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).





Diamonds in toothpaste and hissy fits - an everyday tale of whistle blowing

In this piece I'm assembling the facts as I see them, about the origins of the row between the Swiss Bank UBS and the US income tax people at IRS.

It falls neatly into a story of both wealth and power.  In this case the wealth of the invidual,  set against the power of Government bodies and commercial organisations.  Plus here we have an added element in the mix, the power of one very disgruntled whistle blower.

In 2001, Igor Olenicoff, a multi-millionaire real estate mogul living in California, flew to Switzerland to meet Bradley Birkenfeld. (Birkenfeld is on the left of the photo - from the Daily Telegraph).

This was to prove a very unlucky meeting for Mr Olenicoff, and for many others, and it proved to be the starting pistol that begun the present IRS blitz on off shore companies and so-called tax havens. And nearly brought down one of the great banks of the world, UBS, the Swiss bank specialising in wealth management.

Birkenfeld, now 44, had lived in Switzerland for 13 years, working as a financial adviser to the rich. Since 2001 he has been a director with UBS, living the charmed life of a highly paid expert in tax affairs. He had a million-dollar house under the Matterhorn in Zermatt and an apartment in Geneva and drove a 50,000 dollar BMW.

Birkenfeld looked after important clients for UBS's private bank, catering for US citizens with offshore accounts. Earlier, Birkenfeld had worked for Barclays Bank in Geneva and Mr Olenicoff had been one of his clients. When he left Barclays to become a director at UBS, Birkenfeld took Mr Olenicoff with him. Mr Olenicoff was his biggest client.

Using offshore accounts is not illegal for United States taxpayers, but hiding income in so-called undeclared accounts is. Switzerland does not consider tax evasion a crime, and using undeclared accounts is legal there.

Mr Olenicoff had approached Birkenfeld in good faith, believing, as any of us would, that he was dealing with a decent and trustworthy professional man, representing one of the great banks of the world. He naturally assumed that everything he said would be in confidence as he was talking to a man whose profession was advising on offshore banking. No doubt, Mr Olenicoff was paying a lot of money for the privilege of Birkenfeld's discretion and advice. It seems to me he was betrayed, in the most treacherous manner, by an individual who was himself doing exactly what he was condemning his client for doing.  The hypocrisy of Birkenfeld's behaviour is staggering - not to speak of his stupidity in thinking he could get away with it.

Birkenfeld took Mr Olenicoff's money, gave him advice, helped him move possibly hundreds of millions of dollars from the Bahamas to Switzerland, smuggled several hundred thousands worth of diamonds into the States, hidden in a tube of toothpaste -

- and then sold both his long term client and his ex-employers (who had kept him in luxury for years) straight down the river and into the hands of the IRS, the American tax authorities. The IRS, who didn't see this one coming, took a little time before they realised that their whistleblower, the apparent hero who was claiming virtuously to be so shocked when he found out what UBS was doing that it was his moral duty to tell on them, was hiding the fact that he himself had been doing exactly the same thing.

That's why, unusually for a whistleblower, he's just go 40 months in a state penitentiary, instead of the praise he might have got.

And the whole tacky story seems to have had its roots in little more than a hissy fit by Birkenfeld when he got a less than favourable annual report from UBS, and a smaller bonus than he was expecting. He flounced out of UBS and into the hands of the taxmen, taking his unsuspecting client with him.

Shakespeare talks of how 'one may smile, and smile, and be a villain.'
Well, for 40 months at least, I suspect Birkenfeld won't be doing much smiling.

And by the way, the client who trusted him got a suspended sentence, paid back some $50 million, and was fined $3,500. Maybe, like me, the court had considerable sympathy for Igor Olenicoff.

Goldman Sachs and The Dumb God

I quote below two excerpts I rather liked from John Arlidge's long interview in the Sunday Times on 8 November with the Chairman and CEO of Goldman Sachs, Lloyd Blankfein.

But before that, in view of the publicity that has been given to a careless passing reference to God towards the end of the interview, (and which has occasioned a number of lunatic fringe contributions in the comments column) , I thought I'd start with one of my own favourites quotes. It comes from Ben Johnson's comedy,  Volpone.  Here is Volpone, the old fox himself , speaking as he gazes lovingly on his gold:

"Riches, the dumb god, that givest all men tongues,

That canst do nought, and yet mak'st men do all things;

The price of soul; even hell, with thee to boot,

Is made worth heaven"

First said in 1606, Johnson's words are as accurate today as they were then. Money still enables you to do all things . . .

So here are two short excerpts from John Arlidge's interview with Lloyd Blankfein. 

