Recasting the Swiss as ‘Good Guys’

The latest international financial melodrama casts Swiss bankers against type: as the good guys.

Wearing their new shiny white hats, a posse of Swiss banking officials two weeks ago froze $114.4 million in bank accounts linked to Raul Salinas de Gortari, brother of Mexico’s former president, Carlos Salinas. After a three-year investigation, Swiss officials allege that the former first brother essentially controlled the vast Mexican cocaine-smuggling industry during his brother’s six-year term of office.

Salinas, currently jailed in Mexico on charges of ordering the murder of his brother-in-law, politician Jose Francisco Ruiz Massieu, denies everything, but investigators in Switzerland and elsewhere claim they now have clear and credible evidence linking him to drug trafficking. What many wonder, in Mexico and elsewhere, is how Raul could have been up to his eyeballs in drug smuggling without his brother’s knowledge and connivance.

Cynics also have some questions about Switzerland’s motives in bringing the charges. Deluged by bad publicity in the U.S. over its entanglements with Nazi Germany, Switzerland badly needed some good news fast. Taking on drug lords is one way to burnish a tarnished international reputation--and the Swiss aren’t afraid of Mexican retaliation.

Whatever finally happens to the Salinas brothers and the $114.4 million, Swiss banks will never be the same. Facing relentless pressure from governments around the world and aroused public opinion, Swiss banks, and offshore banks everywhere, are gradually abandoning the concept of secret banking.

This was inevitable once the Holocaust banking scandals broke. The only real moral justification for secret banking is that it protects innocent victims, like the German Jews, from tyrannical and confiscatory governments, like the Nazis. But when Swiss banks used every trick in the book to avoid repaying Holocaust survivors and their heirs after the war, while fighting hard to protect the assets of Nazis, drug lords and various unsavory Third World dictators, a worldwide wave of moral revulsion forced the banks to rethink their approach.

The Holocaust scandal eroded public trust in Swiss banks and bank-secrecy laws, but it only accelerated a process already underway. To understand the erosion of Swiss banking secrecy, we have to go back to the end of Philippine President Ferdinand E. Marcos’ regime in 1986. The People Power government of Corazon Aquino, who replaced Marcos, did something that shocked the comfortable world of international banking: It sued the Marcos family to get back assets that the dictator had allegedly looted and demanded that Swiss banks freeze the Marcos accounts.

The Filipinos did pretty well, ultimately arranging for the return of approximately $400 million to the Philippine treasury, and setting a precedent that alarmed kleptocrats everywhere. Subsequent to the Marcos case, Switzerland passed a law limiting bank secrecy and making it easier for foreign countries to pursue claims against fraudulent asset holders. The Swiss also outlawed the practice of money laundering, and, after a recent set of reforms, Swiss banks can no longer take “no questions asked” deposits of briefcases filled with hundred-dollar bills.

It’s taking all the fun out of dictatorship. No more stepping up to the teller with suitcases of cash looted from some U.N. development program; no more legal impunity for former heads of state; no secure retirements to palatial villas in the south of France.

That the dictators don’t trust the banks is clearer all the time. When Mobutu Sese Seko left Zaire last year, instead of the tens of billions investigators expected to find in Switzerland, the Wall Street Journal reported they could only trace a measly $3.4 million.

That doesn’t mean money laundering has disappeared. No doubt Mobutu, a cautious and intelligent man, took steps to safeguard his wealth from prying eyes. Furthermore, the Russian mafiosi seem to have done a rather good job getting money out of the country, either through Switzerland or through such shady offshore-banking centers as Cyprus, where tax laws gave them especially favorable treatment.

Still, the new sense of discipline and order in international banking has had a chilling effect. It is now clear that the Swiss banks, and indeed all offshore haven banks where nervous depositors could hide money either from tyrants or national income-tax authorities, must adjust to a new public mood. The world’s people don’t like bankers who act as allies of tyrants and drug lords, and the world’s governments don’t like seeing their citizens evade taxes with the connivance of unscrupulous bankers.

All this flies in the face of the conventional wisdom that financial globalization is undermining the power of national governments. With trillions of dollars hurtling through cyberspace every day, say many pundits, national governments can no longer track assets and collect taxes. The wealthy can hide their assets in the Cayman Islands or Switzerland, and drug kingpins and other bad guys can operate with impunity, and governments will be powerless to do anything about it.

Well, no.

What the conventional wisdom misses is another trend: the growing effectiveness of international cooperation to police the global financial market. As governments wake up to the threat that unregulated secret banking poses to their ability to police their borders and tax their citizens, they are pressuring countries like Switzerland to adopt more transparent banking laws.

The current international financial crisis will result in even tighter policing of the international banking system. The growth of global capital markets means that the health of Western banking systems depends in part on the transparency and honesty of bankers in the developing world. We can now look forward to intense pressure from the International Monetary Fund, Western governments and Western central banks to ensure that countries around the world adopt more uniform bank laws, with strict and regular inspections by auditors and banking authorities.

That kind of scrutiny will make life even tougher for dictators and drug lords. Who knows--they may be reduced to hiding their cash under their mattresses.

There’s just one problem. In the new reign of virtue, when ex-dictators and their assets are hunted down remorselessly to the farthest corners of the Earth, how will we ever persuade dictators like Cuba’s Fidel Castro, the Burmese State Law and Order Reconciliation Council and Libya’s Moammar Kadafi to step down? If retirement is a hell hole of lawsuits, frozen assets and genocide trials, what dictator is ever going to lay down the reins of power?