has been claimed by some historians? Finally, what lessons can be learned about Switzerland and Swiss banking from this sometimes regrettable period of Swiss history?

First, let's set the stage for Switzerland and its conduct during World War II. It is important to remember that Switzerland is an exporting nation, whose economy is dependent on sale of goods to other countries. However, Switzerland is landlocked with no direct trading route to the sea, except down the Rhine River through Germany. Mark Twain was correct in his description of Switzerland when he said: "Switzerland is simply a large, bumpy, solid rock, with a thin skin of grass stretched over it."¹⁷

Switzerland has little in the way of natural resources, and much of its land is unusable for agriculture. The country must import all fuel, including coal and oil, plus much of the food for the population comes from outside the country.

During the horrors of the Nazi era in the dark days of World War II, Switzerland stood alone in Europe, a tiny democracy surrounded by the Axis powers. To the North was Nazi Germany, to the East stood the Osterrich, which was formerly occupied Austria, but had then become a German province. On her western border, Switzerland faced German occupied France, and in the South was Fascist Italy. Switzerland was indeed a nation held captive within its own territory.

Her only window to trade outside Nazi Europe was through a narrow sliver of territory stretching from Geneva into Vichy, France. Even this route was cut off in the fall of 1942 when the Germans occupied the remainder of France after the successful American invasion of French North Africa. 

Although Switzerland was surrounded and under constant threat of German invasion during the war, the German war plan for invasion of Switzerland, code named "Aktion Schweiz" by the Wehermant, was close to activation only twice during the war. German troops were massed for attack first in 1940 and again in 1943.

The real threat came late in 1943 after the allies took North Africa from German and Italian forces. At best, Italy had become a wavering German ally, and seemed likely to become a belligerent and turn against Germany at any time. The worst case scenario was a future allied invasion of Italy. In either case, Italy would become a war zone with only two direct rail transportation links between the German Reich and Italy. The first was Austria's Brenner Pass, which was extremely vulnerable to allied air attacks. The second rail route led through the two north-south railroad deep in the Swiss Alps under the Gotthardt and Simplon passes.

Switzerland stood in the way of the survival of Italy and the German forces there at this point in the war. Switzerland could either act as a shield for the allied troops in an invasion of Italy or they could close their rail tunnels cutting off supplies to German troops in Italy. Either alternative was unacceptable to the German High Command. A compromise had to be worked out or German forces would invade and occupy Switzerland.

Hitler chose not to invade Switzerland due to three interrelated reasons, all in one way or another tied into the Gnomes of Switzerland.

The first reason was purely military. In their report of Swiss history, three university professors came to this conclusion: "When war broke out, 400,000 men were with the (Swiss) colors. That number was increased in the course of time by the members of the auxiliary services and by the home guard up to 850,000. There were never fewer than 100,000 men on active service, an impressive number in proportion to a total population of only four million. The world realized that Switzerland would oppose any power which attacked her with all the strength she had."¹⁸

The Swiss war plans were well known to the Germans. In the event of a German invasion, the Swiss army would only fight a delaying action retreat for the populated Metelland region where the cities of Zurich, Geneva and the capital city of Berne is located. The majority of the Swiss forces would retreat to their constructed Alpine fortress locations high in the Alps of Southern and Central Switzerland.  From there, the Swiss army would fight to the death.  The Crucial north-south tunnels and communication links were strategically located within this mountain fortress area.

The Germans were very much aware of the fact that if these tunnels and communication links were demolished, their troops would be cut off in the Italian front, an outcome that the German Reich desperately wanted to avoid.

The second reason was Switzerland’s industrial exports.  After Swiss export routes were closed to the Allies, the Swiss manufacturing capacity were utilized primarily for the German war production needs.  Switzerland played a major indirect role in the sustaining of the Third Reich military machine  to survive as a nation.

Neutral Switzerland had been spared from most of the air bombing destruction that plagued other European manufacturing cities.  Her industry was a major supplier of high quality industrial and military equipment to Germany.

Some of the goods were exchanged for desperately needed imports of fuel oil, coal and food.  Other Swiss military exports were paid for with German gold, much of it obviously looted from other captive nations in Europe.  These exports to Germany helped Switzerland maintain its national independence.  However, this independence was preserved at the price of accepting German payments.

Although some may feel this price was high, especially viewed in retrospect over 50 years later.  However, for Switzerland at that time, it may have seemed a necessary measure to stay out of the war and to thwart a German invasion.  These measures were similar to actions by other European neutrals during the war.

Sweden, for example, allowed large scale movements of German military forces across its borders, while the German steel industry, their most important war industry, survived on Swedish ore shipped across the North Sea.   And although Spain didn’t allow Hitler access to capture Gibraltar, it did send the famous Spanish Blue Division of volunteers to fight with the Germans on the Russian Eastern Front.

It is probably that the price of neutrality would have been higher had Switzerland been invaded and occupied.  Faith Whittlesey, a former U.S. Ambassador to Switzerland, discussed this difficult time and issue: “Although Allied military planners would certainly have preferred to see a Switzerland committed to their cause, Swiss neutrality brought many benefits to the Allies and even to those tragically victimized by the war.  In addition to the 20,000 Jews already protected through residence in Switzerland, about 22,000 Jewish refugees were admitted from surrounding countries.  Switzerland gave asylum to 200,000 other refugees as well.  Sadly, many were turned away – one of the regrettable compromises Switzerland made to avoid incurring the wrath of Nazi Germany. “¹⁹

Additionally, a neutral Switzerland greatly benefited U.S intelligence efforts and prisoners of war.  Whittlesey goes on to say: 

 “…Swiss neutrality also enabled the International Committee of the Red Cross, a Swiss institution, to aid countless displaced persons during the war and to improve conditions for Allied prisoners of war. American intelligence operations under Allen Dulles, run from Switzerland, provided invaluable, up-close information on the German war effort that greatly profited the Allies in successfully prosecuting the war.  Switzerland also became a safe haven for approximately 1,600 American flyers who were downed in Axis territory or who crashed in Switzerland.  Allied airmen were safely interned on Swiss territory, well-treated, and repatriated after the war.  Less known (and somewhat ironic, given the recent debate on Nazi gold), the Allies made significantly greater use of Switzerland’s gold and currency exchanges than the Axis did. “²⁰

Now we discuss the third and primary reason why Hitler did not invade Switzerland during the war.  It appears that Switzerland was indeed the location of a secret financial network of institutions that laundered looted gold stolen by Nazi Germany.  This gold was taken from national treasuries and individuals in countries invaded by Hitler, and was used to finance the German war effort.

