Credit Suisse: transgressions and deficiencies in AML regulations and the Swiss banking culture

Photo credit: Arnd Weigmann - 18April2021/Reuters

A new scandal in which Credit Suisse has recently been implicated creates a new threat to the commercial prospects as well as to the political and moral reputation of Swiss banks. Over the last three decades, Credit Suisse has faced several penalties and sanctions for crimes such as tax evasion, money laundering, and fraud, collecting a total of over $ 4.2 billion in fines or settlements. Each time Credit Suisse has been entangled in scandals, it has promised to do better[1]. Despite the bank defending itself against accusations of wrongdoing, this recent massive leak suggests that rounding goes much deeper than anyone knew[2].

To what extent is the Swiss economy dependent on these banks, and how does this culturally affect the way we see the world? Credit Suisse is well-known for holding money from all over the world, due to laws that protect bank secrecy, something deeply ingrained in its culture. To understand this, we need to go back to the early 20th century, when Swiss banks took advantage of the fact that countries like France began to introduce strict tax rules, certain wealth taxes, and inheritance taxes[3].

Confidentiality in the Swiss banking system is an ancillary bank's legal obligation towards its customer: under Article 398(2) of the Code of Obligations (CO), the bank has a legal obligation to maintain the confidentiality of the information related to its customer[4]. This duty of secrecy (of confidentiality) is a result of either legal or contractual obligations established or agreed on between the institution and the client, even without express agreement. Thus, full disclosure may be in breach of a duty of confidentiality to another customer[5]. In fact, Swiss Banking Law, which is part of the administrative law, includes provisions of criminal law nature, as provided in Article 47, criminalises secrecy violations, however, it does not specify what constitutes a violation of the banker's discretion[6].

Arguments in favour of imposing a duty of confidentiality on banks relate to the commercially sensitive nature of business information, in a way that information about a business has a market value. Banks would like to distribute information throughout the corporate group so that the whole range of bank services can be marketed to customers.

On the other hand, confidentiality frequently acts as a cloak for wrongdoing, a barrier, sometimes impenetrable, surpassed by countervailing public interest. On a practical level, commercial and private clients value the confidentiality of their finances. A bank that acquired a reputation for not doing so would lose the public's trust. If there are public interests in the law obliging banks to keep customers' financial information confidential, the same happens on the other side of the equation: the modern state could not properly function if its members could keep banking information secret. Some would unfairly avoid paying the proper amount of tax. The integrity of markets would be threatened if insiders and manipulators had any occasion for evasion[7]. Hence, confidentiality provides one of the explanations of how international terrorists have transferred their financing around the world without detection.

After all, concealment typically involves cross-border transfers, especially through jurisdictions with strong bank secrecy laws. In some legal systems, the level of confidentiality is strict to the law, with implied terms in the contract. And those provisions are inserted in the agreement in order to allow the institution to give the information to a third party.

Money-laundering rules have been significantly tautened: the EU framework on anti-money laundering (AML) has evolved in line with the work and recommendations of the Financial Action Task Force (FATF), the main international body responsible for combating these crimes. In the last thirty years, the EU has regularly improved money laundering prevention, and ensured a consistent approach to protect and secure the financial system. Moreover, since the implementation of the Fourth AML Directive, the European Commission was required to identify high-risk third countries, which have deficiencies in their regimes[8].

The Swiss Financial Market Supervisory Authority (FINMA) has split down on Credit Suisse in 2018 for due diligence failings in AML processes, and a lack of control and effective corrective intervention, having concluded two enforcement procedures[9]. In the first, involving three institutions, FINMA identified organisational deficiencies through due diligence as well as control mechanisms and risk management. Whereas, in the second procedure, related to a significant business relationship for the bank with a politically exposed person (PEP), the relationship manager in question breached the bank compliance regulations over several years, without the bank discipline it in a timely and proportionate manner. Instead, it rewarded him with high compensation and positive employee reviews[10].

FINMA, at that time, adopted measures to reinforce anti-money laundering processes, restore and improve the bank's full compliance with the law, organisation, and risk management. Credit Suisse accelerated the implementation of steps and FINMA acknowledged those improvements, yet substantial: since there is not an automated comprehensive overview yet, neither the organisational results are good nor the existence of contraventions of anti-money laundering provisions. Thus, Credit Suisse AG must remediate the relevant control systems and processes, and then prove that higher-risk business relationships and transactions are adequately detected, categorised, monitored, and documented[11].

And in terms of Greater Europe, what does it mean for its future image and accountability? Europe, a forum for regional engagement, should manage its concerns while acting autonomously in global affairs. This means pursuing the fight against financial crimes, seeking political and legal solutions to transcend state frontiers, and working out to develop common responses to these threats for the integrity of the highly complex-sophisticated international financial system.

