Private banks reined in

Private banks reined in

Wimbledon is a magnet for the rich and famous. It is a key social event in the private banks’ corporate hospitality budget.

But those budgets are increasingly being tightened due to the rising costs of compliance. The stringency has come after several painful incidents caused bad publicity.

HSBC stained its reputation in 2012 with a record fine for allegedly laundering the money of Mexican drug barons. Members of the drug cartels would arrive at the bank’s Mexican branches with the proceeds of drugs, and were able to deposit hundreds of thousands of dollars in cash into an account without the clerk questioning its origin, and get it transferred to the US.

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US law also prohibits banks doing business with countries under US sanctions. Some are aimed at countering transactions to finance terrorism, some to cut finances for the nuclear arms race. Standard Chartered, HSBC, RBS, Lloyds and 
Barclays were all penalised for processing payments for Iran – through US clearing banks – often removing the reference to Iran to circumvent automatic red flags in the system.

More recently, private banks have been assessing their exposure to the corruption scandal engulfing Fifa, the organising body of world football. Banks processed payments used to bribe Fifa officials to secure broadcasting rights or to ensure a particular country was awarded the World Cup hosting rights.

The know-your-customer rule requires banks to identify if a client is ‘politically exposed’ in that he holds such great influence that he presents a risk for potential corruption, or is a relative of a politically exposed person.

A compliance officer at a global bank said: “We would need to recognise not only the children of the person, but also whether our client was the daughter’s husband.”

In practice, scrutinising and monitoring the clients for political connections and for the source of their wealth is challenging. One private banker complained: “I used to talk with my clients over lunch about yachting. Now I need to ask them where they got their money from.”

A relationship manager at a wealth management company in India said: “In Delhi, the client is polite enough to have a cup of tea. When visiting a client in Mumbai, however, we often get told off. They say ‘Why are you here?’ and ‘Don’t waste my time.’”

Switzerland has long been the traditional home of opaque bank accounts. But the old Swiss offshore model, built on secrecy, is fading. The long arm of US law made itself felt in the Alpine country when a federal campaign fined its banks for helping wealthy Americans evade tax. Since then, Switzerland has signed several agreements on automatic exchange of information about their banking clients.

The reputation risk and the increased expenses of complying with the anti-money laundering rules and sanction regimes made many global banks cut back on private banking operations internationally, and caused a shake-out in the sector. Private banks are now highly risk-averse, and many have started shedding non-compliant clients.