Info Service on WTO and Trade Issues (Oct17/07)
11 October 2017
Third World Network
Further efforts needed to curb illicit flows, Switzerland told
Published in SUNS #8548 dated 9 October 2017
Geneva, 6 Oct (Kanaga Raja) - While the Swiss Federal Government has
undertaken several efforts and achieved progress in curbing illicit
financial flows in recent years, there are several areas in which
there is room for improvement in the fields of accountability, regulation
and supervision of the Swiss financial market, a United Nations human
rights expert said on 4 October.
This is the assessment of Mr Juan Pablo Bohoslavsky (of Argentina),
the UN Independent Expert on the effects of foreign debt and other
related international financial obligations of States on the full
enjoyment of all human rights, at the end of his first official visit
to the country.
"Progress has been achieved, but further efforts are necessary
to make sure that dirty money stemming from tax evasion and corruption
is not entering the Swiss financial market," he said in a UN
"Illicit financial flows undermine the rule of law and human
rights. In particular, they reduce the ability of developing countries
to finance essential public services, such as health care, education
and basic social security schemes," the rights expert added.
"Despite significant efforts in adopting legislation and improving
procedures to detect suspicious transactions, the risk that the Swiss
financial market is used for money laundering remains," said
In his end-of-mission statement, the rights expert pointed out that
illicit financial flows are financial transfers of an unlawful nature.
These can be, for example, funds deposited offshore in order to evade
taxes, which deprive states from needed resources to ensure the realization
of rights such as to education, food, housing and health care.
The assets can also stem from other criminal activity, such as corruption,
misappropriation of public funds, trafficking of persons, drug trafficking
or illegal arms trade.
"As the so-called Panama Papers scandal has underlined, more
prone to siphon money abroad are the rich, corporate and political
elites and their entourage. Among them there are also human rights
abusing rulers, the Abacha's, Marco's, Duvalier's and Ben Ali's of
today," said the rights expert.
"It is obvious that States have to make concerted efforts to
make sure that criminal conduct and robbing people of public resources
does not pay and that stolen assets are returned to their legitimate
It has been estimated that the total volume of illicit financial flows
leaving developing countries amounts to over 1 trillion per year.
This is more than ten times the development assistance provided to
While illicit financial flows affect all countries, including European
countries that struggle to fund their public health and social security
systems, their impact on the enjoyment of human rights is particularly
severe in low-income countries, which are struggling to fund essential
The Independent Expert noted that the Swiss financial centre is a
leading global location for cross-border management of private assets,
with a market share of 25 percent.
Its financial sector contributes 9.1 per cent to the GDP and assets
held in Swiss banks by non-resident custody account holders amount
to 2.92 trillion CHF.
Switzerland is also a hub for commodity trading, with an estimated
global market share of 35 per cent for trade of crude oil, 50 per
cent for sugar and about 60 percent for coffee and metals such as
zinc, copper and aluminium.
The commodity trading industry closely depends on the services of
local banks which provide financing.
"It is my view that Switzerland can play a key role in curbing
illicit financial flows and can also become a frontrunner in integrating
human rights in the public and private financial sector," Mr
According to the rights expert, his general impression is that official
policies in relation to illicit financial flows have seen a positive
change over the years.
In the 2030 Agenda for Sustainable Development all States have pledged
to reduce significantly illicit financial flows by 2030.
Since 2008, many initiatives have been undertaken in Switzerland to
restore the reputation of its banking sector, which has suffered under
revelations that banks domiciled in the country assisted foreigners
in tax evasion or lacked adequate due diligence procedures to prevent
that politically exposed persons can use its jurisdiction to hide
Before 2009 there was widespread cross-border tax evasion by foreign
nationals from various jurisdictions facilitated by banks operating
The data relating to tax evasion by US tax payers is revealing in
itself, said the rights expert.
In 2009 UBS reached a 770 million USD settlement for facilitating
tax evasion of US tax payers and by August 2013 US authorities had
started investigations against 12 additional Swiss financial institutions.
By the end of January 2016, 76 further banks operating in Switzerland
had entered into non-prosecution agreements because they had reason
to believe that they had committed tax-related criminal offences under
the law of the United States in connection with undeclared accounts
of US residents.
The list of banks includes Swiss branches of many well-known international
These non-prosecution agreements include statement of facts providing
details about how the respective banks or client relationship managers
working for them had organised tax evasion schemes for their clients.
Under the so-called "Swiss bank programme" respective financial
institutions would receive a penalty, based on the value of the assets
held in undisclosed accounts. In total, penalties have amounted to
more than 5.5 billion USD.
Yet as the Chief Executive Officer of the Swiss Financial Market Supervisory
Authority (FINMA) has pointed out in April 2016, despite significant
efforts in adopting legislation and improving procedures to detect
suspicious transactions, the risks that the Swiss financial market
continues to be abused for the purpose of money laundering is not
"This is in particular highlighted by the involvement of several
Swiss banks in the Petrobas corruption scandal (in Brazil) and in
the suspicious cash flows linked to the Malaysian sovereign fund 1MDB,"
said the Independent Expert.