While this much is deplorable enough, the rest of the story is even more unbelievable and in fact even involves U.S. financial institutions and the Federal Reserve.  We start with the “bankers bank” or the Bank for International Settlements headed by an American as we begin this sordid story.  Reporter Michael Hirsh has publicized some aspects of this in his article, “Nazi Gold:  The Untold Story.”

“They were ‘a sort of club,’ Thomas McKittrick explained. Banking buddies, pals, confidants.  He and Emil Puhl and Per Jacobbson.  Theirs was a typical old-boy camaraderie of cigars and bar talk and walks along the quiet cobblestones of the streets of Basel, Switzerland.  It didn’t seem to matter that the year was 1943, and they were an American, a Nazi, and a Swede.  Or that beyond their Swiss sanctuary, a hellfire was raging.  Young men were dying by the tens of thousands.   Jews packed into cattle cars were crisscrossing Europe toward slaughter, stripped of  property that, in one form or another, was often funneled as loot through Switzerland.  In fact, these genial club men don’t appear to have been bothered by their complicity in that horror.  They simply went about their work, helping to cash looted gold – gold that they must have known, as officers of the Bank for International Settlements, was stolen by the Nazis from treasuries and cities across Europe.  Gold that financed both the war and the Holocaust….” ²¹

 

Because of the involvement of the Bank for International Settlements, or BIS, other countries became involved in cashing looted gold and properties for the Nazis.  Hirsh continues his explanation:

“By most reckonings, some two thirds of an estimated $660 million, which amounts to about $7.8 billion in today’s dollars, in stolen Nazi gold passed through Switzerland during the war.  That’s were the BIS comes in to the conspiracy.  Founded in 1930, the bank is a quasi-public institution known as the “central bank for central bankers.”  It never played a bigger role than during World War II, when its key clients were the German Reichsbank and the Swiss National Bank.  The bank’s president at the time, American Thomas McKittrick, traveled freely to Berlin, hobnobbing with Emil Puhl, who was a Reichsbank vice president and BIS delegate, and almost doing business as usual.  Thanks in part to McKittrick and the BIS, Germany’s window to the outside financial world never closed. “²²

In looking more closely at the Bank for International Settlements,  the story become even more ironic and convoluted.  The BIS was established in 1930, by the winning Allied nations of World War I, to solve the shortfall in German reparations payments.  It allowed Germany to borrow additional funds by issuing bonds, to resume the payments.

At the end of World War I, Germany was forced by the victorious Allies to pay billions of dollars in reparations.  The strain of this debt, which many historians consider excessive, brought about the hyperinflation in Germany and contributed to the social and political climate which brought about the rise of Hitler to power in 1933.

Now the tables were being turned at the BIS.  In a twist of historical fate, the organization originally created to drain money out of Germany after her defeat in the First World War, was now being used to pay for Germany’s war machine during World War II.

Harold James, a Princeton University historian, agrees:  “The BIS was a central transmission place where deals were struck, where the Portuguese representatives would meet the Reichsbank representatives and that’s what kept money flowing into Nazi coffers “²³

Our next question is who actually owned this “central bank for central bankers” that kept the money exchanged for gold flowing into the Third Reich war machine?  Paul Erdman, a financial writer and founder of a Swiss bank, describes the structure of the BIS.

“Almost immediately after its founding in 1930, however, it became obvious that the BIS would go far beyond its original purpose.  This had, in fact, been foreshadowed by the unique nature of the ownership of the BIS; the controlling shareholders were the leading central banks of the world, initially those of Belgium, England, France, Italy, Germany, and Japan.  The American participation came from a consortium of American commercial banks – J.P. Morgan, the National Bank of New York, and the First National Bank of Chicago – with the Federal Reserve Bank staying in the background in order to avoid any possible political interference from its supervisor, the American Congress…..the BIS became the Club of Clubs, the Central Bankers Club, a place where they could secretly confide in one another, cut deals with one another, and often involve the BIS in the execution of these deals.  Consequently, the BIS developed into the central bank of central banks, a powerful link between the most important financial systems in the world.“²⁴

What part did the Swiss National Bank play in all of this?  They were the custodian of all the gold, a sort of Fort Knox of Europe.  Remember, back in 1941, President Roosevelt issued Executive Order # 8785 which froze the American gold holdings of all European nations including Switzerland, “to prevent the liquidation in the United States of assets looted by duress and conquest.“²⁵

The Swiss National Bank remained open, and its vaults held the gold stored on account and shuffled around between the different nations, including the United States, when government trade or purchases required payment in gold.

The Swiss National Bank made money on the government custodial gold business, so did the BIS where the deals were consummated.  Profits and gold also went to the BIS owners including the American Federal Reserve System and some U.S. commercial banks.

The chances of finding substantial Nazi gold in Switzerland or the Swiss National Bank is slim.  This is also the case for abandoned Jewish assets and accounts lost in Swiss banks, because, although a small portion of the claimed funds may exist, it is difficult to trace the abandoned accounts to the rightful heirs.

A respected spokesman for the banking industry indicated back during the late 1990’s that most of the so-called lost, or dormant accounts have already been found. "Bank Julius Baer & Co. Chairman Hans J. Baer, told Congress on April 23, Baer predicted that a final accounting will show that virtually all holdings 'already have been identified.'"²⁶

There are lost accounts in Swiss banks with an approximate total value in the tens of billions of dollars. The problem for the Swiss banks and for the rightful heirs to these accounts is how to determine who the original owners were and thereby the legitimate beneficiaries? 

Swiss privacy and secrecy can work to the depositor’s benefit or detriment, depending upon the situation.  Bank secrecy has protected many private account holders from confiscation, jail, and, in the case of German citizens during World War II, a death sentence for unreported foreign accounts.  You can be sure that Jewish and anti-Nazi Germans who opened up secret Swiss bank accounts in the 1930’s did not advertise even to their families that they had these accounts.

Remember, Germany was a police state and its citizens could not trust anyone, even their own family members.  A foreign bank account was a death sentence, and most of the account holders thought they would be able to return later and claim their funds.  Unfortunately, many failed to make it out of Germany or from behind the later Soviet Iron Curtain alive.

