Long shadow of Russian cash raises tough questions for Swiss bankers


January was a giant month for Swiss bankers and their Russian shoppers. Many of the Moscow elite had made a convention of coming to the Alps for the orthodox new yr, snowboarding with their households, then catching up with their monetary consiglieri.

In St Moritz, one banker remembers how he would guide blocks of rooms for his shoppers. He would entertain them with snow polo, rolling out the appeal as they clinked champagne glasses and watched horses cost throughout a frozen lake. This yr he couldn’t tempt a single one.

For the most effective a part of a decade, Russian cash has coursed by the Swiss banking world. But, as Russia’s relationship with the west has soured lately, what was as soon as a supply of bumper new earnings for Switzerland’s banks has change into a monetary and reputational threat.

In the run-up to Russia’s invasion of Ukraine in February, many rich Russians had been transferring to raised safeguard their cash from political interference, placing property within the names of relations or shifting them to much less carefully scrutinised jurisdictions, resembling Dubai. In its wake, an enormous sanitisation operation is underneath method at Swiss banks, to attempt to wind down relationships with sanctioned people. Neutral Switzerland has matched all the EU’s punitive monetary measures in opposition to Russia.

Russian troops close to Mariupol, Ukraine, in April © Alexei Alexandrov/AP

More than 1,100 of the Russian elite — together with figures resembling coal and fertiliser billionaire Andrey Melnichenko and banker Petr Aven, each common guests to Switzerland — have change into monetary personae non gratae in a rustic many had assumed would preserve their fortunes secure. The greatest banks, such because the publicly listed trio of UBS, Credit Suisse and Julius Baer, have declared they’ll stop all new enterprise in Russia. For critics, although these are weasel phrases. It is their current Russian shoppers which might be the issue. No one is anticipating many new fortunes to be minted in Russia any time quickly.

“Switzerland has a terrible history when it comes to Russian dirty money,” says Bill Browder, a longstanding Kremlin critic and a former Russian investor. He is sceptical of how a lot dedication there’s amongst Swiss bankers to imposing sanctions. “The Swiss want to be seen as doing something, but they don’t actually want to do anything,” he says.

The US Helsinki Commission, an impartial US authorities company that observes human rights and the rule of legislation in Europe, agrees. In a report issued in May, it labelled the alpine state and its banks “a leading enabler of Vladimir Putin and his cronies”. The Swiss authorities responded by calling US secretary of state Antony Blinken in protest. A spokesperson for the Swiss authorities mentioned president Ignazio Cassis “rejected the [report] in the strongest possible terms”.

Andrey Melnichenko, billionaire and owner of EuroChem Group AG
Coal and fertiliser billionaire Andrey Melnichenko’s monetary ties to Switzerland has come underneath scrutiny © Andrey Rudakov/Bloomberg

Like their counterpart in St Moritz, Swiss bankers the FT interviewed for this story all declined to be recognized. Many extra refused to talk in any respect. Switzerland’s banking secrecy legal guidelines are draconian — speaking about shoppers can earn a prolonged jail time period — and speaking about Russian shoppers is much more taboo.

“When we were onboarding a lot of these clients [in the 2000s], the entire approach was just very different. And you can’t really say that publicly now,” says one former banker who dealt with japanese European and Russian shoppers till retiring two years in the past. “These [Russians] were people who had earned so much money, so quickly, that they didn’t know what to do with it. They were basically ideal clients. As long as you had no questions about where that money had come from . . . and, basically, we didn’t.”

Quite how a lot Russian cash there’s in Switzerland is open to query. In March, the business physique representing Switzerland’s banks, the Swiss Bankers Association (SBA), prompted a stir when it launched particulars of a research estimating there was SFr150bn-SFr200bn ($154bn-$205bn) held in accounts for Russian residents. At the top of final yr, the overall money held on behalf of consumers by Switzerland’s banks was SFr7,879bn, extra half of which was wealth from overseas, based on the SBA.

The disclosure prompted hand-wringing within the Swiss media. Commentators, even at conservative shops such because the newspaper Neue Zürcher Zeitung, requested whether or not Switzerland ought to do enterprise with autocratic regimes anyplace on the planet any extra. But others within the nation have defended its financial relationships with Russia. The outspoken finance director of the canton of Zug, an necessary low-tax centre, mentioned in March it was not his job to “act like a detective” and make judgments on Russian property. In April, he introduced that Zug, house to 37,000 firms, had no sanctioned property to report again to Bern.

Nevertheless, by April, the State Secretariat for Economic Affairs (SECO) introduced that it had frozen SFr9.7bn of Russian property. Authorities have insisted that the quantity is proportionate to the size of asset freezes in different main monetary centres. But Bern has been compelled to row again in some circumstances, and in May it introduced it was unfreezing SFr3.4bn of funds. Switzerland can not freeze funds “without sufficient grounds”, says Erwin Bollinger, a SECO official, who provides that the federal government has obtained knowledge on sanctioned accounts at greater than 70 of the nation’s banks. Direct disclosure by the banks has been patchy. Credit Suisse chief govt Thomas Gottstein instructed a convention in March that about 4 per cent of property in his financial institution’s core wealth administration enterprise had been Russian — a proportion that might equate to roughly SFr33bn.

Credit Suisse Chief Executive Thomas Gottstein addresses the Finanz und Wirtschaft Forum conference in Zurich, Switzerland
Credit Suisse chief govt Thomas Gottstein has mentioned that about 4 per cent of property in his financial institution’s core wealth administration enterprise had been Russian — roughly SFr33bn © Arnd Wiegmann/Reuters

Meanwhile, UBS, the world’s largest personal wealth supervisor, has disclosed it has $22bn of property of “Russian persons not entitled to residency in the European Economic Area or Switzerland”, leaving open the query of how a lot it holds total. Some 16,500 Russians are completely resident in Switzerland, and extra Russians are accepted for Swiss citizenship than every other nationality, based on the State Secretariat for Migration.

