Anti-money laundering measures: Swiss banks look the other way


Like their counterparts in the European Union, Swiss banks are very often involved in money laundering schemes. Here are some recent examples. In February 2019, a court in Paris sentenced Switzerland’s largest bank, UBS, to pay a record fine of €3.7 billion and 800 million in compensation for money laundering and tax fraud in favour of French clients. However, most of these events have an international context and are directly related to corruption. The scandal of the Malaysian state fund 1MDB involved, among others, UBS, the private bank BSI, Falcon Private Bank and the private bank Coutts. 7.5 billion dollars were hijacked from this fund. In addition, the Swiss banks were involved in the corruption cases of the energy multinational Petrobras and the building consortium Odebrecht, both Brazilian companies. Here, too, there is evidence of corrupt and hijacked, funds amounting to billions. Credit Suisse, the second largest bank in Switzerland, has caused a stir because it was involved in the corruption case around FIFA.

What makes the Swiss financial market so vulnerable to money laundering?

The reason for this vulnerability lies in the specific business model of Swiss banks, which establish themselves in the world of international competition as the crossroads of private asset management. There are various reasons why clients around the world choose Switzerland as their investment country. Swiss banking secrecy is certainly a factor, although it has become more permeable. Switzerland has had to accept the exchange of tax information in accordance with OECD standards.

Private banking for wealthy clients and wealth management, which concerns the management of private assets, are still an important asset on the Swiss financial market. We are talking specifically about the overall financial protection of private individuals and their assets. In Switzerland, banks and asset managers manage a total of 3.7 billion Swiss francs. Sixty-two percent of them are not domiciled abroad. The Swiss financial market occupies between 1/4 and 1/3 of the global market. Asset management is therefore one of Switzerland’s most important export services. Private assets that are managed across borders have increased by 300 billion Swiss francs from 2013 to 2018.

The administration of private assets has an extensive personnel infrastructure. Not only Swiss banks but also fiduciaries and lawyers are part of this network. It is obvious that these financial services also attract criminals. The funds that are generated illegally run several times between figureheads and offshore companies. In the final phase of money laundering – the investment phase – these funds are then channelled into financial products and the real economy.

In this way wealth management is a gateway to financial crime and the black economy.

The business model of private wealth management has changed in the second decade of this century.

One of the main activities of most Swiss banks had so far been the protection of foreign clients. The main beneficiaries were US and European clients, especially German clients, who used branches and subsidiaries as intermediaries. The assets of these clients often consisted of black funds. In Germany, among other things, the Minister of Finance of North Rhine-Westphalia bought the so-called Steuersünder Cd’s, CDs containing the stolen data on customers of banks engaged in tax evasion. After obtaining this data, many tax fraud proceedings were initiated against clients in Germany and Swiss banks. Thus, clients with illicit funds in bank accounts in Switzerland considered it appropriate to voluntarily report themselves in order to obtain a reduction in penalties.

In addition, Switzerland lost in a tax dispute with the United States that broke out in 2008. As a result, at the beginning of 2009, the US tax authority IRS announced a remission programme. In order to legalise their funds and avoid criminal prosecution, the US tax evaders had to appoint banks and consultants to help them channel their money to the tax authorities. Employees of Swiss banks in the United States were arrested and sentenced to prison. The “business model” of the Swiss banks failed. As a result, business with American and European clients across borders had to be drastically restricted. In the eyes of international public opinion, Switzerland played as the repentant sinner who would in future follow a “clean money strategy” (“Weißgeldstrategie”) to regain its lost reputation. Switzerland would therefore only accept investments whose legal origins were controlled by the banks and considering the national tax law that clients must comply with in order to ensure the absence of danger.

A clean money strategy is another thing

In reality, the Swiss banks did not abandon the old business model entirely but changed it. Instead, they strengthened their focus on the super-rich in emerging markets, which are usually controlled by more permissive financial market, tax and investigating authorities. In the markets of Asia and South America, many funds of dubious clients were received by Swiss banks’ financial managers on the spot. In this way, money received by Swiss banks and thus laundered no longer had to be transferred to Swiss bank accounts and deposits but could be placed in third countries.

The “High Performers” among the consultants were cashing in huge bonuses in this new, immensely profitable business sector. In addition, when business relations were established, hardly any controls were carried out on new clients and their assets by the boards of directors of Swiss banks and their internal AML compliance officers. While the internal requirements with respect to customer care had to be carried out more and more carefully by bank employees, and the number of suspicions reported by Swiss banks – as was also the case at EU banks – increased significantly, the ”top players” in consulting were free to recruit new clients. In fact, there were very few suspicious cases reported to government institutions for this type of clientele. Subsequently, the Swiss tax authority FINMA defined stricter requirements regarding “know your customer policy” – especially in the case of the private bank Julius Bär.

However, using double standards is not just a Swiss problem. Similar deficits have also been noted at EU banks. Which profit-oriented bank reports to the tax authorities its best clients who generate high earnings? Even if this approach runs the risk that, once it is clear, the bank will face huge reputational problems and must expect operational risks on its balance sheet. In this perspective, divorce from the “good client” will be more the exception than the rule.

A comprehensive whistleblowing system must support the reporting of suspects

In the opinion of mafianeindanke, an effective anti-money laundering strategy must start by rethinking the current approach which has become standard in Europe and globally.

It makes sense, of course, that the supervisory authorities continue to require strict compliance with the obligation to report suspicions and customer care obligations on behalf of banks and other obligated parties. However, the examination mechanisms of the tax authorities – even if the number of evidences on the ground were to increase significantly – do not fully detect serious money laundering cases. Banks may run the risk of failing to comply with the Money Laundering Act because in most cases they escape the controls of the supervisory and investigative authorities.

More control could be achieved by complementing the existing suspicion reporting mechanism with a functioning Whistleblower system. Whistleblowers are people who report or report violations of the law or other misconduct. There are social and economic areas where whistleblowers are indispensable. For example, in the areas of money laundering and corruption. The creation of whistleblower systems is part of the obligations of the supervisory authorities in the German Money Laundering Act. In practice, however, these obligations are only symbolic if formulated in general terms.  So far, these systems are not operational. They do not effectively protect the whistleblower when he addresses the outside world. It is therefore not surprising that many employees of banks and other companies who want to report irregularities prefer to remain anonymous or even keep their knowledge to themselves.

The situation in Switzerland is even more unsatisfactory. So far, the Federal Council (Bundesrat) has rejected any initiative for legal regulation in this area.  Whistleblowers are therefore at risk of being fired and subject not only to social condemnation but also to prosecution.

In October 2019, the European Union issued a directive to protect persons who report violations of existing European laws in their profession. German legislation must implement this directive within two years. Civil society should take an interest in this issue from the beginning.

Mafianeindanke will certainly do so.