zucman switzerland
A Century of Offshore Finance
Of all the countries involved in offshore wealth management, one has been active longer than any other, and it is still the number-one offshore center today. If we take a close look at this country’s banking history, we’ll reveal the intricate mechanisms of dissimulation that, starting from its center, have spread out all over the world, and the ingenuity of some bankers in safeguarding financial secrecy and fraud. And while tax havens rarely publish instructive statistics, this country is actually the exception to the rule: there is a remarkable amount of data from the country available, which have received astonishingly little attention. This country, of course, is Switzerland.
The Birth of a Tax Haven
The fabulous destiny of the Swiss financial center began in the 1920s when, in the aftermath of World War I, the main countries involved began to increase taxes on large fortunes. Throughout the nineteenth century, the greatest European families were able to accumulate wealth by paying little or no taxes. In France, on the eve of the war, a pretax stock dividend of 100 francs was worth 96 francs after taxes. In 1920 the world changed. Public debt exploded, and the state vowed to compensate generously those who had suffered during the war and to pay for the retirement of veterans. That year the top marginal income tax rate rose to 50%; in 1924 it reached 72%. The industry of tax evasion was born.
The industry’s birthplaces—Geneva, Zurich, and Basel—enjoyed fundamentally favorable trends that were already in motion. At the beginning of the century, banks had formed a cartel (the Swiss Bankers Association was established in 1912) and were able to make the Swiss government pay relatively high interest rates, which made Swiss banks very profitable.2 And since 1907, they had benefited from having a last-resort lender, the Swiss National Bank, which could intervene in the event of a crisis and ensure the stability of the entire system. So by the eve of World War I, Switzerland had a financial industry with clear marching orders and a well-developed network of credit establishments. Also, since Switzerland has enjoyed the guarantee of perpetual neutrality since the Congress of Vienna in 1815, it emerged from World War I and the accompanying social upheavals relatively unscathed.
The boom in the tax-evasion industry was also made possible by the transformation of the nature of wealth. In industrialized countries, financial wealth had, since the middle of the nineteenth century, overtaken that of land ownership. In 1920 the holdings of the richest people in the world were essentially made up of financial securities: stocks and bonds issued by public authorities or by large private companies. These securities were pieces of paper that resembled large bank notes. Like notes, most of the securities did not bear names, but instead the phrase “pay to bearer”: whoever had them in his possession was the legal owner. So there was no need to be registered in a cadastre. Unlike individual notes, stocks and bonds could have an extremely high value, as high as several million dollars today. It was possible to hold a huge fortune anonymously.
Tax Fraud 101
During the greater part of the twentieth century, it was possible to transport huge amounts of wealth across borders easily, by traveling with one’s “pay to bearer” securities. This is no longer true today, because securities aren’t tangible objects: they now exist only in electronic form. So to shelter one’s money, in lieu of moving suitcases filled with bank notes across borders, the common solution is electronic transfer to offshore accounts.
Let’s look at a fictitious example. Michael is CEO of the US company Michael & Co., a firm with 800 employees of which he is the single stockholder. To send, say, $10 million to Switzerland, Michael proceeds in three stages. First, he creates an anonymous shell company incorporated, for example, in the Cayman Islands, where regulations on disclosure of company owners are very limited.1 He then opens an account in Geneva under the shell company’s name, which takes all of a few hours. Finally, Michael & Co. buys fictitious services from the Cayman shell company (consulting, for example), and, to pay for these services, sends money to the shell company’s Swiss account. The transaction generates a paper trail that appears legitimate, and in some cases it actually is. Because companies carry out millions of transfers to Switzerland and other large offshore centers every day—and it is impossible to identify in real time those that are legal (for example, sums paid to true exporters) and those that are not (money evading taxes)—the transaction from Michael & Co. to the shell company’s Swiss bank account is unlikely to trigger any money-laundering alarms at the banks.
And Michael wins twice. By paying for fictitious consulting, he first reduces the taxable profits of Michael & Co., and thus the amount of corporate income tax he must pay in the United States. Then, once the money has arrived in Switzerland, it is invested in global financial markets and generates income—dividends, interest, capital gains. The IRS can tax that income only if Michael self-reports it or if the Swiss bank informs the US authorities. Otherwise, Michael can evade US federal income tax as well.
If Michael wants to use the money, he has two possibilities. For small amounts, he can simply go to an ATM. But for large amounts, he has to be more clever. The most popular technique is what’s called “Lombard credit”: Michael takes out a loan with the US branch of his Swiss bank, using the money held in Geneva as collateral. So the money stays in Switzerland, still invested in stocks and bonds, while it is also spent in the United States, to buy, for example, a painting by a famous artist or a condominium in Florida.
In sum, the IRS is cheated out of millions—all the taxes owed over time on the income generated by the wealth hidden in Geneva—and Michael can secretly spend his hidden money however he likes.
If you wanted to keep these paper securities at home under your mattress, you would run the risk of their being stolen, and so owners looked for safe places to keep them. In order to respond to this demand, beginning in the mid-nineteenth century European banks developed a new activity: wealth management. The basic service consisted of providing a secure vault in which depositors could place their stocks and bonds. The bank then took responsibility for collecting the dividends and interest generated by these securities. Once reserved for the richest individuals, in the interwar period these services became accessible to any aspiring capitalist. Swiss banks were present in this marketplace. But—an essential point—they offered an additional service: the possibility of committing tax fraud. The depositors who entrusted their assets to them could avoid declaring the interest and dividends they earned without the risk of being caught, because there was no communication between the Swiss establishments and other countries.
Looking for Lost Securities
Up until the end of the 1990s, the amount of wealth held in Swiss banks was one of the best kept secrets in the world. Archives were kept under lock and key, and banks were under no obligation to publish the details of the assets they were managing. It is important to understand, in fact, that securities deposited by customers have never been included in banks’ balance sheets, even now, for a simple reason: those securities don’t belong to the banks. Since the financial crisis of 2008–9, the term “off-balance sheet” has acquired a nasty connotation, notably referring to the sometimes complex arrangements that were carried out to remove American mortgage loans from bank books. But one of the off-balance-sheet activities par excellence—coincidentally the oldest and still today one of the most common—is actually of childlike simplicity: holding financial securities for someone else.
If today we are able to know the amount of wealth held in Switzerland during the twentieth century, it is thanks to two international commissions appointed in the second half of the 1990s. The mission of the first—presided over by Paul Volcker, former chairman of the US Federal Reserve—was to identify the dormant accounts belonging to victims of Nazi persecutions and the victims’ heirs. For three years, hundreds of experts from large international auditing firms explored the archives of the 254 Swiss banks that had been involved in managing wealth during World War II, producing masses of never-before-seen information—notably, the sum of assets held by each establishment in 1945. The goal of the second commission was to better understand the role played by Switzerland during the war. Presided over by the historian Jean-François Bergier, it also had extensive access to the archives of Swiss banks, which enabled it to establish the sum of securities deposited in the seven largest Swiss establishments during the twentieth century, which, from buyouts to mergers, became the UBS and Credit Suisse of today.
The statistics produced by the two commissions have limitations. Part of the archives had been destroyed; others were kept beyond their reach. But the information gathered by Volcker, Bergier, and their teams is by far the best we have for studying the history of offshore finance. In particular, the data on the assets under custody are of high quality, because, without publishing them, the banks internally kept a detailed accounting of their wealth-management activities, precisely recording the value of the securities that had been entrusted to them, stocks at their market value, and bonds at their face value.
In spite of all this, up to now that information had never been compared to the overall level of European income and wealth in the interwar period, notably due to a lack of statistics on national capital stocks. This is the first contribution of this book: to bring everything together—and the results deserve our attention, for they challenge many of the myths that surround the birth of Switzerland as a tax haven.