Blankfein, acknowledging the public dislike of the banks these days, says:

"I know I could slit my wrists and people would cheer."  But then, he slowly begins to argue the case for modern banking. "We’re very important," he says, abandoning self-flagellation. "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." To drive home his point, he makes a remarkably bold claim. "We have a social purpose."

Later, Arlidge discusses why Goldman Sachs came out of the sub prime mortgage debacle better than other banks.  He points up the fanatical attention to detail that characterises the company, and explains:

"Take the sub-prime mortgage sector, the ticking toxic debt bomb that detonated the economic crisis. One year before bad home loans brought down Lehman and Bear Stearns, forced shotgun marriages of Merrill Lynch to Bank of America and HBOS to Lloyds, and made Royal Bank of Scotland a national joke, Goldman’s daily valuations revealed it had suffered modest losses in its mortgage holdings for just over a week. At most banks, the losses might have gone unnoticed or been dismissed as a rounding error, but Goldman convened a meeting of senior bankers to try to find out what was going on. Even though the housing and mortgage markets were still buoyant, the bank did not like what it saw and began reducing its exposure. When the credit crunch hit, its losses in the mortgage sector were only $1.7 billion, lower than any other big investment bank. UBS lost $58 billion."

Note the final sentence. How are the mighty fallen?  $58 billion down the drain - God in Heaven, what were UBS doing?  Whatever possessed them to get into such murky waters when their whole raison d'etre is asset and wealth management

As for the apparent quote from Blankfein, 'I'm just a banker doing God's work,"  -  for goodness sake lighten up, you people, it was a joke!

The Taxmen, The Bank and The Rat

Getting together this piece about the IRS/UBS row over tax -  triggered by the treachery of one Bradley Birkenfeld, left, a man who makes Judas Iscariot look like a Saint -  it seemed to me that in essence the whole thing comes down to two words: Freedom or Tyranny.

Those are dramatic words,  but this latest attack on the personal money of the

individual is a pretty dramatic affair.

In the violent slugfest between the IRS, the tax collecting arm of the United States Government, and the Swiss Bank UBS, specialising in wealth and asset management,  we seem to be seeing a clear attempt by one side, aided and abbetted by the OECD,  to do away with the long accepted distinction between tax avoidance and tax evasion - to the detriment of every one of us, rich or not.

Bear with me, because this is the boring bit where we have to define our terms.

In any civilised country,  two elements of the tax system have always been recognised - Tax Avoidance and Tax Evasion.

Tax Avoidance is legal. Tax Evasion is not.

To put it simply, Tax Avoidance is me exercising my god given right to hang on to my hard earned money and not hand over unreasonably large chunks of it to a bunch of greedy politicians.

Tax avoidance is the legal exploitation of the tax system, to try and reduce the amount of tax that is payable by means that are within the law, while at the same time - and this is the relevant bit to the present row - making full disclosure of income to the tax authorities.

Examples of tax avoidance are, for instance, using tax deductions, changing ones business structure through incorporation, or establishing an offshore company in a tax haven.

Tax Evasion, however, involves deliberate efforts by individuals, or firms etc, to evade the legitimate payment of taxes by illegal means.
This usually means taxpayers deliberately misrepresenting or concealing the true state of their affairs, and includes dishonest tax reporting, such as underdeclaring income, profits or gains - or overstating deductions.

So, Evasion is naughty. Avoidance is good,  because in a free country money belongs to the people who produce and earn it.

Of course, anybody in their right mind knows a certain level of tax is necessary - a portion of the wealth produced by the population must be given up to pay for the public good - for a decent health service, decent education, a trustworthy system of justice, national defence et al.

But why should we give the government an unlimited claim on our money to use as they see fit? And for what? Corporate bail outs, pet projects, foreign aid - the list goes on and on.

That's why this particular battle makes me nervous.  Not because I'm rich. I'm not - though one day, in a good old capitalist society, I might be.  And then I will want talented people around who will come to my aid and protect me from the grasping hands of my government.

Is there something a touch malevolent about the IRS relentless pursuit of UBS and it's clients?   A sort of old fashioned socialist desire to punish  people for having money? 

Yes, I do know that in this difficult financial landscape, all Governments are scratching round to find every and any source from which they can raise revenue.

And I am not saying the wealthy are perfect - but tell me who is? 

Mr Timothy F Geitner is the Secretary of the Treasury, the American equivalent of the UK's  Chancellor of the Exchequer.  I guess that makes him the boss of the IRS boys.

Do the words 'without sin' and 'casting the first stone' ring a bell, anyone?

more to come -including who are the OECD, and what's in it for them?