Even, if depositors were alive after the war and could visit Switzerland, 12 years had passed.  Many banks had merged, and the Basler Handelsbank that specialized in German business had failed and was liquidated by the Swiss government.  Imagine the questions.  Do you remember the number of your secret account or the false name it was registered under?  Where were your false papers you originally used to open the account?  The problems would have been extremely difficult even for living account holders, and these were almost insurmountable for many legitimate heirs of the dead account holders.

Swiss banking secrecy laws prohibit the disclosure of any information on an account, even if an account exists, unless you can prove you’re the rightful owner or beneficiary.

Frankly, this has always been the problem with any secret account or wealth held under Swiss or other secrecy laws.  If the owner tells the beneficiary, its not a secret anymore.  If nothing is revealed and something unexpected happens to the owner, the secret account and the funds may be lost forever.

In the United States, this wouldn’t be the case for the simple reason that bank privacy or secrecy does not exist.  The IRS or even a private citizen can call or write a bank and ask if there is an account there in the name of the person in question.  This happens all the time in government seizures and lawsuit judgments.  Anyone with a computer can very quickly determine where all of a person’s accounts are and how he spends his money.

This is impossible in Switzerland, even today.  Neither private citizens nor lawyers nor even the Swiss government or tax authorities can request or obtain such information.  Personal privacy and bank secrecy still exist for every Swiss and foreign investor generally unless foreign governments can prove to a Swiss court that a person is guilty of or suspected of a crime under Swiss law.

Another major difference between banking regulations in Switzerland and those in the United States is the disposition of the inactive or lost account.  In Switzerland, after lying dormant for twenty years, the dormant account funds remain at the bank indefinitely.  This money remains on account at the bank.  There are billions of dollars on deposit at Swiss banks with no living owner and no way to determine who the legitimate beneficiaries are.  This is a source of real profits for the Swiss banking industry.

By contrast, in the United States, after a period of years, a dormant account reverts to the state and the money is lost forever.

The lost money of the holocaust victims and their families indicate how the obvious privacy benefits of Swiss bank secrecy can work for and against account holders. 

The Swiss Gnomes provide a reservoir for the deposits of approximately 40 percent of the world’s private wealth.  Often these assets are deposited in Switzerland because of unrest or political and economic instability in the depositor’s home country.  Because of the stability and privacy in Switzerland, the funds continue to come into Switzerland, despite the risk of the accounts being lost.

Jean-Pierre Bernard explains this two way street:  “The 1934 Swiss privacy law saved many lives, particularly German Jews in the 1930’s, some of whom kept enough money in Switzerland to escape with their lives.  Swiss bankers resisted any Nazi subterfuge to penetrate the secrecy of those accounts.  And after the war, the U.S. government held all Swiss assets in the U.S. hostage, as leverage to get information out of Swiss banks about Nazi war criminals, but the Swiss remained adamant about protecting privacy.”²⁷

Although Swiss banking privacy is legendary, secrecy is not the most important reason for Switzerland’s success as a center of international finance.  Of greater significance are the financial and economic infrastructure combined with a hard currency like the Swiss franc and innovative Swiss bank investment services.

Seven of these factors are pointed out in a book by the Oxford Club:

“Switzerland has the respect of the world for its stability, safety, and peacefulness.  How is it that this tiny country, measuring only 137 by 216 miles, with almost no natural resources has the world’s strongest currency?  Has the second highest per capita income in the world?  Is the third largest financial center in the world, managing private assets of more than $2 trillion Swiss francs?  Has avoided war with other nations for over 200 years? Enjoys political and social harmony and stability, even though its population is culturally diverse and has four official languages?  Is ranked year after year in the top 10 places in the world to live by The Economist and by International Living?  And was recently rated number one worldwide for political, financial , and economic stability by the International Country Risk Guide? “²⁸

When one speaks of Swiss Gnomes, Zurich, the financial capital of Switzerland, always comes first to mind. Katrina Rollinson describes Swiss banking in Zurich this way:

“Zurich’s main thoroughfare, the Bahnhofstrasse, is now a major conduit for international finance and center to a banking industry that accounts for 6.5% of Swiss GNP and employs more than 140,000 people…Just around the corner is Switzerland’s central bank, the Swiss National Bank, which is responsible for regulating the finance industry.  Its location was said to have been strategically located and chosen near the lake to enable it to flood its huge gold vaults as a protection against invasion.  Some say its vaults stretch the length of the Bahnhofstrasse itself.” ²⁹

Besides becoming physically larger in size, Swiss banking has also become a larger presence in financial services. Rollinson describes this growth.

“Today Zurich ranks as one of the world’s most important financial centers after London, New York, and Tokyo.  It is an important hub for securities trading, asset management, gold and precious metals and foreign currency trading. According to Bank Vontobel, up to 40% of all foreign managed assets – between two and two and one half trillion Swiss francs – are managed in Switzerland.  The stock market in Switzerland ranks sixth worldwide and third in Europe, behind London and Frankfurt….Switzerland also ranks as the second most important currency trading marketplace in Europe after London, according to the Bank for International Settlements…The Swiss banks are now among the world’s largest traders of stocks and bonds; they are some of the most prodigious lenders in the international capital markets; and they regularly feature among the 20 underwriters of Euro and global bonds…However, their prudence and conservatism remain: they are among the most creditworthy banks in the world. “³⁰

Swiss banks are of interest to many individuals and corporations as a means of establishing a strong base for global investments.

Swiss banks combine traditional banking with international brokerage and financial management. Depositors can bank in U.S. dollars, Swiss francs, or almost any other currency or combination of currencies.  Investors can purchase Certificates of Deposit, U.S. and international stocks, bonds, mutual funds and commodities; or they can buy, store, and sell gold, silver and other precious metals.  Swiss banks also deal in insurance and annuities; and the bank can act as your agent to buy and hold other types of assets.  And, of course, Swiss banks can also issue Visa, Mastercard and other international credit and ATM cards.

Therefore, for some investors, opening a Swiss bank account can be a first move in developing a strategy of safety and international diversification. An individual, corporation, trust, foundation, pension plan or any other legal entity can open an account in Switzerland.

Some international clients are attracted to Switzerland and the Swiss Gnomes because the Swiss banks are able to provide a wide range of services and are free from some of the banking regulations found in other countries.

There are over 500 banks and finance companies in Switzerland.  The three largest commercial banks are Union Bank of Switzerland, Swiss Bank Corporation and Credit Suisse. These major Swiss banks have branches throughout Switzerland as well as the world.  All branches provide the same services emphasizing financial privacy, high reserves for safety, and worldwide influence.