The Swiss Big Bang
The first thing we learn is how extraordinary the rise of Swiss banking at the end of World War I was. Between 1920 and 1938, offshore wealth—meaning that belonging to non-Swiss residents—managed by Swiss banks increased more than tenfold in real terms (that is, after adjusting for inflation): it went from around 10 billion in today’s Swiss francs to 125 billion on the eve of World War II. This growth contrasts vividly with the stagnation of European wealth in general: due to a whole series of economic, social, and political phenomena, the private wealth of the large European countries was approximately the same in 1938 as it was in 1920.3 Consequently, the percentage of the total financial wealth that households on the Continent were hiding in Switzerland, fairly negligible before World War I (on the order of 0.5%), increased greatly to reach close to 2.5%.
Who owned all of this wealth? A tenacious legend, maintained since the end of World War II by Zurich bankers, claimed that Swiss banking owed its rise to depositors who were fleeing totalitarian regimes. For proponents of this thesis, the banking secrecy law that was enacted in 1935 had a “humanitarian” aim: it was meant to protect Jews fleeing financial ruin. And so in 1996 the Economist wrote that “many Swiss are proud of their banking secrecy law, because it . . . has admirable origins (it was passed in the 1930s to help persecuted Jews protect their savings).”4
This myth has been debunked by a great deal of historical research.5 The Volcker commission identified more than 2.2 million accounts opened by non-Swiss individuals between 1933 and 1945. Out of that total number, around 30,000 (or 1.5%) have been linked, with varying degrees of certainty, to victims of the Holocaust. The data established by Bergier and his team show that it was in the 1920s—and not the 1930s—that the Swiss “big bang” occurred. From 1920 to 1929, assets under custody grew at a yearly rate of 14% on average. From 1930 to 1939, they grew only 1% per year. The two most rapid phases of growth were the years 1921–22 and 1925–27, which immediately followed the years when France began to increase its top tax rates. Swiss banking secrecy laws followed the first massive influx of wealth, and not the reverse.
What does it matter if reality belies the propaganda put out by the bankers? The legend hasn’t died—at the very most it has metamorphosed. These days, as is constantly repeated, most customers are fiscally irreproachable and deposit their money in Switzerland only to flee the instability or oppression of their home country. But, as we will see, more than half of the wealth managed by Swiss establishments still today belongs to residents of the European Union (although the share held by developing countries is rising fast), thus making this assertion as fallacious as the preceding one, unless we consider the EU to be a dictatorship.
In the interwar period, the customers of Swiss banks for the most part were French. For example, at Credit Suisse, at that time the largest bank involved in wealth management, 43% of the foreign-owned assets belonged to French residents, only 8% to Spanish or Italian savers, and 4% to Germans.6 The geographical percentages are imperfect, because the depositors did not always give their true address (instead, some gave that of a Swiss hotel, in which case the funds were recorded as belonging to Swiss residents), but all the other data collected within the framework of the Bergier commission confirm that the highest percentage of capital came from France. On the eve of World War II, the available data suggest that 5% of all the financial wealth of French residents was deposited in Switzerland.
What did hidden wealth look like? For the most part, it was made up of foreign securities: stocks of German industrial companies or American railroads, bonds issued by the French or English government, and so on. Swiss securities occupied a very secondary place, for two reasons: the local capital market was much too small to absorb on its own the mass of wealth that took refuge in Switzerland, and the returns on foreign investments were more attractive—on the order of 5% for securities from North America versus 3% for those from Switzerland. After financial securities, the balance was made up of liquidity (bank deposits such as saving accounts, which appear in banks’ balance sheets) and a bit of gold, but foreign stocks and bonds dominated by far. The same is true today, and it is essential to emphasize this point, because it is a source of recurring misunderstanding: for the most part, non-Swiss residents who have accounts in Switzerland do not invest in Switzerland—not today, and not in the past. They use their accounts to invest elsewhere, in the United States, Germany, or France; Swiss banks only play the role of intermediary. This is why it is absurd to think that Swiss offshore banking owes its success to the strength of the Swiss franc, to the traditionally low inflation rate prevailing in Switzerland, or to political stability, as its apologists continue to claim. Through their accounts in Zurich or Berne, bank customers from other countries make the same investments as from Paris or Rome: they buy securities denominated in Euros, dollars, or pounds sterling, whose values go up and down depending on devaluations, defaults, bankruptcies, or wars. Whether these bits of paper are held in Switzerland or elsewhere doesn’t change anything.
For a customer, the main reason to deposit securities in a Swiss bank is and always has been for tax evasion. A taxpayer who lives in the United States must pay taxes on all his income and all his wealth, regardless of where his securities are deposited; but as long as Swiss banks don’t communicate comprehensive and truthful information to foreign governments, he can defraud tax authorities by reporting nothing on his tax return.
The First Threats to Berne
At the end of World War II, wealth management in Switzerland went through a crisis. First, there was a lack of customers. The destruction of the war, the collapse of financial markets, the inflation in the years immediately following the war, and nationalization—altogether these factors annihilated the very large European fortunes that had survived the Great Depression. Private wealth on the Continent reached a historically low level—at scarcely more than a year of national income in France and in Germany versus five years’ worth today. Switzerland had not been affected by the war, but the rest of Europe was in ruins. Between 1945 and 1950, the value of hidden wealth decreased, which hadn’t happened since 1914.
But above all, for the first time Switzerland found itself under the threat of an international coalition that wanted to do away with banking secrecy. In the spring of 1945, Switzerland, which had compromised a great deal with the Axis Powers during the war, sought the good graces of the victors. Charles de Gaulle, supported by the United States and Great Britain, imposed a condition on this rapprochement: Berne was to help France identify the owners of undeclared wealth. The pressure that was exerted then was all the greater in that a large part of the French assets managed by Swiss banks—around a third of the total, according to accounts at the time—was made up of American securities physically located in the United States (conveniently for the banks and their customers, who could thus buy and sell more quickly). But these assets had been frozen since June 1941 by Uncle Sam, who suspected Switzerland of being the sock puppet of the Axis countries. To unfreeze them, the United States demanded two declarations: one from Switzerland revealing who really owned the funds; the other from the French tax authorities indicating that the assets had indeed been declared. For Congress, it was out of the question to send billions of dollars via the Marshall Plan without first trying to tax French fortunes hidden in Geneva!
The history of private banking in Switzerland might have stopped there, because the situation was objectively catastrophic. By freezing assets, the United States had a powerful means of pressure. Swiss bankers, with the complicity of the authorities, nevertheless got out of the predicament brilliantly. How? By engaging in a vast enterprise of falsification, which has been documented by the historian Janick Marina Schaufelbuehl.7 They certified that French assets invested in American securities belonged not to French people but to Swiss citizens or to companies in Panama—a territory where it was already particularly easy to create shell corporations. The US authorities were duped and, with very few exceptions, unfroze the assets on the basis of these false certifications. Boding well for the future, Swiss bankers used this same fraud again in 2005 to enable their customers to escape a new European tax, as we will see in chapter 3.
From the mythology created expressly to justify the banking secrecy law up to large-scale fraud to cover defrauders, everything points to the dishonesty of many Swiss bankers. And so no solution to the problem of tax fraud can be based on their so-called goodwill, as are, however, all the plans recently devised to fight against tax evasion. For example, according to the Rubik agreement with Great Britain, set up in 2013, banks agree—without any checks in place—to collect a tax on the accounts of British customers and to give the proceeds to Her Majesty’s Treasury. But history has proven that this approach doesn’t work: agreements of this type are destined to fail because banks will always claim to have no, or very few, British customers and will collect essentially no taxes. Therefore, it is essential to break with such logic and no longer rely on goodwill and self-declaration, but on constraints and objective procedures for verification.
