Swiss banks reshape business models to reflect war and digital revolution

Recent proposals to reform Switzerland's anti-money laundering regulations follow international pressure after the Russian invasion of Ukraine.

Nearly 60 years after British politicians coined the phrase ‘gnomes of Zurich’, to describe a mythical cabal of sinister bankers plotting the downfall of larger Western economies, Swiss leaders are bringing their financial hub ever closer to full global compliance.

Each time Swiss authorities agree to make another accommodation with the international order, it is usually triggered by geopolitical upheavals. Back in 2009, the end of banking secrecy was ultimately triggered by the global financial crisis (GFC). The most recent proposals to sharpen anti-money laundering rules, published on August 30, stem from international pressure following Russia’s invasion of Ukraine in February 2022.

But there is also a historical understanding among Swiss financiers, that any changes must be incremental, as the lakeside cities of Geneva and Zurich try their hardest to secure their places on Europe’s map of well-policed hubs. The revised Anti-Money Laundering Act (GwG – Geldwäscherei Gesetz), in force since the beginning of the year, is a case in point, with the business community eyeing international developments to help strengthen their financial centre’s integrity.

“This is a logical development of the existing law following Financial Action Task Force and international requirements,” says Sandra Daub, head of business development at Noumena Digital and lecturer at Lucerne University of Applied Sciences and Arts. “But it is important to keep the balance when it comes to elaboration of the new regulation. In particular, new rules should be practicable and the same time, equivalence with international standards and expectations must be maintained,” she says, reflecting debate currently engaging Switzerland’s financial community.

Sanctioned Russians

The central transparency register is already in place in the EU and the US plans to follow suit in 2024. “In general, the central register can provide more efficiency for state prosecutors in the context of criminal proceedings, but it also facilitates the searches for assets of sanctioned Russians,” she says.

The proposal concerning extension of due diligence obligations to lawyers, notaries and trustees limits this duty to "risky activities", focused on the purchase and sale of real estate and formation of companies, leaving legal advisers in a comparable position to financial services providers, already required to identify and verify beneficial owners.

While the proposals will strengthen the image of the Swiss financial centre, NGOs and journalists are unlikely to be granted access to the transparency register. Other chinks in the mountainous country’s defensive armoury also remain. “One real problem in terms of anti-money laundering is still not addressed,” believes Ms Daub. “Why do many countries, including those in the European Union, still legally allow very complex company structures? In more or less all the cases, these constructs are just made to avoid taxes or obfuscate beneficial owners.”

There is little doubt that much Russian money already left Switzerland, after Bern announced sanctions against those connected with the Russian regime soon after Moscow’s invasion of Ukraine in 2022. Consultancy BCG estimates $100bn has since left Europe for Dubai. Ms Daub estimates Russian money accounted for 10 per cent of Swiss banks’ total offshore business. Those firms most affected by the clampdown, she says, were smaller, specialised, Russia-focused players, now doubly hit by outflows and lower margins.

“For the first time, [Switzerland] decided to adopt a set of sanctions against Russia that are closely aligned on the EU regime,” says Shelby du Pasquier, head of banking and finance at Geneva law firm Lenz & Staehelin, and a key negotiator for Swiss banks in international disputes.

“These sanctions include the freezing of assets, restrictions on financial and commercial activities as well as on the provision of legal and accounting services to structures – i.e. trusts – benefitting Russian clients. This has quickly resulted in an exodus of funds from this country, mostly back to Russia or to jurisdictions that have not endorsed the European position, such as Turkey and the UAE.”

How regulations are implemented in practice will prove the litmus test of Switzerland’s future intentions as a financial centre. “While the newest proposed regulations tighten up loose ends, the key test will be if the market participants can exercise sufficient self-control,” comments Ray Soudah, head of MilleniumAssociates strategic consultancy and one of the founding fathers of modern-day Swiss wealth management.

“Many banks, like UBS, already reject all clients from several countries irrespective of their adherence to due regulations, in this way attempting to ‘en bloc’ reduce risk. Banks are no longer interested in helping their non-standard clients.”

Forced compliance

Swiss banks being forced to comply to international standards has been a perennial theme of the centre’s history, although Geneva and Zurich have often carried the can for problems created in Washington, London and other financial capitals.

Back in 1964, British prime minister Harold Wilson and his deputy, George Brown, blamed the mythic ‘gnomes’ – according to European folkore, living in secret subterranean hideaways together with their riches – for their apparent speculation against sterling. US media soon joined the blame game, suggesting Zurich bankers were able manipulate the global financial system in their favour.

Fast forward to 2009, when Western politicians refused to take any blame for irresponsible economic leadership sparking the global financial crisis. Instead, they focused their ire on bankers and investment managers, an easy target, popular with voters angered by financiers’ luxury lifestyles. US president Barrack Obama quickly realised that scapegoating Swiss bankers for their role in helping US citizens avoid tax would not only win him domestic votes, but also reinforce the US image of a moral, international sheriff.

Switzerland’s leading bank, UBS, was the first to settle with US authorities. Under the leadership of pioneering wealth management boss Juerg Zeltner – sadly deceased in 2020 – UBS sealed a $780m deferred prosecution deal with the US, also offering “administrative assistance” relating to the submission of 4,450 US client files by the Swiss federal authorities.

Other Swiss players followed suit, as the cloud of secrecy evaporated.

At around the same time, visionary leaders including Mr Zeltner and Eric Syz, founder of the eponymous private bank after leaving Lombard Odier, heralded a new era for Swiss banking, focused on honing portfolio management expertise and boosting investment returns, rather than supplying clandestine services or force-feeding clients with inappropriate products.

De-risking still dominates

This idea of ‘de-risking’ client books has now dominated Swiss banking for the last 15 years, totally reshaping the country’s business model. And the story has much further to run, believes Mr Soudah as clients pay the price of major corporate upheavals.

“The extremely cheap emergency acquisition of Credit Suisse by UBS is resulting in a certain fragmentation of a large part of CS into the hands of numerous competitors, willing at this stage, in their view, to take timely advantage,” he says. “Many Credit Suisse clients will find themselves totally abandoned and the aggregate market size of Swiss and global private banking will somewhat shrink in size.”

Impact on wealthy clients could be substantial. “Clients will soon be forced to seek multiple banking relationships in private, commercial and investment banking going forward, as inevitably UBS will reduce common client exposure as it seeks to avoid any risks at this stage,” he says.

Further challenges to the Swiss marketplace may be sparked by digital transformation, says Mr Soudah, highlighting the cull of senior private bankers. “Those remaining in call centres are essentially becoming screen-based robots, causing frustration among clients, as banks seek to cut cost rather than innovate through digitalisation.”

While many politicians continue to blame Swiss financiers for their own woes, the nation’s bankers will increasingly need to reshape their ideal business model to ensure long-term survival of their historic industry.