Particularly troubling is the fact that these events are not from
years ago - the money was still accepted until quite recently, that
evidence points to very obvious cases of corruption and that the sums
are vast with individual transactions running into hundreds of millions,
which should have triggered red flags in concerned financial institutions.
"Media reports about Swiss financial institutions suspected to
be involved in facilitating tax evasion or being used for money laundering
have continued to appear in 2017," said Mr Bohoslavsky.
Both, effectiveness and speed with which stolen assets can be returned
are of paramount importance, he said.
In addition, it is important that sanctions to those financial institutions
that have failed to exercise due diligence are imposed in a timely,
transparent and proportional manner in order to make sure that neither
robbing funds, nor hiding them pays off.
He welcomed that Switzerland and its financial institutions will be
participating as of 1 January 2018 with 38 states and territories
in the Automatic Exchange of Information for Tax Purposes (AEOI).
"My main concern is that the new system could remain an ineffective
tool for curbing tax evasion in certain developing countries that
lack the technical requirements to participate in the new system."
He also noted that the commitment of the Swiss Government to curb
illicit financial flows is underlined by its efforts to freeze and
return illicit assets deposited in its jurisdiction belonging to authoritarian
Over the last 30 years, Switzerland has returned two billion dollars
of illicit assets pertaining to politically exposed persons and frozen
suspicious assets valued at hundreds of millions of dollars.
"It is my impression that there is a clear political will in
Switzerland to return stolen assets to the legitimate owners. This
is also demonstrated by technical assistance that Switzerland has
offered to countries that have requested the return of stolen assets,"
the rights expert said.
"Indeed, I would encourage other countries that have received
stolen assets to follow the Swiss example and adopt similar policies
and legal regulations to facilitate their freeze and return and report
annually in public about the amounts frozen and returned."
A balanced and nuanced role of the state is of paramount importance
to ensure accountability, transparency and fairness in the financial
sector when dealing with human rights abuses and illicit financial
The rights expert underlined that the supervision of Swiss banks through
self-regulatory norms set by the Swiss Banking Association and regulation
by the Swiss Financial Market Supervisory Authority (FINMA) is therefore
The rights expert said investigations of recent cases show that the
majority of banks fulfil their duties under the Anti-Money Laundering
Act of Switzerland, but a minority do not.
In the Petrobras case, for instance, FINMA has revealed that 75% of
Swiss banks involved were in conformity with Swiss legal prescriptions
in applying their money-laundering rules.
However, it noted that for the remaining percentage of banks "there
(were) concrete indications that the measures those banks had in place
to combat money laundering were inadequate".
"It is my view that the staffing, resources and powers of FINMA
need to be proportional to the size of the Swiss financial market
and the volume of assets managed by its financial institutions. FINMA
should have sufficient capacities to supervise all banks and financial
intermediaries adequately irrespectively of their size," Mr Bohoslavsky
He also pointed out that criminal sanctions in Switzerland for assisting
foreigners to evade taxes are weak.
"While assisting a foreigner to steal some few hundreds CHF is
a crime in Switzerland, assisting a foreigner to "steal"
from a foreign treasury a quarter of a million within one year, is
not punishable within Switzerland."
The rights expert also noted that the Government presented to the
Swiss electorate a comprehensive corporate tax reform package in 2016
(USR III) which included measures to bring Swiss corporate tax regimes
in line with OECD standards to combat base erosion and profit shifting
(BEPS) of multinational companies.
The new law would have outlawed certain tax reduction regimes that
are no longer accepted internationally, replacing them with patent-box
regimes and other avenues for tax reduction.
In February 2017, the Government proposal failed to reach a majority
during a public referendum. A few weeks ago, the Federal Council published
a revised tax proposal 17 for public consultation with the aim of
ensuring that Swiss corporate tax regimes will become compliant to
"I continue to be concerned about the potential human rights
impact of the revised tax reform proposal 17 in other countries,"
Essentially the tax reform proposal 17 aims to keep taxation of multinational
corporations in Switzerland at low levels to make placing headquarters
in Switzerland attractive.
While this brings undoubtedly benefits in the form of tax receipts
for the country and employment opportunities, it should not be forgotten
that harmful tax competition between countries has resulted over the
last decades in a dramatic reduction of corporate tax burdens of large
corporations worldwide and contributed to the increase of unsustainable
public debt in the developing world.
"Therefore, I would like to call upon the Swiss authorities to
carry out a social and human rights impact assessment of the tax reform
package, which should include an assessment of how the reform will
impact on tax revenues available for the realisation of economic and
social rights within Switzerland and for individuals living abroad,
in particular in developing countries."