The Golden Age of Swiss Banking
By thwarting the first international coalition against banking secrecy at the end of the 1940s, Swiss banks demonstrated their ability to endure. The growth of wealth management quickly resumed, and the three decades of the 1950s, 1960s, and 1970s mark a golden age. Up until the end of the 1960s, the growth rate of assets was comparable to that of the 1920s. In the mid-1970s, according to my estimates, close to 5% of the financial holdings of Europeans was hidden in Swiss bank vaults.
The data series established by the Bergier commission stops in the 1970s, but from there a new vantage point appears from which to follow the development of offshore finance: US Treasury surveys of the holdings of US financial securities by non-American residents. Even today these statistics are still an essential instrument for measuring the weight of tax havens on the world economy.
The first modern survey took place in 1974, and it tells us a great deal: Switzerland, a country that has scarcely more than 0.1% of the world’s population, “held” almost a third of all American stocks that belonged to non-Americans, far more than the United Kingdom (15%), Canada (15%), France (7%), or Germany (3%)! To understand these results, you have to realize that the statisticians at the Treasury have no way of knowing who owns US stocks and bonds through Swiss banks. Although they suspect that for the most part they are French or German depositors whose wealth is managed in Geneva or Zurich, they cannot quantify the phenomenon and therefore they credit all assets to Switzerland. Thus the US Treasury surveys reveal not who possesses the world’s wealth, but where it is being managed—the geography of tax havens more than that of the actual wealth.
The hegemony of Switzerland over the international wealth-management market of the 1970s can be easily explained. Competition from other tax havens was still almost nonexistent, and even by the mid-1970s London had not yet recovered from the consequences of the war. For rich Europeans who wanted to evade taxes, the situation was the same as it was during the 1920s: the only country that offered the protection of banking secrecy was Switzerland. Bankers took advantage of this to increase the fees they charged, which were fixed by a cartel agreement, Convention IV of the Swiss Bankers Association. Tariffs on foreign securities—established as a percentage of the value of the securities deposited—more than doubled between 1940 and 1983. The profit from tax evasion was thus shared among the defrauders and the banks, and in this monopolistic market, the latter had very little trouble cutting the largest piece of the pie for themselves.
Switzerland also benefited from the first oil crisis of 1973, which made the Mideast Gulf princes rich. For those new investors, having an offshore account is of no tax benefit. The new fortunes are not taxable: not only isn’t there any tax on the income from capital in most of the oil-rich countries, but above all in most cases that wealth belongs to the same families who exercise absolute power—including that of imposing taxes—so that it is indistinctly governmental and private, taking the form either of reserves managed by the central bank or of sovereign funds or even family wealth-holding companies, without very clear divisions between these different types of ownership. The reason why petrodollars went to Switzerland in the 1970s rather than the United States is simple: compared to New York, Zurich offered the advantage of anonymity. It was a huge advantage, because the ruling families of the Gulf had every reason to fear that their investments would be closely scrutinized. What could be more arbitrary than their sudden wealth, their ability to buy up companies, land, and real estate everywhere in the world? Swiss bankers would help them exercise this amazing power without attracting too much attention.
In the 1970s the inflow of capital was such that it began to destabilize the Swiss economy. Although nonresidents for the most part owned foreign securities, they were also sometimes eager to invest in Switzerland. That had happened during World War II (when most of the international financial markets were closed), and the scenario was repeated at the time of the collapse of the Bretton Woods system (which put an end to fixed exchange rates for currencies). The problem was that there was so much hidden wealth that if too large a proportion was converted into Swiss francs, the local currency would appreciate dangerously and penalize the entire national economy. To avoid this scenario, in the 1970s the central bank on several occasions imposed negative nominal interest rates on deposits in francs held by nonresidents. The message was clear: foreigners were welcome in Geneva, but only if they were content to buy American or German stocks—not Swiss assets.
The False Competition of New Tax Havens
Beginning in the 1980s, Switzerland was no longer the only player in the game. London was reborn with the liberalization of British financial markets in 1986. New centers of wealth management emerged: Hong Kong, Singapore, Jersey, Luxembourg, and the Bahamas. In all these tax havens, private bankers do the same things as in Geneva: they hold stock and bond portfolios for their foreign customers, collect dividends and interest, provide investment advice as well as other services, such as the possibility of having a current account that earns little or nothing. And, thanks to the limited forms of cooperation with foreign tax authorities, they all offer the same service that is in high demand: the possibility of not paying any taxes on dividends, interest, capital gains, wealth, or inheritances. Consequently, whereas from the 1920s to the 1970s all the wealth of Europeans who wanted to avoid paying taxes went to Switzerland—a few small havens already existed, such as Monaco, but their importance was minimal—since the 1980s the major proportion of the flow of capital has occurred in favor of the new offshore centers in Europe, Asia, and the Caribbean (see fig. 1).
Figure 1: The wealth of Europeans in tax havens (% of the financial holdings of European households).
Source: Bergier and Volker Commissions, Swiss National Bank, and calculations by the author (see the online appendix to chapter 1, www.gabriel-zucman.eu.
We mustn’t exaggerate the competition that these other centers represent for Switzerland, however. In spite of the decline of its share of the market, wealth management in Switzerland continues to prosper. Granted, the rate of growth during the decades of the golden age has disappeared. But the assets managed in Switzerland from the 1980s to the present have continued to increase more quickly than the private financial holdings on the Continent, even if only slightly. According to the latest official statistics, in the spring of 2015 foreign wealth in Switzerland will have reached $2.3 trillion. Around $1.3 trillion belongs to Europeans, or the equivalent of 6% of the financial holdings of EU households. According to my calculations, this is the highest level in history. The death knoll of Swiss banks is thus premature: they have never been as healthy as they are today.
What’s more, the competition of new tax havens is in fact only a facade. To view Swiss banks in opposition to the new banking centers in Asia and the Caribbean doesn’t make much sense. A large number of the banks domiciled in Singapore or in the Cayman Islands are nothing but branches of Swiss establishments that have opened there to attract new customers. Accounts circulate from Zurich to Hong Kong by a simple game of signatures, depending on attacks against banking secrecy and on treaties signed by Switzerland with foreign countries. Even the historically discreet private banks, a handful of hundred-year-old Swiss establishments where associates are responsible for their own wealth, have branches in Nassau and Singapore.
The Virgin Islands—Switzerland—Luxembourg
Rather than competing with one another, tax havens have in fact had a tendency to specialize in the various stages of wealth management. In the past, Swiss bankers provided all services: carrying out the investment strategy, keeping securities under custody, hiding the true identity of owners by way of the famous numbered accounts. Today only securities custody really remains in their purview. The rest has been moved offsite to other tax havens—Luxembourg, the Virgin Islands, or Panama—all of which function in symbiosis. This is the great organization of international wealth management.
For the most part, investments are no longer carried out from banks. Gone are the days of the capitalism of “small investors” when depositors themselves chose the stocks and bonds they wanted to hold, before transmitting their buying and selling orders to their banker. They have conferred this task to people for whom it is their profession, investment-fund managers. Funds pool the money of the owners and invest it throughout the entire world. This enables them on average to obtain better returns than individual investors, who are then generally content to choose the funds that seem the most promising. But the funds are not located in Switzerland. Most of those in which rich people invest today are domiciled in three other tax havens: Luxembourg, Ireland, and the Cayman Islands.
The classic type of funds, sometimes known as UCITS (Undertakings for Collective Investment in Transferable Securities), has been massively implanted in Luxembourg in the past twenty years. This Grand Duchy, a microstate with a half million inhabitants, is thus the number-two country in the world for the incorporation of mutual funds, after the United States! If you live in Europe, try this instructive experiment: ask your banker to put your savings in a mutual fund and read the prospectus that you are given—there is a fifty-fifty chance it is based in Luxembourg. Hedge funds—funds that carry out all sorts of more-or-less acrobatic investments—are for the most part sheltered in the Cayman Islands, because regulations covering their speculative positions are particularly soft there. As for Ireland, outside of UCITS and hedge funds, it is the chosen land of monetary funds.
