Swiss banks will likely have to comprehensively review how they onboard and exit clients.
Whatever anyone says, the de facto end of Swiss neutrality is not going to be easy on banks. And if anyone thought that finding and reporting sanctioned assets to authorities was at all hard, they are likely to have another thing or two coming.
Freezing assets was the easy part. It is more than likely that most of the wealth has been siphoned off into innumerable numbers of entities, accounts, and individuals around the world. All of them are likely to have few – if any – links to anyone sanctioned.
Despite that, the onus is still going to be on them to be constantly on guard, making sure they either have no connection to such assets or, if they do, to exit them as promptly as feasible under prevailing regulation.
Ineffective Screening and Systems
Institutions are probably going to take the well-worn path of hiring compliance and financial crime experts while looking at how to improve their internal screening and name matching systems. That might all help but it is not going to do the job by a long shot.
Even in today’s age, most systems and human investigators can be easily duped. It goes back to the whole «garbage-in, garbage-out» conundrum.
How do you deal with an individual that is on-boarded using a still valid passport with a maiden name showing no link to a sanctioned individual? Wait for the adverse news alert or a client review a few years down the line? How about a married name? How do you know if a client is providing all their citizenships?
For these systems to work, they ultimately rely on clients providing full and complete information about themselves. But banks struggle with this, as do governments do, particularly in countries where multiple citizenships are not allowed, as the recent Winter Olympics showed in the extended discussion over Chinese-American skier Eileen Gu.
There is also the law of diminishing returns. The more information that is required, the more incentive there is to disclose as little as possible. There is not all that much that governments and the private sector can do about it – and that is even rightfully so in a democracy such as Switzerland’s.
The problem is that banks will bear the full blame when any links to a sanctioned individual are substantiated, and their reputation will suffer, particularly if they didn’t discover it themselves first.
Another large problem for Swiss finance is the financial crime risk in wealth management and private banking is usually secondary and indirect.
That means that often attempts at financial crime if undertaken through the banking system at all, are usually confusingly layered through hard-to-trace networks of retail and commercial banking businesses. Often the methods are extremely inventive, such as North Korea’s longstanding efforts to offload oil on the high seas to evade UN sanctions, as finews.com recently indicated and as Bloomberg reported may be currently happening with Russian shipping.
Sometimes attempts to launder money are extremely mundane and evidenced by little more than multiple attempts to withdraw cash from different ATMs at different banks in the same city in the space of a few hours. Or by exchanging large amounts of currency at a busy airport branch.
But Swiss banks do not typically take the front seat to this kind of activity, leaving them more on the defensive than other banks as clients usually shows up prima facie with adroit, fitting sets of identification and plausible sources of wealth and funds.
No Ability to Scrutinize
They do not have large-scale international retail transaction monitoring systems covering a large, widespread population of accounts that can support, or discount, adverse news alerts and name matches.
Except in certain niches, and usually limited to Switzerland and Swiss companies at that, they typically do not manage payments with the finance departments of commercial companies. They generally don’t provide large-scale international trade lending, which can give a bank an almost unfettered ability to scrutinize a company’s activities. It puts bankers in a position to visit production facilities, reconcile goods under transport against invoices, and monitor shipping paths and destinations to make sure they do not deviate to a sanctioned destination.
The view of a typical wealth manager and a private bank is usually static. Maybe a one-time onboarding exercise, followed by the funding of an investment account. After that, irregular individual payment and debit instructions, some direct investments, brokerage, face-to-face meetings, and general portfolio management.
In the long-term, this leaves them constantly exposed to things like the «Suisse Secrets» leaks under which Credit Suisse was accused of banking criminals and corrupt individuals for decades. It always seems like they are on the back foot because they usually are. And any new issue that crops up inevitably becomes intertwined with a generally false understanding of the limits of prevailing Swiss banking secrecy.
So how can Swiss banks make sure that this doesn’t happen again and prevent any international consensus from building that they are laggards when it comes to implementing the current sanctions regime against Ukraine?
Finding Secondary Assets
The relationship bankers themselves need to be fully and completely confident that there is no conceivable financial or familial relationship in their client portfolios with anyone remotely proximate to anyone that has been sanctioned.
The banks must be aware that for sanctions to work, they need to comprehensively review their onboarding and documentation activities in a way that assesses the probability or possibility of remote, secondary assets. And then exiting those relationships even when there is no conclusive evidence in the full knowledge that there is no system that can figure this out reliably.
In all this, it shouldn’t be forgotten that exiting a relationship is ultimately a reasonable step. The assets are being returned to the client and the bank is simply severing the relationship with them. And if the client doesn’t want the asset back, which can happen, that is often an answer in and of itself.
As, in the end, implementing a new and wide-ranging sanctions regime works in exactly the opposite way that the Swiss legal system, and that of many other countries, functions.
It is not about the principle of being innocent until proven guilty. It is exactly the opposite – presuming guilt first.
And it is more than likely to end up throwing out much good business along with the bad. But that may be the actual, true price of maintaining a bank’s reputation in the current world.