By law, Swiss banks are subject to the toughest capital requirements in the world, and guard a high percentage of their reserves in gold and Swiss francs.

Author Adam Starchild describes the controls and regulations on Swiss Banks:

“Swiss banks are regarded as extremely safe institutions.  The entire Swiss financial industry is tightly regulated and Swiss banks are strictly supervised by the Swiss Banking Commission.  Swiss banks face regular exacting and complex audits.  The audit process us both comprehensive and meticulous.  There are only 17 audit firms – each must follow a specific set of detailed procedures and rules laid down by the Banking Commission as they go over the bank’s books.  Because of its preciseness, the audit has become a guarantee for Swiss bank depositors.“³¹

Swiss banks must hold more capital against loans than required by the Bank of International Settlements, which coordinates global capital standards.  In Swiss banks, nearly 10% of the total liabilities must be equity.  To prevent banks from having unrealized paper profits on its securities, Swiss banks that own securities must write then down to market, or cost, whichever is lower every month.  Unrealized paper profits are common on the books of banks in other countries, thus overstating a bank’s actual strength.

The philosophy underlying Swiss banking is capital growth as well as capital preservation.  Thus, in addition to guarding a client’s money, they assist in its investment by offering many services that can help capital expand.

Swiss banks provide both deposit accounts and fiduciary accounts to buy and hold investments, the bank acting as a private agent to buy and hold any kind of financial instrument.  If a client asks their Swiss bank to purchase stocks, bonds, or precious metals, the bank will hold these assets in a fiduciary account, also called a custodial account or a safekeeping account.  A fiduciary account can also be used to hold other personal assets, such as home mortgages and shares of a client’s business.

Any investment made by the bank in a depositor’s name is always the exclusive property of that depositor and not an asset of the bank.  A deposit account, on the other hand, represents something the bank owes you.  It is a claim against the bank’s assets.  Checking accounts and savings accounts are deposit accounts.

Another feature foreign investors take note of is that non residents of Switzerland are free of all Swiss taxes.  Financial experts can structure accounts so that investors who reside outside of Switzerland pay no Swiss taxes, including the 35% Swiss withholding tax on interest.  Even for residents, this tax is charged only on money invested in Switzerland.

The Gnomes have made opening accounts as simple as possible, also in an effort to attract international investors and make Swiss banking accessible.  Alex Sutter describes what is required for a non-resident to open a Swiss account:

“Swiss banks are investor friendly and they have been dealing with foreign clients for centuries.  Opening an account in Switzerland is a simple and uncomplicated affair.  All bank officers speak several languages, including English.  Later, just mil or fax your instructions and they will be done immediately.  They execute orders quickly and courteously and are easy to deal with. How often do you go to your bank?  With today’s banking by fax, mail and plastic money, it isn’t very often.  Soon you won’t go at all. Banking will be done by coded E-mail from your computer.  Swiss banks are equipped to handle any kind of financial communication.  When you feel that you need the bank’s advice, just pick up the phone and speak to your personal banker who handles your account and knows you and your financial goals.  You won’t wait in line.  Swiss bankers respect you and your money, and sincerely feel that it is their responsibility to help you keep it.“³²

Another attraction Swiss banking has for international investors is that most Swiss banks have a selection of investment to choose from.  These plans may be diversified across industries and countries, international or emerging markets or may focus only on blue chip investments.  Some investors manage their accounts themselves, while others find personal and business concerns too time consuming, and hire the Swiss managers at the bank to handle the account.   Still others hire outside investment managers.

Generally, Swiss bank accounts can be opened with a $50,000 investment in mutual funds.  However, fully diversified managed accounts invested in individual securities often have minimums of $500,000 to one million dollars.

As the numbers and types of Swiss banking services have grown, so have the numbers of account managers and investment strategies available to meet the needs of most foreign investors, depending on risk tolerance.  In the current Swiss investment market, investors can choose from portfolios which meet conservative, moderate, or speculative investment needs.

Funds may be added or withdrawn from the account at any time. Most banks will provide an international debit card for purchases or cash withdrawals through automatic teller machines in the United States.  For some investors, an important feature of these cards is that international debit card purchases offshore usually are not recorded where they can be accessed by lawyers ad investigators who might investigate personal financial records.

 

While banking with the Swiss Gnomes certainly has an allure, investors need to address several concerns. The first thing is to request information from several financial institutions to make sure the bank is appropriate for the investor’s specific investment needs, account size and required services.

Americans taking advantage of Swiss bank services must consider several issues.  First is becoming aware or requirements for taxes and reporting requirements on a Swiss bank account.  The U.S. Treasury has reporting requirements for Americans who establish offshore bank accounts, which require every American with an offshore bank account when the value of the account exceeds $10,000 at any time during the year, even for one day, to file the appropriate disclosure forms.

While ignoring this requirement won’t bring the death penalty to Americans, as it did World War II Germans, it will have serious consequences.  The potential severity of not abiding by this reporting rule is explained by international tax expert, Carlos E, Kepke:

“Whenever depositing funds in a foreign bank account, don’t forget the Banking Secrecy Law, an inaccurate name if there ever was one – it should be called the Banking Disclosure Law.  It compels U.S. citizens with foreign bank accounts which total or exceed $10,000 in any tax years to report ownership of their accounts to the U.S. government.  If you have more than one account, the total applies to all accounts.  Something that is not well know is that this also includes certificates of deposits and negotiable securities in securities accounts.  Get convicted on this and you may be hit with a fine of up to $500,000 or a sentence of up to five years in jail, the same as for failure to report a transfer of cash out of the country.“³³

Another note is that any interest or gains on Swiss accounts, while not taxed in Switzerland, are reportable on U.S. tax forms each year.  Many Americans make the mistake of assuming that earnings accumulated offshore are not taxable in the U.S. while this is the case in most nations’ tax laws, only the United States, the Philippines, and the tiny African nation of Eriteria tax residents on all gains or income earned anywhere in the world.

Another area which causes some complications for Americans looking to invest with the Swiss Gnomes is the difficulties Americans have in receiving investment information from Swiss institutions.

More and more Swiss banks will not do business with Americans.  This is not because the banks don’t want to deal with American investors, but rather because of restrictive U.S. government policies and securities regulations that threaten foreign institutions offering non-registered investments to U.S. citizens.