Most money managers still work in New York, Paris, or London—close to their clientele—but the funds are subjected to the laws of the tax haven in which they are domiciled. What is the benefit of this maneuver? It enables—completely legally—the avoidance of various taxes created to penalize defrauders. Take the example of a Luxembourg fund that invests in American stocks. By virtue of the tax treaty between the two countries, the United States collects no tax on the dividends that are paid into the fund. In the Grand Duchy, neither the dividends that the fund earns nor those that it distributes to investors are taxed. The situation is identical in Ireland and in the Cayman Islands. Add to this the fact that it costs very little to create funds there, and the success of these three offshore sites is completely explained. In Switzerland, on the contrary, dividends distributed by funds are subjected to a tax of 35%. What is the consequence of this tax, which is intended to discourage tax fraud? Swiss funds have migrated to the Grand Duchy, and from their accounts in Geneva, investors now essentially buy Luxembourg funds.
Switzerland has also left to other tax havens control over the techniques used to hide beneficiaries. Today numbered accounts are forbidden by anti-money-laundering legislation. They have been replaced by trusts, foundations, and shell corporations. In the 1960s, accounts in Switzerland were identified by a series of numbers. Today, through the miracle of financial innovation, they are identified by a series of letters: on bank statements the “account 12345” has become that of “company ABCDE.” In all cases, the true owner remains undetectable. In 2012 four scholars attempted to create anonymous companies through 3,700 incorporation agents all over the world: in about a quarter of the cases, they were able to do so without providing any identification document whatsoever.8
However, shell corporations are not domiciled in Switzerland, but for the most part in a handful of tax havens where their creation is cheap, rapid, and safe. As for trusts, they are the specialty of the paper-pushers of the British Empire. Today more than 60% of accounts in Switzerland are thus held through the intermediary of shell companies headquartered in the British Virgin Islands, trusts registered in the Cayman Islands, or foundations domiciled in Liechtenstein. An essential point: The Anglo-Saxon trusts do not compete with the opacity services sold by Swiss banks; the two techniques of dissimulation have, on the contrary, become fundamentally intertwined.
Even if Switzerland has lost its hegemony and is henceforth inserted in the great organization of international wealth management, it’s important to understand that it remains the heart of the machine for two reasons. First, because the entire chain often starts at its banks: although formally domiciled in the Virgin Islands, the shell corporations are for the most part created in Geneva; and it is Swiss bankers who advise their customers which investment funds to put their money into. Above all, it is neither the involvement of the Virgin Islands or Luxembourg that enables tax fraud, but that of Switzerland (and comparable offshore private banking centers). Investing in a Grand Duchy fund from an account in Paris—or transferring that account to a shell corporation—does not enable the evasion of French taxes on income or wealth. No matter what one does, fraud originating in French or US banks is impossible, because they fully and truthfully exchange their information with tax authorities. It is only thanks to the lack of effective cooperation of a number of offshore private bankers that ultra-rich individuals are able to illegally evade taxes by not declaring income on their wealth. And although it is not alone, Switzerland is still to this day the number-one place for offshore private banking.
Swiss Banks: $2.3 Trillion
Let’s now take a look at a detailed accounting of the wealth held in Switzerland today. Since 1998 we have monthly statistics from the Swiss National Bank (SNB). Until recently, this unique set of data—no other country in the world produces anything similar—had not been studied.9 According to the latest available information, in the spring of 2015 foreign wealth held in Switzerland reached $2.3 trillion. Since April 2009—the date of the London summit during which the countries of the G20 decreed the “end of banking secrecy”—it has increased by 18%.
Should we be surprised by this insolent trend? Contrary to what we read everywhere, financial secrecy and opacity are far from dead. Granted, recent policy changes, as we shall see, are making it more difficult for moderately wealthy individuals to use offshore banks to dodge taxes: for them, the era of banking secrecy is coming to an end. Switzerland has agreed to cooperate with the United States to identify some American customers who haven’t declared income, and that cooperation should extend to a number of other developed countries by the end of this decade. Swiss bankers are also attempting to get rid of the mattresses stuffed with cash that many Germans or French have inherited, which are too visible and not very profitable. But the decrease of “little accounts” is more than made up for by the strong growth of assets deposited by the ultra-rich, in particular coming from developing countries. For them, impunity is still almost complete, as poor countries are for the most part excluded from the talks to increase international cooperation between offshore banks and foreign authorities.
And $2.3 trillion is probably a low estimate. The SNB data are on the whole of good quality: they cover all of the banks operating in Switzerland—including branches of foreign banks—and all of the wealth that is held in them. But they aren’t perfect—no economic statistics are; they are all constructions whose meanings and limitations must be carefully understood. In this instance, the fundamental problem is that statisticians are not looking to identify the true beneficiaries of the wealth. This has two consequences. The first is that some assets attributed to Swiss citizens in reality belong to foreigners. I have attempted to take this problem into account, but there is no completely satisfactory way to correct it, and the correction I propose may be insufficient.10
Figure 2: Swiss accounts (spring 2015). In 2015 banks domiciled in Switzerland managed $2.3 trillion belonging to nonresidents. Within this total, $1.3 trillion belonged to Europeans. Forty percent of the wealth managed in Switzerland is placed in mutual funds, principally in Luxembourg.
Source: Swiss National Bank and calculations by the author (see online annex to chapter 1, www.gabriel-zucman.eu).
More important, 60% of the assets belonging to foreigners are attributed to the British Virgin Islands, Panama, and other territories where shell corporations, trusts, and foundations are domiciled. To know who really owns wealth in Switzerland, we need to make some assumptions about who is behind these shell entities. After examining the available evidence, the assumption I retain is that the wealth held through shell companies belongs to American, British, or German citizens in the same proportion as the directly held wealth does, with a correction to take into account that since 2005 Europeans have had greater incentives to use shell companies and Gulf countries have less incentive to do so.11 This involves a margin of error, but despite this limitation, the amounts in figure 2 are the best we have available; they are the only ones that are based on the use of a transparent methodology applied to official statistics, covering all Swiss banks, and not on the hearsay or the so-called expertise of groups of advisers or lawyers whose interests are not always clear.
From this figure we can learn two things. First, contrary to a tenacious legend, a bit more than 50% of the total, or around $1.3 trillion, still belongs to Europeans, and not to Russian oligarchs or African dictators. This proves something obvious: Europe is the richest region of the world; the total private wealth on the Continent is more than ten times greater than that of Russia or Africa, and it is not at all surprising that this is reflected in the absolute levels of offshore wealth. The three countries that border Switzerland are logically in the lead—Germany with around $260 billion, France with $240 billion, and Italy with $140 billion.
But the second thing we learn is that the predominant weight of European capital in no way means that tax evasion isn’t a problem for Africa or for developing countries in general. Relative to their size, the assets that these countries hold in Switzerland are impressive, and the trend is disturbing. With more than $150 billion in Switzerland—more than the United States has, a country whose GDP is seven times higher—the African continent is the economy most affected by tax evasion. If the current trend is sustained, emerging countries will overtake Europe and North America by the end of the decade. And the consequences of tax fraud are even more serious for developing countries—which lack basic infrastructure and public services such as health care and education—than for rich countries.
What investments do foreigners make from their hidden accounts? In the spring of 2015, out of the total $2.3 trillion held in Switzerland, scarcely $250 billion takes the form of term deposits in Swiss banks. The rest is invested in financial securities: stocks, bonds, and above all mutual funds. Among those funds, Luxembourg holds the lion’s share, with around $750 billion.
So today the majority of Swiss bank customers are Europeans, who for the most part control their assets through trusts and shell corporations domiciled in the British Virgin Islands, which provide them with the same level of anonymity as in the time of numbered accounts. Their favorite investment is in Luxembourg funds, on which they pay absolutely no tax.
