Swiss Bank Transformation or the end of Bank Secrecy

Money laundering

Money laundering (Photo credit: @MSG)

Like strict parents, banks are only popular when they say ‘Yes.’ Usually for good rather than ill, providers of financial services have many reasons to say ‘No,’ instead, but that means having a steady pool of disappointed souls whose projects have been rejected. Over time, the list of reasons to say no has grown, too. That has meant a history of reorganization and reinvention.

Anything newsy catches the eye, and the reinvention du jour concerns that of Swiss banking. Once the great fortress of banking secrecy, even the walls of Jericho came down with the right leverage. Putting the gutting of UBS and the failure of Wegelin and Bank Frey into perspective requires a bit of history.

Expansion of Bank Regulation Since 1980

Although the chief claim of the Occupy Wall Street crowd has been that bank deregulation led to the 2008-2009 meltdown, anyone actually working in financial services since the 1980s knows that the opposite was true. Like the mythical hydra, for every regulation loosened or removed, two sprang up its place. In the case of Swiss bank secrecy, the sword of Damocles started to fall way back in the 1980s.

The BCCI Scandal and Anti-Money Laundering

The opening salvo was fired, not at the Swiss per se, but at a notorious, Middle Eastern money launderer with connections in China, BCCI, whose shady operation was divided into units in Luxembourg, Grand Cayman, Kuwait, London, and Geneva, mostly with different accountants, apparently to avoid close scrutiny. As the shenanigans began to unwind in 1987, both the Bank of England and Luxembourg’s bank regulator jointly required that BCCI consolidate to a single accountant. The plot thickened and by 1991, it became clear that BCCI had illegally acquired a US bank. BCCI had also lied to regulators, laundered money, and the list went on. Indictments were handed out to its officers.

Shining a Bright Light Into Some Dark Corners

More importantly, the investigation revealed a seamy underside of international background that was worse than shady. It was pitch black. Keeping in mind that the Internet wasn’t the Internet until it was commercialized after the NSFNET was decommissioned in 1995, tax evaders and dictators stayed a step ahead of regulators, but the gap was already closing. Most people in the US don’t realize it, but the Patriot Act of 2001 was almost entirely composed of amendments to existing law, broadened to explicitly include the Internet. In many instances those rules had already been broadened in the mid-1990s during the Clinton Administration, as the Internet became a commercial venture.

All of which gets us back to UBS. These days, with transparency of wire traffic to regulators, if not to us, the supply of hidey-holes is fast drying up. No doubt the confident gleam in the secret bankers’ eyes dimmed when the US government didn’t just ask for disclosures, but provided a list of specific account numbers. It wasn’t just the US, either. Following the collapse of the USSR, the Russian government aggressively pursued billions of disappeared dollars, too.

A Brighter Future

For the Swiss, whose main marketing appeal was the promise of banking secrecy, but who likely have no real secrets left to speak of, reinvention was a no-brainer. For its part, the world is now saying ‘No’ to tax evasion, terrorism, and money laundering in less and less uncertain terms. Healthier banking and a feeling less ill at ease in counterparty transactions with the Swiss will be the eventual result. There was always something unsavory about deposits of cash in brown paper bags anyway.

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