Financial writer Michael R. Sesit discussed American investment restrictions in the June 27, 1996 Wall Street Journal article, “You Can Look, But U.S. Investors can’t get their hands on some of the best international investments”:

“Although many international investment opportunities have opened up to Americans over the past two decades, literally thousands of them remain effectively closed to individuals, in large part because of restrictive U.S. government policies.  What’s more, some of them rank among the world’s most tempting – and most successful – investments.   When it comes to international investing,  ‘ the individual American is one of the most restricted people in the world.’ Says Bruce Johnson, director of global research at ING Barings Securities Ltd.  in London.  The government is, in effect, saying: Despite your education, the general wealth of America relative to the rest of the world, you can’t be trusted to invest overseas…. “³⁴

It is not just unregistered stocks and bonds that are prohibited by the SEC from sale in the U.S. Unregistered mutual funds and most funds managed by Swiss banks are also unavailable to American investors.  Michael Sesit explains why many foreign investment companies stay completely out of the U.S. market.

…”Under the Investment Company Act of 1940, a foreign fund that isn’t registered with the SEC cannot offer its securities publicly in the U.S.  And if the SEC suspects something is amiss, ‘the onus falls on the investment company or unit trust’ to show that it isn’t, says Richard Rosenthal, European legal director for Morgan Stanley & Co. in London.  As a consequence, most offshore mutual funds play it safe:  They generally require investors to certify that they aren’t U.S. residents or acting on behalf of U.S. residents; many funds also bar U.S. citizens no matter where they live.” ³⁵

So clearly, American securities regulations limit an individual investor’s ability to invest in offshore funds managed by Swiss and other foreign institutions.

Jurg M. Lattmann, President of JML Swiss Investment Counsellors AG, in Zug, Switzerland discusses the reality of U.S. government SEC threats to offshore institutions, even extending to the largest Swiss banks.

“The SEC is not an organizations that Swiss investment institutions take lightly.  Remember Colonel Harwood?  I don’t remember what the investment model was, but there was some gold involved.  The Treasury wanted the financial records of the American customers of Harwood, who were dealing with Credit Suisse.  Under Swiss law it was illegal for the bank to release the information so the U.S. authorities threatened to confiscate the assets of Credit Suisse New York if that information were not surrendered.  This type of blackmail is what most companies are afraid of…..

For me, the worst thing about this whole system is that the U.S. government will not allow supposedly free Americans to get the information they want to have.  You travel the world and you see investment opportunities and you say, well, that would be interesting to do.  But as an American you always have to ask yourself, it is legal? Can I legally buy that or legally get this information?  The SEC is supposed to protect the investor, but when an American writes to a foreign country asking about an investment or insurance product what he’s likely to get is a letter back saying that due to SEC regulations the company is not allowed to send this information.“³⁶

In recent years, the validity and need for the Swiss bank account has been called into question.  Is there still bank secrecy and privacy today for foreign investors in Switzerland? If you are an avid reader of the financial press, it would appear that Swiss secrecy and Swiss banking have become an illusion; remnants from a bygone era and uncompetitive with current financial needs. 

For example, headlines appearing in financial publications in recent years include these:

• The Exploding Myth of the Swiss Banks

• Opening A Swiss Account Is No Big Secret

• Swiss Secrecy: Don’t Bank On It

• Laws, Fees Take Glow Off the Swiss Bank Account

• The Days Are Numbered For Secret Accounts

• Swiss Banking Haven Losing Luster

• Is Swiss Secrecy Still Bankable?

• Those Famed Swiss Bank Accounts Aren’t Quite As Impenetrable As They Used To Be

Despite these warnings from the press that Swiss secrecy is non-existent, Switzerland remains the safe haven of choice for much of the world’s private wealth.  Why the dichotomy?

One explanation is that many foreign governments, the press, and private financial competitors covet the near majority control the Swiss have over much of the world’s private investment business.   The headlines not withstanding, the following story clearly shows why and how Swiss banking privacy remains strong as ever.  While this is a dramatization, it reflects very closely the climate of modern Swiss banking. 

Jeffrey Robinson tells this story in his book, The Laundrymen:

“According to London’s Financial Times, 40% of all private assets worldwide are managed in Switzerland – a staggering amount of money.  But then, at last count, there were 108 banks in Lugano, and three times that many throughout Ticino.  There are more banks there than in the more populated, more accessible Canton of Geneva.  In fact, Lugano boasts one of the highest banks-per-capita rations in the world, more than twice that of Switzerland’s acknowledged banking capital, Zurich.

While every bank in Lugano is regulated by Swiss banking laws and governed every bit as fastidiously as every other bank in the country, the easy access from Italy and the proximity of well-established casinos make banks here especially attractive for anyone seeking an especially “discreet” relationship”  and because discretion is such a salient commodity you quickly learn that you can't just walk into a bank and announce you want to hide money.“³⁷

The experience Robinson’s character, called Signor, has as he attempts to open a secret Swiss account, could be duplicated by anyone who tries to go about it in all the wrong ways. “I’d like to open a secret bank account,” comes the request in a forthright tone. “Un compte secret.” A woman at the first bank doesn’t disguise her annoyance with such clumsiness.  “We’re not interested in any new business of that kind,” she says. 

The aspiration is repeated in a slightly less hearty voice at the second bank. “I’d like to open a secret bank account. Un compte secret.” A woman there is hardly more congenial. “Do you mean a compte anonyme? May I suggest another bank that might be more receptive?”  She does. It isn’t.  “We are not taking on any new private banking business,” a man at the third place explains to an increasingly unobtrusive inquirer. “Perhaps you might try somewhere else.”

An official at the fourth stop, directly across the street, is even less affable, despite the ever-diminishing decibels. “There is no such thing here as a secret bank account.  I’m terribly sorry to disappoint you. Secret Swiss bank accounts are only for the movies.”

However, at the fifth bank, when a properly hushed desire is expressed to discuss “various benefits of private bank,” the Special Affairs teller responds with a businesslike nod and directs her prospective client to a carpeted suite of offices behind a locked door.  There, an impeccably tailored Gentleman introduces himself, wondering graciously if Signor would care to speak French, Italian, English or German.  Signor suggests English. 

The gentleman nods and in a polished British accent, asks, “A Coffee?  Perhaps some tea?”  After two pitch-black expressos arrive on  a silver tray carried by a suitably attired waiter, the Gentleman closes his office door and asks how he may be of assistance.  Signor says he’s interested in establishing “a discreet private banking relationship. Perhaps something along the lines of un compte anonyme.”

