Banking Comes Under Scrutiny

SECRECY and independence - hallmarks of Swiss banking - are under attack. The government will debate a new law on money laundering in December. Passage is not in doubt. The law should take effect next year.

The Swiss National Bank, Switzerland's central bank, has tightened control over the banks' nearly $60 billion international trade in currency, thereby treading on territory traditionally left to the banks and signaling new limits to their independence.

The Swiss Cartel Commission, a monopoly-busting agency, wants to abolish 19 mutual consent arrangements, sort of gentlemen's agreements among the banks which the commission believes stifle competition. The banks agreed to 10 of the changes, argued successfully against five more, and this week finished presenting their case against the other four. By the end of the year the Finance Ministry will make a decision.

Difficult negotiations with the European Community (EC), of which Switzerland is not a member, include pressure to end the country's role as a tax shelter. As much as $600 billion, which has escaped EC tax collectors' eyes may be under Swiss management. Tax fraud is a crime in Switzerland, but tax evasion is not. Legal assistance is given to other countries only when the tax crime is punishable under Swiss law.

Meanwhile, international competition is eating into market share and thus into once-easy profits. Between 1975 and 1988, the foreign assets of Swiss banks quadrupled. But combined foreign assets of all banks increased 10-fold. Thus, the Swiss percentage share of the global banking industry's foreign assets fell from 6 percent to less than 3 percent.

Drug dealers and dictators

As if that were not enough, a series of events in the past 10 years has enhanced the myth that Swiss bankers rake it in thanks to drug dealers and money-grubbing dictators.

The good old days - when all they had to worry about was making money - are indeed finished for Swiss bankers, but the Swiss are far from finished. Profits are still high by bank standards in any other country. Three of the 10 most credit-worthy (AAA-rated) banks in the world are Swiss, and the Group of Ten international bank supervisory group recently adopted as its model Swiss practices for uncovering money-laundering operations.

Robert Jeker is head of Credit Suisse which, along with the Swiss Bank Corporation and Union Bank of Switzerland, are referred to as the ``Big Three'' Swiss banks (box). At a recent press conference, stung by accusations that he and his colleagues provide a haven for drug kings' cash, an impassioned Mr. Jeker lashed back, ``I'm very happy to live in a secure country, a peaceful one where people feel they can safely invest their money. It's not true that we're sitting and waiting for men with money bags to come in - we do not want crooks' money!''

Numbered bank accounts

Jeker's outburst underscores the dilemma faced by Swiss bankers. They feel their battle is with a changing, more competitive international banking world. But they must also fight a stubborn public perception that what they really do is provide such amenities as numbered bank accounts for the world's dishonest rich.

Numbered bank accounts, in which the owners' identities are known only to a handful of bank executives, do exist, of course. And Switzerland - with New York and Singapore - is one of the world's centers for currency exchange. These two features have long attracted criminals trying to hide the source of their income.

There are cultural reasons for the peculiarities of the Swiss system. Switzerland is a confederation, with the federal government relatively weak compared to those of the 19 cantons and six half-cantons. Attempts to give the federal government more power meet with stiff resistance. Laws, including the Swiss bank law, are usually no more than a brief couple of paragraphs, although they may be overlaid by a series of gentlemen's agreements.

The Swiss are fiercely proud of their right to privacy, even from the government - thus, numbered accounts, which also protect foreigners from their own intrusive governments. The Swiss are equally adamant that government interference in private or business affairs be kept to a minimum - and currency trading is viewed as one such business.

``We've always had an attitude toward money that differed from [that of] our neighbors,'' notes one banker. ``We see it as just a commodity, like any other, whereas in France and Italy, for example, it is viewed with more reverence and more fright.'' She recalls that as a child her parents used to put the weekly earnings from their family business - 100,000 francs - between their dog's teeth and send him off to the bank to deposit it. ``Everyone knew our dog and knew what he was doing; no one found it odd.''

The Pizza Connection case

Times have changed. A flurry of kidnappings in Italy, bank frauds in various countries, the Pizza Connection drug case: all sent money into hiding in Switzerland. By 1986, public opinion had begun to turn against the misuse of banking secrecy, as it came to light that deposed rulers Ferdinand Marcos and ``Baby Doc'' Duvalier had stashed away millions of dollars in Switzerland.

The latest blow to prestige came late last year with the Lebanon Connection heroin smuggling case, which ultimately led to the resignation of Federal Counsellor Elisabeth Kopp because of links between her husband and the criminals.

As recently as 1984 the Swiss voted in a referendum to maintain bank secrecy, but change was in the wind. The banking law was expanded this summer to make non-bank financial institutions accountable to the Federal Banking Commission. And the new law on money laundering was drafted (story, this page).

The new law plugs two gaps in the Swiss system by making it a serious crime to thwart an investigation into laundering, or not to observe ``due diligence in handling money'' to identify the real owner. The onus is now on bankers to try to determine if there is, for example, a drug operator or another Marcos behind the person opening an account.

Bankers are not waiting for the law to go into effect. Says Credit Suisse's Jeker, ``In the past we figured that a head of state must be OK as a client - if the government is doing business with him, why shouldn't we? Today we're more careful.'' Jeker says his bank has in recent months refused heads of state as clients and closed the accounts of others.