What are Swiss banks and how do they work?

Early Swiss laws protecting the identity of clients were codified way back in 1713 AD by authorities in Geneva -- a city which, by then, had become a refuge for the wealth of French royalties and European elites.

Since then, the notion of secrecy has always been at the centre of all the banking laws formed in Switzerland, a small European country tucked between snow-capped Alps.

And about 80 years ago, in 1934, a law made sharing client information with foreign countries a criminal offence.

Article 47 of the Swiss Banking Act said that without the customer's consent and in the absence of a criminal complaint, revealing clients details to almost anyone, including the government, would be a crime. A violation could land the person in question in prison for five years.

And, over the years, the country became a magnet for tax-dodging people and entities around the world. They parked their money to evade taxes in their countries – denting their government’s exchequers.

But some sort of watershed moment came in May, 2014 when over 50 countries signed a declaration prepared by the Organisation for Economic Co-operation and Development. The countries, for the first time, agreed on global exchange of information about their respective taxpayers’ financial information. Switzerland too promised to share information about client bank accounts.

But, early this year, a leak of Credit Suisse data again triggered a debate around the banking laws of the Alpine country. The alleged leak revealed that the bank’s clients were involved in torture, drug trafficking and money laundering.

Meanwhile, back home in India, the hunt for black money is still on. Prime Minister Narendra Modi rode to power in 2014, promising to bring it back. But in July 2021, a news agency reported that Minister of State for Finance Pankaj Chaudhary had told the Lok Sabha that the government had no official estimate of the black money kept in Swiss banks for the past 10 years.

Since 2018, India and Switzerland have a system of automatic exchange of information in tax matters. Under it, in September 2019, for the first time, detailed financial information on all Indian residents with accounts in Swiss financial institutions was provided to Indian authorities.

But most experts believe that the official data given by the Swiss banks is that of the legal wealth parked by Indians there. The black money reaches Swiss banks after travelling through 5-6 tax havens, like Jersey Island To Havana. This process is called layering, which makes it very difficult for authorities to trace the trail.

Meanwhile, India has passed a Black Money law that arms its taxmen to go after citizens with secret foreign bank accounts and assets.

Citing lawyers, a financial daily report said that close to half a dozen appeals were coming up for hearing in Switzerland courts. The petitions want to stop Swiss authorities from sharing information with India.

The grounds for appeal are that the Indian law can be applied retroactively and that it can be used to impose criminal sanctions that would be stricter than those that would have applied at the time the offences were committed originally.

Swiss National Bank data show that in 2020, funds kept by Indian individuals and companies in Swiss banks rose to their highest level in 13 years. Clearly, despite all the negative connotations, Swiss banks continue to be popular.