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LIVING IN SWITZERLAND

OPINION: Why Switzerland is failing in its fight against money laundering

As one of the world’s largest offshore financial centres, Switzerland is a magnet for money laundering.

Swiss franc notes held against a black background
How serious of a problem is money laundering in Switzerland? Photo by Claudio Schwarz on Unsplash

Money is channelled in and out of the country at multiples of what would be the normal rate for the size of the economy. 

In the ongoing Brazilian Petrobras/Odebrecht corruption scandal alone, Swiss prosecutors froze 1,000 accounts in 40 Swiss banks worth $1.1 billion. Seizing and returning illegal assets is something the Swiss do rather well, when asked. 

But are the Swiss authorities doing everything in their power to deter economic criminals? It really doesn’t look that way. There are weaknesses all along the justice pipeline from parliament to prison, which add up to little meaningful punishment for wrongdoing. 

‘Swissleaks’: The Credit Suisse scandal explained

The verdict? Could do better.

Here are the five main failings in the Swiss fight against economic crime:

Weak laws

When Swiss parliament had the chance to close money laundering loopholes, it didn’t take it. A revision of the Anti-Money Laundering Act was approved by Swiss parliament in March of last year. The revision was a lengthy process and the government’s goal was to bring Swiss law into line with international practice. 

However, parliamentarians watered down the government’s proposed changes to the act, crucially excluding lawyers and financial advisors from the due diligence requirements. The Financial Action Task Force (FAFT), an international watchdog, had been calling for this step since 2005. 

Could the implacable resistance in Bern have anything to do with the fact that one in four members of parliament are qualified lawyers? Some Swiss media have raised the question.  

ANALYSIS: Is Switzerland actually a tax haven?

Too slow

Complex international financial investigations take time. That’s understandable. The Petrobras affair has been under investigation by Swiss prosecutors since 2014, with one conviction so far in Switzerland. 

For the few financial fraud cases that finally come before the courts, there is often a ping pong game of appeals back and forth. The result can be that justice delayed is justice denied.

François Pilet of Gotham City, a Swiss platform reporting on economic crime, tracks large and small cases on their tortuous journey through the Swiss courts. His conclusion: “By exploiting the multiple possibilities for appeal at cantonal and federal level, it is possible to delay a case by around 10 years before an eventual conviction comes into effect.”

Too soft

One of the main players responding to fraud in the Swiss financial sector is the Swiss Financial Market Supervisory Authority Finma. As an enforcer, the authority is limited in how much pain it can inflict. It does not have the power to impose fines.  

Finma oversees 29,000 institutions and products, including 17,700 financial intermediaries and 500 banks. Where Finma finds wrongdoing, its usual response is to name and shame, and restrict some activities. In some egregious cases, Finma has ordered assets to be forfeited and imposed an external auditor. But mostly, the offending bank does not face life-changing measures.  

EXPLAINED: Which banks are best for foreigners in Switzerland?

In November 2021, for example, Finma announced the conclusion of its investigation into banks connected to alleged cases of corruption linked to the Venezuelan oil company PDVSA. 

After reviewing the activities of more than 30 banks, Finma found breaches of Swiss supervisory obligations in five cases. It ultimately opened enforcement proceedings against those five banks, including Julius Baer and Credit Suisse.

These proceedings amounted to recommendations, some restrictions of activities, obligations to report on progress, and some individual staff were banned from acting in a senior role. Just one institution, CBH Bank, was forced to terminate all remaining business relationships with Venezuelan clients. Julius Baer faced a one-year acquisition ban. 

No jail time

In the rare cases where a court manages to convict an intermediary, the punishment is usually relatively meaningless – a suspended sentence. This is partly because the Swiss legal system does not have the same punishment ethos that is the norm in other countries. 

Since 2007, all prison sentences under two years are automatically suspended. Because most sentences for fraud are under two years, it means people convicted of economic crimes, which may also ruin or cost lives, will never spend a day in prison. 

At the most, they will have to pay back the money they have stolen, if they still have it. This soft approach is at odds with other European countries which have become increasingly tough on white-collar crime. 

READ MORE: Why are Americans being turned away from Swiss banks?

Honour system

In the fight against money laundering, the Swiss system relies on the banks to follow due diligence rules to determine whether a given client’s assets are legal. Banks and financial intermediaries are meant to assess their own customers and report any suspicious activity to the Money Laundering Reporting Office (MROS). 

But an oversight system based on self-regulation has obvious limitations. According to Public Eye, “the friction between a bank’s legal duties and its drive to make profit is one of the main stumbling blocks in the Swiss supervisory system”. 

More often than not, banks end up responding to reports of suspicious assets that come from outside, rather than in house – chiefly uncovered by the media or prosecutors. By the time they act, the fraud has been long-running. 