“I must caution you.”  The Gentleman begins, “that this kind of facility has been much romanticized over the years.  The so-called secret Swiss bank account is strictly for pulp fiction and the cinema.” “Now where,” Signor probes, “do you suppose they got such a notion?”

He speculates, “Perhaps they’ve misinterpreted the banking rules in this country as they actually exists. What we do have to offer is a code that protects all bank accounts.  Everything from your conventional current account to your child’s savings account.  It’s a crime in Switzerland for anyone working in a bank, or anyone who has ever worked in a bank, to reveal any information whatsoever about an account.  It is against the law even to say that a specific account exists. “You mean you’d be breaking the law if you told me your wife kept her checking account in this branch?”  “That’s correct.” ³⁸

The experience Robinson’s character, called Signor, has as he attempts to open a secret Swiss account, could be duplicated by anyone who tries to go about it in all the wrong ways. “I’d like to open a secret bank account,” comes the request in a forthright tone. “Un compte secret.” A woman at the first bank doesn’t disguise her annoyance with such clumsiness.  “We’re not interested in any new business of that kind,” she says. 

The aspiration is repeated in a slightly less hearty voice at the second bank. “I’d like to open a secret bank account. Un compte secret.” A woman there is hardly more congenial. “Do you mean a compte anonyme? May I suggest another bank that might be more receptive?”  She does. It isn’t.  “We are not taking on any new private banking business,” a man at the third place explains to an increasingly unobtrusive inquirer. “Perhaps you might try somewhere else.”

An official at the fourth stop, directly across the street, is even less affable, despite the ever-diminishing decibels. “There is no such thing here as a secret bank account.  I’m terribly sorry to disappoint you. Secret Swiss bank accounts are only for the movies.”

However, at the fifth bank, when a properly hushed desire is expressed to discuss “various benefits of private bank,” the Special Affairs teller responds with a businesslike nod and directs her prospective client to a carpeted suite of offices behind a locked door.  There, an impeccably tailored Gentleman introduces himself, wondering graciously if Signor would care to speak French, Italian, English or German.  Signor suggests English. 

The gentleman nods and in a polished British accent, asks, “A Coffee?  Perhaps some tea?”  After two pitch-black expressos arrive on  a silver tray carried by a suitably attired waiter, the Gentleman closes his office door and asks how he may be of assistance.  Signor says he’s interested in establishing “a discreet private banking relationship. Perhaps something along the lines of un compte anonyme.”

“I must caution you.”  The Gentleman begins, “that this kind of facility has been much romanticized over the years.  The so-called secret Swiss bank account is strictly for pulp fiction and the cinema.” “Now where,” Signor probes, “do you suppose they got such a notion?”

He speculates, “Perhaps they’ve misinterpreted the banking rules in this country as they actually exists. What we do have to offer is a code that protects all bank accounts.  Everything from your conventional current account to your child’s savings account.  It’s a crime in Switzerland for anyone working in a bank, or anyone who has ever worked in a bank, to reveal any information whatsoever about an account.  It is against the law even to say that a specific account exists. “You mean you’d be breaking the law if you told me your wife kept her checking account in this branch?”  “That’s correct.” ³⁸

This experience helps demonstrate why lost bank accounts are so difficult to locate even by the rightful beneficiaries.  Additionally, although the Swiss banks will do what is required by law to find lost accounts, this is not a high priority unless a request is made, since these dormant accounts are a substantial source of bank revenues.

“Swiss silence is by design, and in all but the rarest circumstances, it is not merely 24-caret gold but inlaid with diamonds, rubies, and sapphires.  Every account is protected, at times to an extreme degree.   Take the case where someone dies and his heirs attempt to discover if he’s been stashing money in an account.  All they will ever get out of any Swiss banker is a hollow stare and a slightly chilly reminder that banking codes prohibit disclosure of any information concerning any accounts. 

However, in this case there’s more to it than a mere requirement to comply with the law.  Banks zealously cloister their business behind strict banking codes because they’re permitted to reap the bounty of accounts that have lain dormant for over twenty years.  If you die and no one knows about your compte anonyme, the bank can claim your money.  One estimate has it that at any given time there are tens of billions of dollars sitting unclaimed in Swiss banks.

So, technically, the Gentleman is right.  What he hasn’t endeavored to say is that in Switzerland not all accounts are protected equally, that some are considerably more equal than others.

Banks all over the world offer preferential facilities to customers willing to pay for the privilege. Private banking is standard product in today’s financial services industry.  Marketed as being extra exclusive, and therefore appropriately priced, it’s even readily available in every major North American city, where banking secrecy is scarcely ironclad.  However, when you speak about private banking in Switzerland, the accent really must be placed on the word private. “³⁹

So bank account privacy and secrecy still exist in Switzerland, but not if you break a Swiss law, or are a major political tyrant or dictator and have committed crimes against your citizens. Still, depositors are protected in many cases.

Andreas Hubschmid, First Secretary of the Swiss Bankers Association, made the following comments on the same subject: “Bank secrecy was never meant to cover up for money launderers and criminal organizations…..Today’s Swiss Gnomes must scrupulously identify their customers or risk a run-in with Swiss investigators.“⁴⁰

So, again, the original and continuing purpose for Swiss banking secrecy is to protect the innocent, not to shield the guilty, and indications from both Swiss government authorities and Swiss banking officials point to the continuation of this policy.

This experience helps demonstrate why lost bank accounts are so difficult to locate even by the rightful beneficiaries.  Additionally, although the Swiss banks will do what is required by law to find lost accounts, this is not a high priority unless a request is made, since these dormant accounts are a substantial source of bank revenues.

“Swiss silence is by design, and in all but the rarest circumstances, it is not merely 24-caret gold but inlaid with diamonds, rubies, and sapphires.  Every account is protected, at times to an extreme degree.   Take the case where someone dies and his heirs attempt to discover if he’s been stashing money in an account.  All they will ever get out of any Swiss banker is a hollow stare and a slightly chilly reminder that banking codes prohibit disclosure of any information concerning any accounts. 

However, in this case there’s more to it than a mere requirement to comply with the law.  Banks zealously cloister their business behind strict banking codes because they’re permitted to reap the bounty of accounts that have lain dormant for over twenty years.  If you die and no one knows about your compte anonyme, the bank can claim your money.  One estimate has it that at any given time there are tens of billions of dollars sitting unclaimed in Swiss banks.