Of all the countries involved in offshore wealth management, one has been active longer than any other, and it is still the number-one offshore center today. If we take a close look at this country’s banking history, we’ll reveal the intricate mechanisms of dissimulation that, starting from its center, have spread out all over the world, and the ingenuity of some bankers in safeguarding financial secrecy and fraud. And while tax havens rarely publish instructive statistics, this country is actually the exception to the rule: there is a remarkable amount of data from the country available, which have received astonishingly little attention. This country, of course, is Switzerland.
The Birth of a Tax Haven
The fabulous destiny of the Swiss financial center began in the 1920s when, in the aftermath of World War I, the main countries involved began to increase taxes on large fortunes. Throughout the nineteenth century, the greatest European families were able to accumulate wealth by paying little or no taxes. In France, on the eve of the war, a pretax stock dividend of 100 francs was worth 96 francs after taxes. In 1920 the world changed. Public debt exploded, and the state vowed to compensate generously those who had suffered during the war and to pay for the retirement of veterans. That year the top marginal income tax rate rose to 50%; in 1924 it reached 72%. The industry of tax evasion was born.
The industry’s birthplaces—Geneva, Zurich, and Basel—enjoyed fundamentally favorable trends that were already in motion. At the beginning of the century, banks had formed a cartel (the Swiss Bankers Association was established in 1912) and were able to make the Swiss government pay relatively high interest rates, which made Swiss banks very profitable.2 And since 1907, they had benefited from having a last-resort lender, the Swiss National Bank, which could intervene in the event of a crisis and ensure the stability of the entire system. So by the eve of World War I, Switzerland had a financial industry with clear marching orders and a well-developed network of credit establishments. Also, since Switzerland has enjoyed the guarantee of perpetual neutrality since the Congress of Vienna in 1815, it emerged from World War I and the accompanying social upheavals relatively unscathed.
The boom in the tax-evasion industry was also made possible by the transformation of the nature of wealth. In industrialized countries, financial wealth had, since the middle of the nineteenth century, overtaken that of land ownership. In 1920 the holdings of the richest people in the world were essentially made up of financial securities: stocks and bonds issued by public authorities or by large private companies. These securities were pieces of paper that resembled large bank notes. Like notes, most of the securities did not bear names, but instead the phrase “pay to bearer”: whoever had them in his possession was the legal owner. So there was no need to be registered in a cadastre. Unlike individual notes, stocks and bonds could have an extremely high value, as high as several million dollars today. It was possible to hold a huge fortune anonymously.
Tax Fraud 101
During the greater part of the twentieth century, it was possible to transport huge amounts of wealth across borders easily, by traveling with one’s “pay to bearer” securities. This is no longer true today, because securities aren’t tangible objects: they now exist only in electronic form. So to shelter one’s money, in lieu of moving suitcases filled with bank notes across borders, the common solution is electronic transfer to offshore accounts.
Let’s look at a fictitious example. Michael is CEO of the US company Michael & Co., a firm with 800 employees of which he is the single stockholder. To send, say, $10 million to Switzerland, Michael proceeds in three stages. First, he creates an anonymous shell company incorporated, for example, in the Cayman Islands, where regulations on disclosure of company owners are very limited.1 He then opens an account in Geneva under the shell company’s name, which takes all of a few hours. Finally, Michael & Co. buys fictitious services from the Cayman shell company (consulting, for example), and, to pay for these services, sends money to the shell company’s Swiss account. The transaction generates a paper trail that appears legitimate, and in some cases it actually is. Because companies carry out millions of transfers to Switzerland and other large offshore centers every day—and it is impossible to identify in real time those that are legal (for example, sums paid to true exporters) and those that are not (money evading taxes)—the transaction from Michael & Co. to the shell company’s Swiss bank account is unlikely to trigger any money-laundering alarms at the banks.
And Michael wins twice. By paying for fictitious consulting, he first reduces the taxable profits of Michael & Co., and thus the amount of corporate income tax he must pay in the United States. Then, once the money has arrived in Switzerland, it is invested in global financial markets and generates income—dividends, interest, capital gains. The IRS can tax that income only if Michael self-reports it or if the Swiss bank informs the US authorities. Otherwise, Michael can evade US federal income tax as well.
If Michael wants to use the money, he has two possibilities. For small amounts, he can simply go to an ATM. But for large amounts, he has to be more clever. The most popular technique is what’s called “Lombard credit”: Michael takes out a loan with the US branch of his Swiss bank, using the money held in Geneva as collateral. So the money stays in Switzerland, still invested in stocks and bonds, while it is also spent in the United States, to buy, for example, a painting by a famous artist or a condominium in Florida.
In sum, the IRS is cheated out of millions—all the taxes owed over time on the income generated by the wealth hidden in Geneva—and Michael can secretly spend his hidden money however he likes.
If you wanted to keep these paper securities at home under your mattress, you would run the risk of their being stolen, and so owners looked for safe places to keep them. In order to respond to this demand, beginning in the mid-nineteenth century European banks developed a new activity: wealth management. The basic service consisted of providing a secure vault in which depositors could place their stocks and bonds. The bank then took responsibility for collecting the dividends and interest generated by these securities. Once reserved for the richest individuals, in the interwar period these services became accessible to any aspiring capitalist. Swiss banks were present in this marketplace. But—an essential point—they offered an additional service: the possibility of committing tax fraud. The depositors who entrusted their assets to them could avoid declaring the interest and dividends they earned without the risk of being caught, because there was no communication between the Swiss establishments and other countries.
Looking for Lost Securities
Up until the end of the 1990s, the amount of wealth held in Swiss banks was one of the best kept secrets in the world. Archives were kept under lock and key, and banks were under no obligation to publish the details of the assets they were managing. It is important to understand, in fact, that securities deposited by customers have never been included in banks’ balance sheets, even now, for a simple reason: those securities don’t belong to the banks. Since the financial crisis of 2008–9, the term “off-balance sheet” has acquired a nasty connotation, notably referring to the sometimes complex arrangements that were carried out to remove American mortgage loans from bank books. But one of the off-balance-sheet activities par excellence—coincidentally the oldest and still today one of the most common—is actually of childlike simplicity: holding financial securities for someone else.
If today we are able to know the amount of wealth held in Switzerland during the twentieth century, it is thanks to two international commissions appointed in the second half of the 1990s. The mission of the first—presided over by Paul Volcker, former chairman of the US Federal Reserve—was to identify the dormant accounts belonging to victims of Nazi persecutions and the victims’ heirs. For three years, hundreds of experts from large international auditing firms explored the archives of the 254 Swiss banks that had been involved in managing wealth during World War II, producing masses of never-before-seen information—notably, the sum of assets held by each establishment in 1945. The goal of the second commission was to better understand the role played by Switzerland during the war. Presided over by the historian Jean-François Bergier, it also had extensive access to the archives of Swiss banks, which enabled it to establish the sum of securities deposited in the seven largest Swiss establishments during the twentieth century, which, from buyouts to mergers, became the UBS and Credit Suisse of today.
The statistics produced by the two commissions have limitations. Part of the archives had been destroyed; others were kept beyond their reach. But the information gathered by Volcker, Bergier, and their teams is by far the best we have for studying the history of offshore finance. In particular, the data on the assets under custody are of high quality, because, without publishing them, the banks internally kept a detailed accounting of their wealth-management activities, precisely recording the value of the securities that had been entrusted to them, stocks at their market value, and bonds at their face value.
In spite of all this, up to now that information had never been compared to the overall level of European income and wealth in the interwar period, notably due to a lack of statistics on national capital stocks. This is the first contribution of this book: to bring everything together—and the results deserve our attention, for they challenge many of the myths that surround the birth of Switzerland as a tax haven.