The final unseen and unspoken failing lies in the cultural legacy of banking secrecy. Part of Switzerland’s success story is the strength of its financial sector. Swiss politicians, banks, and to some extent, the public, share a sense that keeping financial matters confidential is not such a bad idea.

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OPINION & ANALYSIS

OPINION: Why Switzerland needs to scrap its fabled 1,000 franc notes

If the Americans can get by with $100 bills, the British manage with £50 and EU citizens now mostly €200, why do the Swiss need such a large denomination? The answer is, they don’t, writes Clare O'Dea, as she explains why it should be binned.

OPINION: Why Switzerland needs to scrap its fabled 1,000 franc notes

The existence of the 1,000-franc note, so blatantly open to misuse, is justified with platitudes about the Swiss liking cash.

Apparently the 1,000-franc note is quite pretty but I can’t say for sure as I’ve never seen or touched one. With the exception of Singapore and Brunei, no other country sees fit to issue such a large-denomination note for the simple reason that it’s not needed for legitimate business.

Financial secrecy is obviously a big part of the appeal of the 1,000-franc note. To say otherwise is not really credible. Cash in this condensed form is anonymous, untraceable, easily transportable, easily concealed.

As Bradley Birkenfeld said in a 2015 CNBC interview, “I mean you could put half a million in your pocket, no problem”. Remember that name? Birkenfeld was the (in)famous UBS whistleblower who exposed the bank’s shady practices to the US authorities in 2007, triggering the dismantling of Swiss banking secrecy.

The Swiss National Bank (SNB) explains that the big note is used as a “store of value” to a considerable degree. What does that mean? The SNB’s own research shows that most people keep less than 1,000 francs in cash at home. Are we talking about storing value under the mattress or in a safe deposit box?  Who does that and for what reason?

Look, I’m sure there are people with 1,000 notes squirrelled around the place who run their finances in a totally clean and honest way. The latest SNB survey on payment methods found that half of the population had been in possession of at least one 1,000-franc note over the previous two years. The note is especially popular among men over the age of 55

But inevitably there are tax evaders, money launderers and other criminals who find the big notes come in very handy. The €500 note was scrapped after 17 years mainly because of its popularity with criminal gangs in the EU and beyond, to the extent that it had become an embarrassment.

The €500 note is still legal tender but no new notes have been issued in the euro zone since 2019, following the decision by the European Central Bank. The move came after serious concerns were expressed by academics, international police agencies and EU finance ministers.

When production of the €500 note officially ceased, the largest denomination note accounted for 20 per cent of the value of all euro notes in circulation. Doesn’t it seem odd that 60 per cent of the value of all francs in circulation are in 1,000-franc notes? That’s 9.4 per cent of all physical notes. Something doesn’t add up.

I have heard people argue that 1,000-franc notes are popular for big expenses, like buying a car or jewellery. Or for paying big bills over the counter at the post office (this I have seen). Rumour has it that farmers like to buy livestock with the purple polymer and paper mix. Each to his own.

But these financial practices are fast becoming dated and are anyway not common enough to explain the volume of 1,000 notes in circulation. Yes, it’s official: cash is no longer king in Switzerland.

As recently as 2017, some 70 per cent of non-recurring payments were made in cash, purchases like clothes, the supermarket shopping, or restaurant meals, according to the SNB survey on payment methods. This had reduced to 43 per cent by 2020, the last time the survey was carried out.

The most recent data on payment behaviour comes from the Swiss Payment Monitor, a joint research project between the University of St. Gallen and the ZHAW Zurich University of Applied Sciences, which reported in August of this year.

The study found that the debit card remains the most frequently used form of payment for face-to-face business (34.8 per cent), followed by cash (33.2). Credit cards are less popular at 16.5 per cent. Meanwhile mobile payments are growing in popularity, increasing share from 1.5 per cent of transactions to 11.2 per cent over the past five years. 

What this boils down to is that people are perfectly adept at paying electronically in all kinds of ways and the role of the 1,000-note in retail or person-to-person purchases is far from essential.

While we’re on the subject of money, this month saw the release of the Credit Suisse Global Wealth Report, in which Switzerland emerged as the world’s richest country. The average wealth of adult residents in this country is 672,508 francs, up 5.4 per cent from the previous year. Assets include stocks and shares, pensions savings, and property.

In case you’re feeling left out, the median wealth per adult in Switzerland is 165,266 francs. That means half of the population possesses less than this amount. The figures are skewed upwards by a smallish number of mega rich individuals, with a little help from the 1.1 million millionaires in Switzerland. My guess is that these two groups have the most use for the 1,000-franc notes.

Reading between the lines, I sense some national pride in the attachment to this world-beating high denomination note. Swiss people like to hold cash – that’s our way. We also like our privacy – so what!

Not to spoil the fun, but all cultures need to be aware that just because they’ve always done something a certain way does not mean the practice has merit and is worth preserving. I recommend taking a long, hard look at the legitimacy of the fabled 1,000-franc note.

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