Standard Chartered. They are the whipping boy du jour suffering at what I term “long hand of American imperialism”. This week they stand accused of all sorts of wrongdoing connected to Iran. Before them Credit Suisse, Lloyds, ABN and Barclays have been pressured in to handing over fistfuls of green backs to Uncle Sam for similar reasons. These attacks appear to have a lot in common with the tactics being applied to the Swiss banks to disclose information about US clients and even those employees who have dealt with these clients. I am all for control, all for doing business properly, but I am most vehemently a defender of following the rules. Being both British and Swiss, I am doubly upset by these recent events. The current onslaught is not playing by the rules and it is not cricket. I’d welcome others’ views.
The Payments Uncle Sam Does Not Like
Various banks are currently in the spotlight of the American regulators. Very broadly, there are two sins they are seeking to punish banks for. One is truly a sin, the other is not. The general media have, perhaps not surprisingly, not really articulated the story and simply merged the parts into a neat “money laundering” sound bite. The activity that is a real sin is that of money laundering. Helping out Mexican drug barons is not good and that deserves to be punished. Clearly there are several banks who have had, and may still have, weak controls that fail to prevent account opening and transactions with these undesirable counterparts.
The alleged sin that is not one is around USD payments for sanctioned countries, such as Iran. There has long been a list of sanctioned countries; Syria, Iran and the like. However what was not on sanctions list was the use of the USD. Take Iran as an example. They sell oil, to somebody allowed to buy it, receive dollars and buy something from somebody allowed to sell it. Iran needs to move US dollars. Various banks have acted as correspondent or Nostro for these banks. The payments used to flow unquestioned through the US payment systems. Certainly the Swiss banks used to protect the privacy of all their private customers, including my humble self, by noting that the payment was “By Order Private Client”. That is now no longer permitted, but it was for many years. During those many years the US banks were happy to earn their fees and did not raise any issues. This does not constitute a violation of the OFAC rules; this is something that was confirmed by a US Treasury official (More..)
In recent years, Uncle Sam decided to change the rules. Fair do’s. But, and it was a big one, the US regulators decided that the rules applied retroactively and set out to punish some relative weaklings; the Swiss banks. They alleged that the Swiss had for years misled their fine, god fearing American banks by not disclosing those private client names. In the mid noughties there was a similar case, where the NY Branch of a Middle Eastern bank had its operating license revoked because at some point in the very distant past, a payment was made to a Palestinian organisation, that at the time as not on any list of banned counterparts. Many years later, that organisation appeared on the OFAC list of “bad” counterparts. Uncle Sam’s enforcers deemed that this bank should have known about this way back when. This is just willful; call it bullying, call it a tax, but it is not cricket. That bank was nearly brought to its knees, because it had to find an alternate correspondent for US Dollar payments; one compliance officer after another refused the payments, even though the bank was not convicted of wrong doing. The word had got out. If your Balance Sheet is in US Dollars and you cannot make payments, you are illiquid and virtually out of business. The bank survived the difficulties and is in good health today.
Uncle Sam and the Swiss
The Americans are desperate to find out how many of their citizens are hiding their wealth in Switzerland. Some Swiss banks and some Swiss bankers have quite apparently been proactive in serving these clients and have done so in a manner that breaches the rules. They will be found out and if justice is executed appropriately, will deserve theri punishments.
There are though many Americans and many Germans who have brought their money to Switzerland and other places, because they could. There was no law against having a foreign account, rather there was a requirement to correctly report taxes. The rules of engagement were governed by a formal bilaterally agreed double tax treaty, which regulated what the US had to do to get the Swiss government and the Swiss banks to help them with any enquiries about their citizens and vice versa. This treaty quite clearly prevented the use of widespread “fishing trips”; each country was allowed to ask for help in relation to a named person where there was a criminal case to be answered for something that was a crime in both countries, but not make broad catch all demands, sch as “we demand the details of all Americans”. Switzerland had a a distinction between tax evasion and avoidance; rather a thin line and one not used elsewhere. But, nonetheless, the rules were clear and agreed to. America then decided it wanted to change the rules. That is fine, but it was not enough to keep Uncle Sam happy though. No, the Americans wanted to change the rules retroactively and seek information on “American accounts” that Swiss institutions had opened long ago. This provoked a right old bun fight, with individuals being arrested.
As part of this inquisition, the US authorities have forced the Swiss banks to disclose the names of employees who had anything to do with American clients. The threat was that if they did not comply, they would be criminally indicted in the US. The list, apparently with some 10’000 names, was handed over with the blessing of the Swiss government and the Swiss banking regulator, in spite of all the Swiss laws that make it a crime to do so. Many former and current Swiss bankers must now fear that if they travel outside of Switzerland they will be arrested and extradited to the US. There are numerous ways in which this action breaks Swiss law, however as there are no class action lawsuits in Switzerland and damages claims are normally limited to actual damages, the banks have chosen the lesser evil.
So determined are the forces of law & order in America to enforce their rules, that this last week they arrested two Swiss teenagers traveling in the US and questioned them for six hours. Not because they had committed an offense, or were suspected of having committed one, but because they were after information on the kids’ father, a Swiss banker.
All of this is bullying and none of it is cricket.
And the Germans are worse
There have been various stories in the last couple of years of how the German Finance Ministry has both bought stolen data and paid to have data stolen to order about the offshore holdings of its citizens. In the US, ironically, none of the data is admissible in court under the “fruits of the poison tree” principal. For once, the Americans are praiseworthy. The German Finance ministry is no better than a common criminal; the ends do not justify the means.
Lessons Learned: Bullying is an objectionable activity. We don’t like it in our schools and neighbourhoods and we should neither like it, nor have to put up with it, in our international relations. The world’s banks have done much of late to damage the public’s trust; they should do business properly and they should properly control their business.
Governments and regulators should avoid bullying tactics, and most decidedly so in other countries. Rules should be followed; if the parties involved do not like them, they should change them. That is a proper approach. Retroactive enforcement is not and it as unacceptable as bullying.
High taxes drive citizens to break the law. As those fine right wingers in the NRA will tell you, guns do not kill, people do. Offshore banks are like the gun; somebody has to pull the trigger to put the assets there. They do it, at least in part, because the taxes are too high.
I would offer the Germans a tip to help sort out the finances; for the usual 10% of course. Tax your citizens globally as Uncle Sam does. There are swathes of Germans in Switzerland, all gone South, not to escape bad winter but to escape the high tax regime. I guess the non-residents would not vote for that one.
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