The Swiss Big Bang
The first thing we learn is how extraordinary the rise of Swiss banking at the end of World War I was. Between 1920 and 1938, offshore wealth—meaning that belonging to non-Swiss residents—managed by Swiss banks increased more than tenfold in real terms (that is, after adjusting for inflation): it went from around 10 billion in today’s Swiss francs to 125 billion on the eve of World War II. This growth contrasts vividly with the stagnation of European wealth in general: due to a whole series of economic, social, and political phenomena, the private wealth of the large European countries was approximately the same in 1938 as it was in 1920.3 Consequently, the percentage of the total financial wealth that households on the Continent were hiding in Switzerland, fairly negligible before World War I (on the order of 0.5%), increased greatly to reach close to 2.5%.
Who owned all of this wealth? A tenacious legend, maintained since the end of World War II by Zurich bankers, claimed that Swiss banking owed its rise to depositors who were fleeing totalitarian regimes. For proponents of this thesis, the banking secrecy law that was enacted in 1935 had a “humanitarian” aim: it was meant to protect Jews fleeing financial ruin. And so in 1996 the Economist wrote that “many Swiss are proud of their banking secrecy law, because it . . . has admirable origins (it was passed in the 1930s to help persecuted Jews protect their savings).”4
This myth has been debunked by a great deal of historical research.5 The Volcker commission identified more than 2.2 million accounts opened by non-Swiss individuals between 1933 and 1945. Out of that total number, around 30,000 (or 1.5%) have been linked, with varying degrees of certainty, to victims of the Holocaust. The data established by Bergier and his team show that it was in the 1920s—and not the 1930s—that the Swiss “big bang” occurred. From 1920 to 1929, assets under custody grew at a yearly rate of 14% on average. From 1930 to 1939, they grew only 1% per year. The two most rapid phases of growth were the years 1921–22 and 1925–27, which immediately followed the years when France began to increase its top tax rates. Swiss banking secrecy laws followed the first massive influx of wealth, and not the reverse.
What does it matter if reality belies the propaganda put out by the bankers? The legend hasn’t died—at the very most it has metamorphosed. These days, as is constantly repeated, most customers are fiscally irreproachable and deposit their money in Switzerland only to flee the instability or oppression of their home country. But, as we will see, more than half of the wealth managed by Swiss establishments still today belongs to residents of the European Union (although the share held by developing countries is rising fast), thus making this assertion as fallacious as the preceding one, unless we consider the EU to be a dictatorship.
In the interwar period, the customers of Swiss banks for the most part were French. For example, at Credit Suisse, at that time the largest bank involved in wealth management, 43% of the foreign-owned assets belonged to French residents, only 8% to Spanish or Italian savers, and 4% to Germans.6 The geographical percentages are imperfect, because the depositors did not always give their true address (instead, some gave that of a Swiss hotel, in which case the funds were recorded as belonging to Swiss residents), but all the other data collected within the framework of the Bergier commission confirm that the highest percentage of capital came from France. On the eve of World War II, the available data suggest that 5% of all the financial wealth of French residents was deposited in Switzerland.
What did hidden wealth look like? For the most part, it was made up of foreign securities: stocks of German industrial companies or American railroads, bonds issued by the French or English government, and so on. Swiss securities occupied a very secondary place, for two reasons: the local capital market was much too small to absorb on its own the mass of wealth that took refuge in Switzerland, and the returns on foreign investments were more attractive—on the order of 5% for securities from North America versus 3% for those from Switzerland. After financial securities, the balance was made up of liquidity (bank deposits such as saving accounts, which appear in banks’ balance sheets) and a bit of gold, but foreign stocks and bonds dominated by far. The same is true today, and it is essential to emphasize this point, because it is a source of recurring misunderstanding: for the most part, non-Swiss residents who have accounts in Switzerland do not invest in Switzerland—not today, and not in the past. They use their accounts to invest elsewhere, in the United States, Germany, or France; Swiss banks only play the role of intermediary. This is why it is absurd to think that Swiss offshore banking owes its success to the strength of the Swiss franc, to the traditionally low inflation rate prevailing in Switzerland, or to political stability, as its apologists continue to claim. Through their accounts in Zurich or Berne, bank customers from other countries make the same investments as from Paris or Rome: they buy securities denominated in Euros, dollars, or pounds sterling, whose values go up and down depending on devaluations, defaults, bankruptcies, or wars. Whether these bits of paper are held in Switzerland or elsewhere doesn’t change anything.
For a customer, the main reason to deposit securities in a Swiss bank is and always has been for tax evasion. A taxpayer who lives in the United States must pay taxes on all his income and all his wealth, regardless of where his securities are deposited; but as long as Swiss banks don’t communicate comprehensive and truthful information to foreign governments, he can defraud tax authorities by reporting nothing on his tax return.
The First Threats to Berne
At the end of World War II, wealth management in Switzerland went through a crisis. First, there was a lack of customers. The destruction of the war, the collapse of financial markets, the inflation in the years immediately following the war, and nationalization—altogether these factors annihilated the very large European fortunes that had survived the Great Depression. Private wealth on the Continent reached a historically low level—at scarcely more than a year of national income in France and in Germany versus five years’ worth today. Switzerland had not been affected by the war, but the rest of Europe was in ruins. Between 1945 and 1950, the value of hidden wealth decreased, which hadn’t happened since 1914.
But above all, for the first time Switzerland found itself under the threat of an international coalition that wanted to do away with banking secrecy. In the spring of 1945, Switzerland, which had compromised a great deal with the Axis Powers during the war, sought the good graces of the victors. Charles de Gaulle, supported by the United States and Great Britain, imposed a condition on this rapprochement: Berne was to help France identify the owners of undeclared wealth. The pressure that was exerted then was all the greater in that a large part of the French assets managed by Swiss banks—around a third of the total, according to accounts at the time—was made up of American securities physically located in the United States (conveniently for the banks and their customers, who could thus buy and sell more quickly). But these assets had been frozen since June 1941 by Uncle Sam, who suspected Switzerland of being the sock puppet of the Axis countries. To unfreeze them, the United States demanded two declarations: one from Switzerland revealing who really owned the funds; the other from the French tax authorities indicating that the assets had indeed been declared. For Congress, it was out of the question to send billions of dollars via the Marshall Plan without first trying to tax French fortunes hidden in Geneva!
The history of private banking in Switzerland might have stopped there, because the situation was objectively catastrophic. By freezing assets, the United States had a powerful means of pressure. Swiss bankers, with the complicity of the authorities, nevertheless got out of the predicament brilliantly. How? By engaging in a vast enterprise of falsification, which has been documented by the historian Janick Marina Schaufelbuehl.7 They certified that French assets invested in American securities belonged not to French people but to Swiss citizens or to companies in Panama—a territory where it was already particularly easy to create shell corporations. The US authorities were duped and, with very few exceptions, unfroze the assets on the basis of these false certifications. Boding well for the future, Swiss bankers used this same fraud again in 2005 to enable their customers to escape a new European tax, as we will see in chapter 3.
From the mythology created expressly to justify the banking secrecy law up to large-scale fraud to cover defrauders, everything points to the dishonesty of many Swiss bankers. And so no solution to the problem of tax fraud can be based on their so-called goodwill, as are, however, all the plans recently devised to fight against tax evasion. For example, according to the Rubik agreement with Great Britain, set up in 2013, banks agree—without any checks in place—to collect a tax on the accounts of British customers and to give the proceeds to Her Majesty’s Treasury. But history has proven that this approach doesn’t work: agreements of this type are destined to fail because banks will always claim to have no, or very few, British customers and will collect essentially no taxes. Therefore, it is essential to break with such logic and no longer rely on goodwill and self-declaration, but on constraints and objective procedures for verification.