Julius Baer has made no direct disclosure of the scale or wealth of its Russian consumer base, although it has mentioned, considerably elliptically, that the worth of property held by its Moscow-based subsidiary is a few SFr400mn. Information from the handfuls of different smaller Swiss personal banks is even scantier.

Even main business figures surprise what’s being left unsaid. One govt, who for the previous twenty years has been a senior determine within the personal banking world in Switzerland, says he has virtually little doubt that the importance of many banks’ shut working relationships with sanctioned people is being underplayed. “You don’t have dozens and dozens of people employed on your Russia desks if you are not making money in Russia,” he says.

Moreover, he provides, many Russian shoppers have completed their enterprise by Swiss banks’ subsidiaries overseas, resembling these in Monaco, London or Asia. It shouldn’t be clear to him whether or not all these property have been caught by the Swiss guidelines. Swiss banks have a authorized obligation to file the last word useful homeowners of all property they deal with worldwide, however doing so precisely could be tough in jurisdictions the place it’s straightforward for third events to masks who the homeowners are.

Switzerland’s banks have moved dramatically from the freewheeling strategy of earlier years, when there was “a run on Russia”, says Thomas Borer, a former main Swiss diplomat turned guide, who has labored with outstanding Russian shoppers. He now helps Switzerland’s sanctions coverage. “Being militarily neutral does not mean being economically indifferent,” he says.

But he argues that Swiss banking tradition continues to be very completely different from elsewhere within the west. Even the most important banks, he says, had been clinging to relationships with Russian shoppers because the Ukraine disaster unfolded. The Financial Times revealed that, as late as March, Credit Suisse was asking buyers to destroy paperwork which may expose Russian oligarchs it had completed enterprise with to authorized dangers.

Thomas Borer
Thomas Borer, a former main Swiss diplomat turned guide, who has labored with outstanding Russian shoppers

One senior relationship supervisor at a Zurich-based financial institution agrees. Even as sanctions got here in, he says, the dominant strategy was to ask, “how can we make this work for the client?” slightly than “how do we do this for the government?”. But he defends the strategy, saying: “Doing everything you can for your client is a Swiss commitment to excellence. If I was a watchmaker I would want to make the best watches with many complications. And if I was a policeman, then maybe I would want to be the best at catching Russian criminals. But I’m a banker.”

There continues to be authorized ambiguity in Switzerland over whether or not sanctions apply to members of the family and associates of listed people. This has offered a loophole bankers have helped at-risk shoppers to actively exploit lately. Swiss banks have seen “billions” of property transferred to the names of spouses and kids of Russian shoppers, in a pattern that accelerated within the run-up to the struggle, says one banker.

One financial institution chief govt admitted lately to the FT that there have been many “grey areas” in making use of sanctions. Part of the issue, he mentioned, was that financial institution authorized departments had been struggling to acquire readability from Bern on which asset transfers had been deemed to be evading sanctions and which weren’t.

Many who’ve been within the business for a very long time decry the brand new guidelines they need to comply with round taking new shoppers and being sure of the supply of their wealth. “Know your customer used to mean just that: do you know the person? Now it is supposed to mean: do you know every little thing about their financial and private life?” says one Geneva-based banker.

Many Russians themselves knew the banks had been now not secure havens, significantly since 2018 when Swiss banks started making important concessions to info sharing on consumer accounts with different governments. Swiss residency didn’t defend billionaire Viktor Vekselberg in 2018, for instance, when he was focused by US sanctions; each Credit Suisse and UBS moved to terminate loans with him.

A pedestrian walks by the logo of Swiss banking giant UBS engraved on the wall of its headquarters
The complete property UBS holds for Russians with Swiss residency stays unclear © Fabrice Coffrini/AFP/Getty

The SBA says its members adhere to the best worldwide requirements. Chief govt Jörg Gasser, argues Swiss banks have “no interest in funds of dubious origin” and have rigorous procedures in place to quickly display screen for sanctioned property. “Swiss banks have been — and still are — very careful and diligent when it comes to accepting client funds,” he says, including you will need to recognise the massive quantity of respectable enterprise completed with Russian entrepreneurs who usually are not topic to sanctions.

For Mark Pieth, emeritus professor of felony legislation on the University of Basel and a specialist in white-collar crime, the actual story of the previous decade is how Switzerland’s legal professionals, slightly than its bankers, have change into the facilitators of hidden international cash. “Swiss bankers were extremely cosy with Russians in the past,” he says. “Alongside London, this country was the porch for Russians into the west . . . but now I wouldn’t say the problem is so much with the banks — it is all the other intermediaries.”

Swiss legislation offers exceptional sweep to attorney-client privilege, says Pieth, which means legal professionals can refuse to reveal virtually something to the authorities about their shoppers. The Swiss Bar Association strongly rejects this. “Professional secrecy does not protect against criminal acts,” it says. “Lawyers know the law and know what to do.”

One senior business determine defends the banks’ place unapologetically. He says all people now desires to know the origins of their luxurious jackets. But 10 years in the past no one was asking the place they had been made, by whom and with what supplies. In banking, as in vogue, issues have modified, he says, however no one is haranguing the style world in the identical method they’re criticising banks.

Fashion firms, although, have moved with the instances and opened up, whereas Switzerland’s banks, for all their insistence on change and compliance, nonetheless wish to keep as a lot of the secrecy surrounding their shoppers as doable — even at a time of worldwide disaster.

This article is a part of FT Wealth, a piece offering in-depth protection of philanthropy, entrepreneurs, household places of work, in addition to different and influence funding

Source: www.ft.com