In this sense, the three EU political parties are calling on the European Union to assess Switzerland's risks, given the close relationship between European and Swiss banks [12]. It is unacceptable that criminals and despots around the world can recur to money laundering so easily when they enter the EU. Should Switzerland also be classified as a country at high risk of money laundering and financial crime? The parties will take these findings into account in the next review by the European Commission on the list of high-risk third countries, assess whether Switzerland poses a threat to the financial integrity of the block, and take action accordingly.

From investing in Greensill Capital and the family office Arquegos to the resignation of Chairman Antonio Horta-Osório less than a year after allegedly violating Covid 19's quarantine rules, Credit Suisse has been tackling recent crises [13]. There is nothing wrong with having and maintaining a Swiss bank account, but banks should avoid customers who have made money illegally or have been involved – allegedly – in crimes. Despite the renown of these clients, Credit Suisse has maintained relationships with some of them for years, making them primarily responsible for identifying them and imposing restrictions[14]. Therefore, every relevant department within the bank must get permission to see all the client’s relationships with the bank instantly and automatically.

At the banking regulatory level, prudential regulation ensures a sound banking system and the protection for customers, in the event of a failure of self-regulation[15]. Nonetheless, the problem goes beyond the bank's failures and due diligence, pointing to weak regulation across the entire Swiss macro cosmos banking infrastructure and the insufficient enforcement of regulations. Unless the baking institution undergoes a massive change of culture and practice, it will lose the trust of its remaining clients more soon than later with great implications for the European scheme and partners.

References:

[1] The Guardian. Revealed: Credit Suisse leak unmasks criminals, fraudsters and corrupt politicians. 20 February 2022. https://www.theguardian.com/news/2022/feb/20/credit-suisse-secrets-leak-unmasks-criminals-fraudsters-corrupt-politicians (accessed March 07, 2022).

[2] Organized Crime and Corruption Reporting Project. What is Suisse Secrets? Everything You Need To Know About The Swiss Banking Leak. 20 February 2022. https://www.occrp.org/en/suisse-secrets/what-is-suisse-secrets-everything-you-need-to-know-about-the-swiss-banking-leak#9-what-is-credit-suisses-point-of-view-how-has-the-bank-responded (accessed March 07, 2022).

[3] The Guardian. Credit Suisse: a bank for dictators, drug lords and criminals. 21 February 2022. https://www.theguardian.com/news/audio/2022/feb/21/credit-suisse-a-bank-for-dictators-drug-lords-and-criminals-podcast (accessed March 07, 2022).

[4] Code des Obligations [C.O.] Art. 398(2)(Switz.).

[5] Basel Committee on Banking Supervision. “Basel Committee on Banking Supervision.” Core Principles for Effective Banking Supervision, 14 September 2012: 21-27.

[6] Swiss Banking Act, Article 47(1)(a)

[7] Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, et al. Principles of Banking Law. Third, Oxford University Press, 2018, 255.

[8] K. Grigaité, C. Dias, M. Magnus. European Parliament. Preventing money laundering in the banking sector - reinforcing the supervisory and regulatory framework, October 2021: 2-5.

[9] Jaeger, Jaclyn. Compliance Week. 17 September 2018. https://www.complianceweek.com/finma-finds-deficiencies-in-aml-processes-at-credit-suisse/8104.article (accessed March 07, 2022).

[10] Swiss Info. swissinfo.ch. 17 September 2018. https://www.swissinfo.ch/eng/dirty-money_credit-suisse-found-lacking-in-fight-against-money-laundering/44403668 (accessed March 07, 2022).

[11] Swiss Financial Market Supervisory Authority FINMA. FINMA finds deficiencies in antimoney laundering processes at Credit Suisse. 17 September 2018.

https://www.finma.ch/~/media/finma/dokumente/dokumentencenter/8news/medienmitteilungen/2018/09/20180917-mm-gwg-cs.pdf (accessed March 07, 2022).

[12] The Guardian. Credit Suisse leak: three largest parties call for EU to assess Switzerland risk. 22 February 2022. https://www.theguardian.com/news/2022/feb/22/credit-suisse-leak-three-largest-parties-call-for-eu-to-assess-switzerland-risk (accessed March 07, 2022).

[13] Sam Jones. Landmark Credit Suisse money laundering trial opens. Financial Times. 7 February 2022. https://www.ft.com/content/3c52036b-f824-4897-8a78-0ccb69bc40ce (accessed March 07, 2022).

[14] Organized Crime and Corruption Reporting Project. What is Suisse Secrets? Everything You Need To Know About The Swiss Banking Leak. 20 February 2022. https://www.occrp.org/en/suisse-secrets/what-is-suisse-secrets-everything-you-need-to-know-about-the-swiss-banking-leak#9-what-is-credit-suisses-point-of-view-how-has-the-bank-responded

[15] Llewellyn, David. Financial Services Authority. “The Economic Rationale for Financial Regulation.” April 1999, 31. Available at https://www.fep.up.pt/disciplinas/pgaf924/PGAF/Texto_2_David_Llewellyn.pdf