Switzerland has been a strong supporter of the process that resulted
in the adoption of the United Nations Guiding Principles on Business
and Human Rights.
"In December last year, the Government adopted a National Action
Plan for implementing the Guiding Principles in Switzerland after
a consultative process with the private sector and non-governmental
organizations; an important step that I salute."
The National Action Plan endorses the concept of a smart mix of mandatory
and voluntary commitments, however, only few of its action points
refer to any regulatory measures to improve business respect for human
While the National Action Plan is rather comprehensive, it regrettably
does not include particular action points in relation to the financial
sector of Switzerland, except mentioning the important role played
by the Thun Group of Banks, an informal network of eleven major banks
aimed at exchanging good practices in implementing the UN Guiding
principles on business and human rights in the financial sector of
large corporate banks.
The rights expert welcomed the leading role of UBS and Credit Suisse
in setting up the Thun Group of Banks with the aim to engage with
peer international banks in a discussion and exchange of information
on human rights due diligence.
However, he shared the concerns voiced by the UN Working Group on
Business and human rights and other stakeholders that one of its recent
discussion papers would unduly limit the responsibilities of banks
for preventing and mitigating human rights impacts to which they are
directly linked in the context of their client relationship.
He therefore welcomed that the Thun Group has recently invited human
rights experts and non-governmental organizations to their annual
meeting and hoped that concerns expressed by human rights experts
will be taken into account.
"Furthermore, I would like to encourage the Government, Swiss
Banking, the Association of Swiss Private Banks and other professional
associations to consider developing in dialogue with non-governmental
organizations and human rights experts a banking sector agreement
on responsible business conduct in Switzerland."
The Dutch Banking Sector Agreement may be a source of inspiration
in this context, said the rights expert, adding that in his view there
is a need to develop a common understanding and more consistency in
what it means to include human rights due diligence in the financial
"In my view, the secret loan scandal in Mozambique pushing the
country close to bankruptcy underlines the real need to incorporate
the Guiding principles of foreign debt and human rights and UNCTAD's
principles for responsible borrowing and lending in such sector agreements."
Mr Bohoslavsky welcomed that an increasing number of pension funds
in Switzerland have adopted investment policies that include some
human rights criteria, including the public pension funds of the cantons
of Geneva and Vaud.
In December 2015, seven public pension funds managing investment assets
totalling over CHF 150 billion founded the Swiss Association for Responsible
The pension funds include the BVK (Zurich canton's civil service pension
fund), compenswiss (AHV/IV/EO compensation fund), comPlan, the Swiss
Post Office pension fund, the Swiss Federal Railways pension fund,
the federal pension fund PUBLICA and Suva.
In total, the volume of assets managed in Switzerland following sustainability
criteria has significantly increased during the last years.
A market study covering 41 Swiss institutional investors indicates
that sustainable investments have reached 266 million USD in 2016.
Violation of human rights was the most important exclusion criteria
of asset managers, followed by violation of labour rights, corruption
and bribery and disrespect for the environment.
"Private Banks that have specialised in wealth management can
similarly integrate human rights approaches in their asset management
strategies and in financial products offered to their clients,"
said the rights expert.
For example, the private Bank Lombard Odier excludes as a general
policy at group level any investments involved in the production or
distribution of controversial weapons, including biological, chemical
weapons, anti-personnel mines, cluster weapons, depleted uranium and
It is in particular noteworthy that it has also banned investments
in financial instruments such as futures, options, swaps, indices,
and exchange-traded funds directly linked to "essential food
commodities" such as wheat, rice, corn and soybeans.
Switzerland has adopted a human rights policy aiming for coherence
and for the protection of human rights at home and abroad.
Its Government expects that private financial institutions headquartered
in Switzerland respect human rights wherever they operate and that
they exercise human rights due diligence throughout their business
and client relationships.
In recent years, the Federal Government has undertaken several efforts
and achieved progress in curbing illicit financial flows which undermine
the rule of law and the enjoyment of human rights in Switzerland and
in foreign countries.
"I believe, however, that it is necessary to integrate more systematically
human rights considerations into financial policies of public and
private institutions based in Switzerland."
First of all, there is a legal obligation to do so. Second, further
embedding human rights in financial policy would enhance the reputation
of the Swiss financial market.
It would also give further credibility to its human rights policies
and to the aim of making Switzerland's financial market a leader in
"Finally, and this is in my view the most important aspect, it
would improve the protection and enjoyment of human rights in Switzerland
and abroad," said Mr Bohoslavsky.
"As outlined above, I have identified several areas in which
there is room for improvements in the fields of accountability, regulation
and supervision of the Swiss financial market and hope that my recommendations
will be duly considered."
Making further efforts to implement human rights in the financial
field should be considered an evolving duty as asymmetric power relations
undermining human rights operating underneath financial markets need
to be continuously re-composed, said the rights expert.