The Hidden Wealth of Nations Read online

  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 enab
les 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.