The Golden Age of Swiss Banking
By thwarting the first international coalition against banking secrecy at the end of the 1940s, Swiss banks demonstrated their ability to endure. The growth of wealth management quickly resumed, and the three decades of the 1950s, 1960s, and 1970s mark a golden age. Up until the end of the 1960s, the growth rate of assets was comparable to that of the 1920s. In the mid-1970s, according to my estimates, close to 5% of the financial holdings of Europeans was hidden in Swiss bank vaults.
The data series established by the Bergier commission stops in the 1970s, but from there a new vantage point appears from which to follow the development of offshore finance: US Treasury surveys of the holdings of US financial securities by non-American residents. Even today these statistics are still an essential instrument for measuring the weight of tax havens on the world economy.
The first modern survey took place in 1974, and it tells us a great deal: Switzerland, a country that has scarcely more than 0.1% of the world’s population, “held” almost a third of all American stocks that belonged to non-Americans, far more than the United Kingdom (15%), Canada (15%), France (7%), or Germany (3%)! To understand these results, you have to realize that the statisticians at the Treasury have no way of knowing who owns US stocks and bonds through Swiss banks. Although they suspect that for the most part they are French or German depositors whose wealth is managed in Geneva or Zurich, they cannot quantify the phenomenon and therefore they credit all assets to Switzerland. Thus the US Treasury surveys reveal not who possesses the world’s wealth, but where it is being managed—the geography of tax havens more than that of the actual wealth.
The hegemony of Switzerland over the international wealth-management market of the 1970s can be easily explained. Competition from other tax havens was still almost nonexistent, and even by the mid-1970s London had not yet recovered from the consequences of the war. For rich Europeans who wanted to evade taxes, the situation was the same as it was during the 1920s: the only country that offered the protection of banking secrecy was Switzerland. Bankers took advantage of this to increase the fees they charged, which were fixed by a cartel agreement, Convention IV of the Swiss Bankers Association. Tariffs on foreign securities—established as a percentage of the value of the securities deposited—more than doubled between 1940 and 1983. The profit from tax evasion was thus shared among the defrauders and the banks, and in this monopolistic market, the latter had very little trouble cutting the largest piece of the pie for themselves.
Switzerland also benefited from the first oil crisis of 1973, which made the Mideast Gulf princes rich. For those new investors, having an offshore account is of no tax benefit. The new fortunes are not taxable: not only isn’t there any tax on the income from capital in most of the oil-rich countries, but above all in most cases that wealth belongs to the same families who exercise absolute power—including that of imposing taxes—so that it is indistinctly governmental and private, taking the form either of reserves managed by the central bank or of sovereign funds or even family wealth-holding companies, without very clear divisions between these different types of ownership. The reason why petrodollars went to Switzerland in the 1970s rather than the United States is simple: compared to New York, Zurich offered the advantage of anonymity. It was a huge advantage, because the ruling families of the Gulf had every reason to fear that their investments would be closely scrutinized. What could be more arbitrary than their sudden wealth, their ability to buy up companies, land, and real estate everywhere in the world? Swiss bankers would help them exercise this amazing power without attracting too much attention.
In the 1970s the inflow of capital was such that it began to destabilize the Swiss economy. Although nonresidents for the most part owned foreign securities, they were also sometimes eager to invest in Switzerland. That had happened during World War II (when most of the international financial markets were closed), and the scenario was repeated at the time of the collapse of the Bretton Woods system (which put an end to fixed exchange rates for currencies). The problem was that there was so much hidden wealth that if too large a proportion was converted into Swiss francs, the local currency would appreciate dangerously and penalize the entire national economy. To avoid this scenario, in the 1970s the central bank on several occasions imposed negative nominal interest rates on deposits in francs held by nonresidents. The message was clear: foreigners were welcome in Geneva, but only if they were content to buy American or German stocks—not Swiss assets.
The False Competition of New Tax Havens
Beginning in the 1980s, Switzerland was no longer the only player in the game. London was reborn with the liberalization of British financial markets in 1986. New centers of wealth management emerged: Hong Kong, Singapore, Jersey, Luxembourg, and the Bahamas. In all these tax havens, private bankers do the same things as in Geneva: they hold stock and bond portfolios for their foreign customers, collect dividends and interest, provide investment advice as well as other services, such as the possibility of having a current account that earns little or nothing. And, thanks to the limited forms of cooperation with foreign tax authorities, they all offer the same service that is in high demand: the possibility of not paying any taxes on dividends, interest, capital gains, wealth, or inheritances. Consequently, whereas from the 1920s to the 1970s all the wealth of Europeans who wanted to avoid paying taxes went to Switzerland—a few small havens already existed, such as Monaco, but their importance was minimal—since the 1980s the major proportion of the flow of capital has occurred in favor of the new offshore centers in Europe, Asia, and the Caribbean (see fig. 1).
Figure 1: The wealth of Europeans in tax havens (% of the financial holdings of European households).
Source: Bergier and Volker Commissions, Swiss National Bank, and calculations by the author (see the online appendix to chapter 1, www.gabriel-zucman.eu.
We mustn’t exaggerate the competition that these other centers represent for Switzerland, however. In spite of the decline of its share of the market, wealth management in Switzerland continues to prosper. Granted, the rate of growth during the decades of the golden age has disappeared. But the assets managed in Switzerland from the 1980s to the present have continued to increase more quickly than the private financial holdings on the Continent, even if only slightly. According to the latest official statistics, in the spring of 2015 foreign wealth in Switzerland will have reached $2.3 trillion. Around $1.3 trillion belongs to Europeans, or the equivalent of 6% of the financial holdings of EU households. According to my calculations, this is the highest level in history. The death knoll of Swiss banks is thus premature: they have never been as healthy as they are today.
What’s more, the competition of new tax havens is in fact only a facade. To view Swiss banks in opposition to the new banking centers in Asia and the Caribbean doesn’t make much sense. A large number of the banks domiciled in Singapore or in the Cayman Islands are nothing but branches of Swiss establishments that have opened there to attract new customers. Accounts circulate from Zurich to Hong Kong by a simple game of signatures, depending on attacks against banking secrecy and on treaties signed by Switzerland with foreign countries. Even the historically discreet private banks, a handful of hundred-year-old Swiss establishments where associates are responsible for their own wealth, have branches in Nassau and Singapore.
The Virgin Islands—Switzerland—Luxembourg
Rather than competing with one another, tax havens have in fact had a tendency to specialize in the various stages of wealth management. In the past, Swiss bankers provided all services: carrying out the investment strategy, keeping securities under custody, hiding the true identity of owners by way of the famous numbered accounts. Today only securities custody really remains in their purview. The rest has been moved offsite to other tax havens—Luxembourg, the Virgin Islands, or Panama—all of which function in symbiosis. This is the great organization of international wealth management.
For the most part, investments are no longer carried out from banks. Gone are the days of the capitalism of “small investors” when depositors themselves chose the stocks and bonds they wanted to hold, before transmitting their buying and selling orders to their banker. They have conferred this task to people for whom it is their profession, investment-fund managers. Funds pool the money of the owners and invest it throughout the entire world. This enables them on average to obtain better returns than individual investors, who are then generally content to choose the funds that seem the most promising. But the funds are not located in Switzerland. Most of those in which rich people invest today are domiciled in three other tax havens: Luxembourg, Ireland, and the Cayman Islands.
The classic type of funds, sometimes known as UCITS (Undertakings for Collective Investment in Transferable Securities), has been massively implanted in Luxembourg in the past twenty years. This Grand Duchy, a microstate with a half million inhabitants, is thus the number-two country in the world for the incorporation of mutual funds, after the United States! If you live in Europe, try this instructive experiment: ask your banker to put your savings in a mutual fund and read the prospectus that you are given—there is a fifty-fifty chance it is based in Luxembourg. Hedge funds—funds that carry out all sorts of more-or-less acrobatic investments—are for the most part sheltered in the Cayman Islands, because regulations covering their speculative positions are particularly soft there. As for Ireland, outside of UCITS and hedge funds, it is the chosen land of monetary funds.
