The Good, the Bad, and Swiss Banks

When I was a child I was taught that there were only two certain things in life: death and taxes. When I became a teenager, I amended that. There were three things that were certain: death, taxes - and the privacy of a Swiss Bank account.

In an uncertain world, you could put your faith in the numbered account of a Swiss bank, and know that your assets were safe, hidden from prying eyes, accessible only to yourself. In a world in which you could trust no-one, the one exception was the Swiss bank.

Now death and taxes reign supreme. As for the Swiss banks - how are the mighty fallen.

A year or so ago, after a protracted, bitter fight with the American IRS (the US Treasury office that deals with income tax affairs), UBS (United Bank of Switzerland) caved in and handed over many names and details of its clients' private financial affairs.


counter hall of UBS Zurich

Following this painful episode, new legislation was put into place making it more difficult, for instance, for plundering rulers to open accounts in Switzerland.

What now is the position of the Swiss banks? If discretion and secrecy have gone, what rules are we left with? UBS have frozen the funds of several dictators in the past few months. Why? Let's take the case of Hosni Mubarak, the fallen former President of Egypt.

UBS held funds for Mubarak for years, apparently quite happily, with no reservations, and considerable profit to themselves.

This situation lasted until Wednesday, 10 February 2011.
On Thursday, 11 February, Mubarak left office, and retreated to his home in Sharm-el-Sheikh. Within two hours the bank had frozen his assets for approximately 3 years.

A couple of questions come to mind. Under a freeze, does a bank still take a fee for holding the assets, and can that bank still lend that money out at interest? UBS do not at this time appear to be returning it immediately to the Egyptians, though, to be fair to the Swiss, they have an extremely good record recently in returning money to the country of origin.

And James Nason, of the Swiss Bankers Association, speaks forcibly in defence of Switzerland in that regard:
" The case of the late Nigerian dictator Sani Abacha was a classic example. The Swiss investigation into Abacha funds at Swiss banks revealed that a substantial proportion of his plundered funds had first been laundered by banks in the US and UK. A subsequent investigation by the UK banking regulator (FSA) in fact revealed that between 1996 and 2000, 23 British banks laundered some USD 1.3 billion of Abacha’s illicit assets. In September 2000 Nigeria’s ambassador to Switzerland, Mr. Ogbe Obande, told Swiss Radio: “I’m happy to say without equivocation that so far Switzerland has given the best cooperation to Nigeria in its quest to recover the looted property stashed in banks across Europe and the Americas.”


Switzerland remains the only country in the world to have returned Abacha funds to Nigeria and Nigeria remains frustrated at the lack of cooperation from the UK and US. Yet the media continue to give the impression that Switzerland was the only country whose banks accepted Abacha funds.


But one can't blame people for asking - if Mubarak is such an offensive client, why did they accept his money in the first place? He's still the man he was, and the money they're holding is still the same money they've been holding, I presume for some time.

How do the Swiss themselves explain this? James Nason has been telling Robert Brookes of http://www.swissinfo.ch/ that Swiss banks are obliged by legislation to stick to strict regulations when opening and handling accounts.

"There are very strict procedures in place, so-called due diligence procedures, basically "know your customer” rules," he says. "First the bank has to decide if it wants a business relation with this person. If you’re a so-called “politically-exposed person” (Pep), that means somebody holding an important public office in a foreign country, the bank has to assess how much of a legal or reputational risk you might pose.


If it decides to go ahead, one basic question is: Can you prove your identity? The banks are obliged by law to verify the identity of the client so they will want to see some kind of official identification document. Then the third and a very important step is to find out: Are these your assets you’re bringing to the bank or do these assets belong to someone else? The bank is also legally obliged to find out who the beneficial owner of the assets is or are."

Know your customer. Unless Swiss bankers all live in monastic seclusion high up in the Alps and never read the papers, how could they not know of Mubarak. He was a world figure, had been in charge in Egypt for 30 years, the bank had 'known' him and his character and his way of running his country, for years.

Presumably, when opening his account, they had inquired "Are these your assets you’re bringing to the bank or do these assets belong to someone else?"

And, presumably, the answer given was satisfactory, otherwise they would have refused him as a client.

Though in defence of the Swiss, it should also be pointed out that sometimes monies paid into a Swiss Bank have already passed through other banks, say in the US or the UK, where the 'know your customer rules' are not as strict.

Mr Nason also explains that they "put clients in different risk categories, so for example an 80-year-old grandmother from the next village would be a low-risk client whereas a 28-year-old casino owner from St Petersburg, for example, or a defence minister from a country notorious for corruption would obviously be considered to pose a higher risk."


One would assume the President of a country notorious for corruption would pose as high a risk as a defence minister. Certainly, immediately Mubarak fell from power, the bank took a strong moral view and froze his assets.

Mr Nason goes on: "There are very clear regulations in place. If a bank notices a suspicious transaction or it has well-founded suspicions that something like money laundering is going on, the bank is obliged by law to freeze the account and report it to the authorities, the Money Laundering Reporting Office. In some countries a bank would have to wait for a court order in order to freeze the funds but in Switzerland a bank can act on its own initiative. The authorities then have five working days to investigate and then they will tell the bank what to do."

Things now being as they are, one wonders why anyone these days would place their money with a Swiss bank who assesses a client as suitable, strikes a contract with that client to look after their funds, maintains that position for years, and then in a matter of two hours turns on the client, and freezes all their assets. If Mubarak's money was legitimate when he was in power and the bank accepted it, then surely it was still legitimate when he was no longer in power?

Swiss authorities explained the quick freezing of the account by saying it was taken "to avoid any misappropriation of Egyptian Government assets."

That doesn't quite answer the question.

I'm not discussing morality here - it's a murky area, one person's morality is another's immorality - I am simply looking at the business side of things.  But if morality comes into it, then surely it comes in on both sides. 

A bank is in the business of attracting wealthy clients, offering them expertise, protection for their assets and advice. That is the contract they strike with the client.  Surely, if they take the client's funds, earning good profits out of doing so, they owe some loyalty to that client. Wouldn't it be reasonable, when seeing that client heading for the rocks, to give them some advance warning - something along the lines of 'look old man, your future is not looking good, we advise you to remove your money from our bank pdq otherwise we will be forced to freeze your assets.'  Whatever the banker thinks of the client privately, he has taken the money, entered into a deal with the client and used it to the advantage of his bank. 

Mind you, even as I write this a little voice in my head says softly are you sure freezing an account is exactly what you think it is, are you sure there aren't angles you've missed? No, I'm not sure, because money is a complex creature, where money is there will always be angles, tricks of the trade, ways around things - angle within angles!  I can think of a couple myself . . .


There's no denying that the agonising battle between UBS and the Americans has cast a very long shadow on the Swiss banks.
And regarding the rash of frozen funds lately, there does seem to be something interesting happening on two fronts, both in relation to the rich and the Swiss Banks, and attitudes by the Swiss Banks to American clients.

More of than on the next post - and where to put money now the Swiss have fallen from grace.

(You can read the whole interview with Nason at www.swissinfo.ch dated 1 February 2011.)

the photo of UBS is from a 'wallpaper' site which encourages me to pass the contents of the site onwards, to facebook etc, so I take it I am able to use what is a very good photo).