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Banking secrecy - some historical context

8 Mar 10

A recent article in the popular and widely-read French history magazine, Historia, provides some useful background on the origins of banking secrecy, writes a CA in Luxembourg

The Revocation of the Edict of Nantes in 1685 by Louis XIV is often considered to be one of the key dates in the development of banking secrecy. It led more than 250,000 Protestants to flee France with many transferring their wealth to Switzerland. From there, they discretely continued to finance the French monarchy, with Louis XIV as principal borrower. (Discretion was assured - it would never have done for anyone to know that the French king was borrowing from "Protestant heretics"). Louis XIV even had a Swiss banker, Jacques Necker, as director general of French finances.

To reinforce this discretion, in 1713, the Great Council of Geneva decreed that its bankers must keep a register of their clients and their transactions. It forbade client information to be divulged to anyone other than the client in question without the express consent of the Municipal Council. Thus began two centuries of an implicit contractual duty whereby each bank client had the right to demand the strictest confidence from the bank in the business affairs with which it was entrusted and equally, and conversely, the bank's duty to keep completely quiet about those affairs.

The first step was thus taken in 1713. Whenever, thereafter, Europe succombed to revolutionary fervour, more wealth was transferred to Switzerland. Even Napoleon is believed to have had a Swiss bank account.

A step change of course occurred in the 1930s. Switzerland became more and more of a safe haven as political pressures increased. Hitler threatened to execute (and actually did) anyone who failed to declare their wealth outside Germany. France too, albeit in a less barbaric manner, sought to restrain its citizens from concealing their wealth abroad. In 1932, the French police raided the Paris headquarters of the Commercial Bank of Basel, and froze the assets of two other institutions. This led to a major scandal implicating key political figures and even some church dignitaries at a time of deep economic austerity.

Switzerland responded by a new banking law - the Swiss Banking Act of 1934 - criminally penalising anyone who violated banking secrecy.

Recents events with UBS and the US authorities and the activities of various tax authorities in the UK, France, Germany and Italy have made headlines.

I believe, however, that it is important to keep in mind the historical context.

Swiss bank secrecy has protected funds deposited in Swiss banks for over 300 years. It has often protected investors from unscrupulous and undemocratic regimes.

Times have, however, changed. Progress has been made. While there is still, unfortunately, a place in our world for the investor protection described above, it is one which clearly needs to be distinguished from the illegitimate use of such protection for tax evasion purposes.

The next chapter in the history of banking secrecy is clearly being written.

A CA in Luxembourg

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Banking secrecy | Switzerland