Most money managers still work in New York, Paris, or London—close to their clientele—but the funds are subjected to the laws of the tax haven in which they are domiciled. What is the benefit of this maneuver? It enables—completely legally—the avoidance of various taxes created to penalize defrauders. Take the example of a Luxembourg fund that invests in American stocks. By virtue of the tax treaty between the two countries, the United States collects no tax on the dividends that are paid into the fund. In the Grand Duchy, neither the dividends that the fund earns nor those that it distributes to investors are taxed. The situation is identical in Ireland and in the Cayman Islands. Add to this the fact that it costs very little to create funds there, and the success of these three offshore sites is completely explained. In Switzerland, on the contrary, dividends distributed by funds are subjected to a tax of 35%. What is the consequence of this tax, which is intended to discourage tax fraud? Swiss funds have migrated to the Grand Duchy, and from their accounts in Geneva, investors now essentially buy Luxembourg funds.
Switzerland has also left to other tax havens control over the techniques used to hide beneficiaries. Today numbered accounts are forbidden by anti-money-laundering legislation. They have been replaced by trusts, foundations, and shell corporations. In the 1960s, accounts in Switzerland were identified by a series of numbers. Today, through the miracle of financial innovation, they are identified by a series of letters: on bank statements the “account 12345” has become that of “company ABCDE.” In all cases, the true owner remains undetectable. In 2012 four scholars attempted to create anonymous companies through 3,700 incorporation agents all over the world: in about a quarter of the cases, they were able to do so without providing any identification document whatsoever.8
However, shell corporations are not domiciled in Switzerland, but for the most part in a handful of tax havens where their creation is cheap, rapid, and safe. As for trusts, they are the specialty of the paper-pushers of the British Empire. Today more than 60% of accounts in Switzerland are thus held through the intermediary of shell companies headquartered in the British Virgin Islands, trusts registered in the Cayman Islands, or foundations domiciled in Liechtenstein. An essential point: The Anglo-Saxon trusts do not compete with the opacity services sold by Swiss banks; the two techniques of dissimulation have, on the contrary, become fundamentally intertwined.
Even if Switzerland has lost its hegemony and is henceforth inserted in the great organization of international wealth management, it’s important to understand that it remains the heart of the machine for two reasons. First, because the entire chain often starts at its banks: although formally domiciled in the Virgin Islands, the shell corporations are for the most part created in Geneva; and it is Swiss bankers who advise their customers which investment funds to put their money into. Above all, it is neither the involvement of the Virgin Islands or Luxembourg that enables tax fraud, but that of Switzerland (and comparable offshore private banking centers). Investing in a Grand Duchy fund from an account in Paris—or transferring that account to a shell corporation—does not enable the evasion of French taxes on income or wealth. No matter what one does, fraud originating in French or US banks is impossible, because they fully and truthfully exchange their information with tax authorities. It is only thanks to the lack of effective cooperation of a number of offshore private bankers that ultra-rich individuals are able to illegally evade taxes by not declaring income on their wealth. And although it is not alone, Switzerland is still to this day the number-one place for offshore private banking.
Swiss Banks: $2.3 Trillion
Let’s now take a look at a detailed accounting of the wealth held in Switzerland today. Since 1998 we have monthly statistics from the Swiss National Bank (SNB). Until recently, this unique set of data—no other country in the world produces anything similar—had not been studied.9 According to the latest available information, in the spring of 2015 foreign wealth held in Switzerland reached $2.3 trillion. Since April 2009—the date of the London summit during which the countries of the G20 decreed the “end of banking secrecy”—it has increased by 18%.
Should we be surprised by this insolent trend? Contrary to what we read everywhere, financial secrecy and opacity are far from dead. Granted, recent policy changes, as we shall see, are making it more difficult for moderately wealthy individuals to use offshore banks to dodge taxes: for them, the era of banking secrecy is coming to an end. Switzerland has agreed to cooperate with the United States to identify some American customers who haven’t declared income, and that cooperation should extend to a number of other developed countries by the end of this decade. Swiss bankers are also attempting to get rid of the mattresses stuffed with cash that many Germans or French have inherited, which are too visible and not very profitable. But the decrease of “little accounts” is more than made up for by the strong growth of assets deposited by the ultra-rich, in particular coming from developing countries. For them, impunity is still almost complete, as poor countries are for the most part excluded from the talks to increase international cooperation between offshore banks and foreign authorities.
And $2.3 trillion is probably a low estimate. The SNB data are on the whole of good quality: they cover all of the banks operating in Switzerland—including branches of foreign banks—and all of the wealth that is held in them. But they aren’t perfect—no economic statistics are; they are all constructions whose meanings and limitations must be carefully understood. In this instance, the fundamental problem is that statisticians are not looking to identify the true beneficiaries of the wealth. This has two consequences. The first is that some assets attributed to Swiss citizens in reality belong to foreigners. I have attempted to take this problem into account, but there is no completely satisfactory way to correct it, and the correction I propose may be insufficient.10
Figure 2: Swiss accounts (spring 2015). In 2015 banks domiciled in Switzerland managed $2.3 trillion belonging to nonresidents. Within this total, $1.3 trillion belonged to Europeans. Forty percent of the wealth managed in Switzerland is placed in mutual funds, principally in Luxembourg.
Source: Swiss National Bank and calculations by the author (see online annex to chapter 1, www.gabriel-zucman.eu).
More important, 60% of the assets belonging to foreigners are attributed to the British Virgin Islands, Panama, and other territories where shell corporations, trusts, and foundations are domiciled. To know who really owns wealth in Switzerland, we need to make some assumptions about who is behind these shell entities. After examining the available evidence, the assumption I retain is that the wealth held through shell companies belongs to American, British, or German citizens in the same proportion as the directly held wealth does, with a correction to take into account that since 2005 Europeans have had greater incentives to use shell companies and Gulf countries have less incentive to do so.11 This involves a margin of error, but despite this limitation, the amounts in figure 2 are the best we have available; they are the only ones that are based on the use of a transparent methodology applied to official statistics, covering all Swiss banks, and not on the hearsay or the so-called expertise of groups of advisers or lawyers whose interests are not always clear.
From this figure we can learn two things. First, contrary to a tenacious legend, a bit more than 50% of the total, or around $1.3 trillion, still belongs to Europeans, and not to Russian oligarchs or African dictators. This proves something obvious: Europe is the richest region of the world; the total private wealth on the Continent is more than ten times greater than that of Russia or Africa, and it is not at all surprising that this is reflected in the absolute levels of offshore wealth. The three countries that border Switzerland are logically in the lead—Germany with around $260 billion, France with $240 billion, and Italy with $140 billion.
But the second thing we learn is that the predominant weight of European capital in no way means that tax evasion isn’t a problem for Africa or for developing countries in general. Relative to their size, the assets that these countries hold in Switzerland are impressive, and the trend is disturbing. With more than $150 billion in Switzerland—more than the United States has, a country whose GDP is seven times higher—the African continent is the economy most affected by tax evasion. If the current trend is sustained, emerging countries will overtake Europe and North America by the end of the decade. And the consequences of tax fraud are even more serious for developing countries—which lack basic infrastructure and public services such as health care and education—than for rich countries.
What investments do foreigners make from their hidden accounts? In the spring of 2015, out of the total $2.3 trillion held in Switzerland, scarcely $250 billion takes the form of term deposits in Swiss banks. The rest is invested in financial securities: stocks, bonds, and above all mutual funds. Among those funds, Luxembourg holds the lion’s share, with around $750 billion.
So today the majority of Swiss bank customers are Europeans, who for the most part control their assets through trusts and shell corporations domiciled in the British Virgin Islands, which provide them with the same level of anonymity as in the time of numbered accounts. Their favorite investment is in Luxembourg funds, on which they pay absolutely no tax.
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