So, technically, the Gentleman is right.  What he hasn’t endeavored to say is that in Switzerland not all accounts are protected equally, that some are considerably more equal than others.

Banks all over the world offer preferential facilities to customers willing to pay for the privilege. Private banking is standard product in today’s financial services industry.  Marketed as being extra exclusive, and therefore appropriately priced, it’s even readily available in every major North American city, where banking secrecy is scarcely ironclad.  However, when you speak about private banking in Switzerland, the accent really must be placed on the word private. “³⁹

So bank account privacy and secrecy still exist in Switzerland, but not if you break a Swiss law, or are a major political tyrant or dictator and have committed crimes against your citizens. Still, depositors are protected in many cases.

Andreas Hubschmid, First Secretary of the Swiss Bankers Association, made the following comments on the same subject: “Bank secrecy was never meant to cover up for money launderers and criminal organizations…..Today’s Swiss Gnomes must scrupulously identify their customers or risk a run-in with Swiss investigators.“⁴⁰

So, again, the original and continuing purpose for Swiss banking secrecy is to protect the innocent, not to shield the guilty, and indications from both Swiss government authorities and Swiss banking officials point to the continuation of this policy.

Do the Gnomes of Switzerland still offer needed services in the global world today?  In this advanced age of the Internet, electronic funds transfer and interrelated global economy and investment markets, can a small nation like Switzerland still compete on the world financial scene?

Fear of government and court ordered asset seizures, rumors of a new expatriation tax, and a legal system some feel is out of control are just a few reasons that more and more Americans decide to establish Swiss accounts.

What does the future hold for Switzerland, Swiss banking, and the Gnomes of Switzerland?  As international computer networking and electronic banking makes the world smaller, times are changing for Switzerland and her banking industry.  Swiss banks now have to compete on a global basis, and many of the smaller Swiss financial institutions have had to merge with larger banks.

Switzerland again faces a situation similar to the one she faced in the late 1930’s.  Once again a large super power is demanding an end to the long held Swiss belief of secrecy and privacy in financial affairs.  Again, questionable tactics are sometimes being used to break down the door of Swiss financial privacy.

While the Swiss have moved toward an open door policy on banking secrecy when there is proof of drug money, money laundering, insider trading activities, organized crime or if major political misdeeds are involved.  However, they have received a great deal of pressure to open the records even further.  As reporter John Templemann discovered,

“Despite the Swiss moves, pressure on Switzerland and other flight-capital havens to follow the straight and narrow is hardly over.  U.S. authorities are now trying persuade Switzerland and Austria to hand over information on the accounts of suspected tax cheats.  Both countries say they won’t unless prosecutors can prove massive organized fraud.  Even in these days of squeaky clean bank morality, old habits die hard.“⁴¹

A financial privacy newsletter noted this experience. 

 “….IRS investigators were accused of actually lying to Swiss authorities to get information about an account holder.  According to curt documents, they told the Swiss they were investigating the man for being involved in organized crime, when they were really investigating him for criminal tax evasion.  Under their Mutual Legal Assistance Treaty (MLAT) with the U.S., the Swiss are obligated to provide information in organized crime investigations. 

They are not obligated to help U.S. investigators in income tax evasion cases.  Thus, the Swiss authorities released the information that the IRS wanted, as required under the treaty….It later came out that this man was not involved in organized crime at all.  He was being investigated for income tax evasion….What’s more, the judge painted the IRS activities as a little white lie, and said that it wasn’t worth reversing the man’s conviction over it. “⁴²

Despite pressure from the U.S. and other large nations, however, past history indicates that Switzerland will continue to uphold the economic rights of financial privacy to both Swiss and foreign account holders. One reason that Swiss banking and privacy will survive is the economic importance of Swiss banking to the Swiss economy.

However, the major reason has nothing to do with the Swiss banking establishment or the need to retain foreign investors in Switzerland.  The main reason the Swiss banking and privacy laws will remain intact is that the people ultimately rule the government.  Even the political powers of the Swiss banks, the central government, and pressure from the United States can not overrule the power of the citizens and their right to initiatives and referendums when deciding important issues in Switzerland.

In the past, when national referendums have been held to vote on a reduction in bank secrecy, the voters continue to reject these proposals.  The citizens are not particularly concerned about eh privacy rights of foreign investors, but they are determined to protect eh historical rights to financial privacy for Swiss citizens.  By doing so, they protect the right to privacy of all world investors in Switzerland.

In Switzerland, the people rule, and sometimes they must drag the government in line behind them.  Such is the power of the people in the world’s only direct democracy.

Staying out of the European Union has had a major impact on the Swiss economy and financial system.  First in 1995, German investors fearful of losing the benefit of the German mark’s hard currency status, dumped billions of markets into Swiss banks, causing an upward explosion in the value of the Swiss franc.  Although this investment flood was good for Swiss financial institutions, the other major economic secrets of exports and tourism were hurt by the Swiss franc’s precipitous rise.  The greatest concern of the Swiss is managing the effects of a single European Union’s currency, the Euro.

Major financial changes in the world, and particularly in Europe, often prompt investors to pour money into the Swiss franc. Again, while this is good for Swiss financial institutions and foreign investors in the franc, the other Swiss industries would suffer.

Foreign investors can conclude that the Swiss National Bank will do what is necessary to safeguard the national economy.  The expectation exists, therefore, that if the Swiss franc become overvalued, the Swiss could again limit the acceptance of foreign funds.  Also of note is that the Swiss government has never restricted the withdrawal of funds.

Will the Gnomes of Switzerland give up their highly valued bank secrecy because of pressure from the Untied States?  Can Swiss banks continue to compete successfully in the world marketplace of financial and investment services?

The answers are found in the 700 year history of Switzerland.  Based on past performance, it is reasonable to conclude that the Swiss will compromise and negotiate while the slow wheels of Swiss democracy and change will continue to protect Swiss citizens and world investors from the outside risks, threats, ad intimidation.

Swiss bank privacy will continue to protect private citizens and those foreign investors that have broken no laws that are considered crimes in Switzerland.  As stated by a major Swiss bank in corporation with the Swiss Banker’s Association:

“The individual’s right to privacy is a basic concept that democratic countries recognize and reinforce with constitutional guarantees.  Since this democratic principle is the cornerstone of all personal liberties, the erosion of privacy through mounting government surveillance of citizen’s activities and attitudes raises disturbing questions in any free society. Switzerland and its banking community have compelling reasons for resisting invasions of privacy that threaten to compromise traditions and principles nurtured for 700 years.“⁴³

The  Swiss Gnomes will lead the Swiss banking industry to growth and profits and they will compete and continue to lead the world in private investment management.

“Swiss banks, like banks nearly everywhere, are challenged at home and abroad as technology and deregulation have increased competition and changed ways of doing business.  But Swiss banks are building on their strengths as they adjust to new opportunities.  Thus, optimism for Switzerland’s future and the place of its banks in world finance is clearly warranted. “⁴⁴

Switzerland provides a valuable service as a neutral location where politicians and adversaries can meet and discuss their differing views, problems, and resolve differences without war or economic intimidation.  The country also provides a service to private citizens and companies from around the world, who will continue to require a safe haven for their wealth, a haven that historically has been provided by the Gnomes of Zurich.

Unlike many countries where cultural traditions and heritage are often discarded and changed like used cars, real change comes very slowly to Switzerland.  For example, the earliest written account of Switzerland was in the first century B.C. when Poseidonius, a Greek writer, described the Swiss as “rich in gold but peaceable.”  Five hundred years ago in The Prince, Machiavelli’s classic on political power, he wrote “Switzerland is known for her stability and military strength.”

Then in the 19^th century, noted author Victor Hugo described the future of Switzerland when he wrote the following: “In history, Switzerland will have the last word.”

The past 700 years seem to affirm these conclusions.  Switzerland continues its long tradition of a belief in gold, stability, and political neutrality combined with a strong defense, and is on a path to continue these traditions.  Christopher Blocher of the Swiss People’s Party, stated the current Swiss view best, “We didn’t fight foreign domination for 700 years to give up our freedom now.“⁴⁵

Oxford professors agree in their analysis:

“Not although she is neutral, but because she is neutral, Switzerland can render valuable services to an international peace organization….The principle of Swiss foreign policy will always be: Neutrality and Solidarity.”  “⁴⁶

For the Swiss Gnomes in finance, their role in the past hundreds of years has changed in some ways, particularly in the use of technology.  But in many important ways, such as providing privacy in banking and investment to the world’s citizens, the job remains the same.  And they seem poised to continue filling a need. So perhaps Switzerland will indeed have the last word in history, and the Swiss Gnomes, the last world in world investment banking.

 

Excerpted from Swiss Gnomes & Global Investing: Secrets of the Great Investors audio classics series by Knowledge Products. 
Order the complete series here.

ENDNOTES:

---

¹Walter Sorell, The Swiss: A Cultural Panorama of Switzerland, (New York: The Bobbs-Merrill Company, Inc.) p.55.

²Mark Skousen, Mark Skousen's Complete Guide to Financial Privacy, (Alexandria House Books, 1982) p.61.

³Robert Roethenmund,  The Swiss Banking Handbook, (New York: Books in Focus, 1980) p.3.

⁴Alex Sutter, Switzerland, Wealth & You, (Zug: Librex Ltd., 1995) p.39.

⁵Ron Holland, Escape the Pension Trap, (Skyland, NC: Offshore Publications, 1995) p.97.

⁶Jean-Pierre Bernard, Switzerland Means Safety, (Zurich: Agora Communications Ltd., 1992) p.11.

⁷Robert Kinsman, Your New Swiss Bank Book, ( Homewood, IL: Dow Jones-Irwin) p.11.

⁸Harry Browne, Harry Browne's Complete Guide to Swiss Banks, (New York: McGraw-Hill Book Company) p.3.

⁹The Swiss Solution: Privacy Minimization and Wealth Building for Americans Today. Edited by Lawrence C. Oakley (Seminars International Inc. 1985) p.1.

¹⁰Rosanna Arquilles, The Swiss Franc: 24 Years of Profits, (Skyland, NC: Offshore Publications) p.1.

¹¹Gary Alexander, Introduction to Switzerland for Americans: A Swiss Chronicle, p.4.

¹²Why Switzerland? (Skyland, NC: Offshore Publications, 1995) p.63.

¹³Sorell, p.268.

 

ENDNOTES:

---

¹⁴The Swiss code of neutrality, as first drafted in 1515.

¹⁵John McPhee, The Swiss Army: La place de la concorde Suisse (London & New York: Faber and Faber, 1983) p.13.

¹⁶London Financial Times, Letter to the Editor, November 1996.

^17"My Swiss Impressions/What They Thought About People" Swiss World, October/November 1996, p.9.

¹⁸E. Bonjour, H.S. Offier, G.R. Potter, A Short History of Switzerland, (Oxford: Oxford University Press, 1952 reprinted, 1985) p.367.

¹⁹Faith Whittlesey, "Nazi Gold: The Swiss Side of the Story," Wall Street Journal, 11 Dec. 1996, Editorial Page.

²⁰Ibid

²¹Michael Hirsh, "Nazi Gold: The Untold Story," Newsweek, 4 Nov. 1996, p.47.

²²Hirsh, p.48.

²³Hirsh, p.48.

²⁴Paul Erdman, The Swiss Account (Tom Doherty Associates, 1992) p.28.

²⁵Paul Erdman, Swiss American Economic Relations (Basel-Tobingen, 1959) p.94.

 

²⁶Dean Foust, "More Evidence of Hidden Holocaust Cash." Business Week, 6 May 1996, p.38.

²⁷Bernard, p.10.

²⁸Swiss Money Secrets, (Baltimore: The Oxford Club, 1996) p.7.

²⁹Rollinson, Katrina, "Zurich Banking," Swiss News: The National Lifestyle and Business Magazine October 1996, p.14..

³⁰Rollinson  p.19.

³¹Adam Starchild, Fortress Switzerland, (Zurich: City Druck Offset & Verlag AG, 1994) p.26.

³²Sutter, p. 41 & 42.

³³John Pugsley's Journal, (Agora Publishing Inc.) September 1996.

³⁴Michael R. Sesit, "You Can Look, But US Investors Can't Get Their Hands on SOme of the Best International Investments." Wall Street Journal, 27 June 1996.

³⁵Sesit,

³⁶Holland, p.63.

³⁷Jeffrey Robinson, The Laundrymen, (New York: Arcade Publishing) p.187 - 188.

³⁸Robinson  p.189 - 190.

³⁹Robinson  p.190.

 

 

 

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