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Swiss making progress on return of corrupt cash but doubts remain about laundering defences

Thu, 2 Feb 2012 11:37 GMT

Source: Content partner // Thomson Reuters Accelus

Swiss franc banknotes of several values are sorted in a money counter in a bank in Zurich 16/08/2011 REUTERS/Arnd Wiegmann

Switzerland is making good progress on discussions aimed at returning hundreds of millions of dollars frozen following the Arab Spring, but the final process could take up to five years, a senior Swiss government official has conceded. The situation has also raised questions as to how the corrupt money managed to infiltrate the Swiss banking system in the first place, according to anti-corruption experts.

Last month government officials from around the world met in Lausanne, Switzerland to discuss the restitution of more than $700 million worth of Egyptian, Tunisian and Libyan assets frozen as a result of uprisings in those countries last year. Organised by the Federal Department of Foreign Affairs (FDFA), the seminar brought together 40 legal experts from around 15 countries, together with members of international organisations.

Valentin Zellweger, a director and legal adviser at the Swiss Department of Foreign Affairs, described the meeting as a great success as it was the first time leaders of the Arab Spring had met with officials from the main financial centres to discuss these issues. Officials from Tunisia, Egypt, Libya and other Arab countries, as well as representatives from the U.S., Belgium and France attended the discussions. Officials from the UK were invited but did not attend.

Great strides

Zellweger told Thomson Reuters that the Swiss government was dedicated to returning corrupt money to countries as soon as possible. Egypt and Tunisia have both sent requests to Switzerland for the return of frozen assets. It is thought that around $410 million from Egypt has been frozen, while the Swiss are holding on to around $60 million from Tunisia. The Swiss have also returned around $385 million of Libyan assets which were frozen following United Nations (U.N) sanctions. Around $265 million in Libyan assets remains in Swiss bank accounts and, so far, no money has yet been returned to the Egyptian or Tunisian authorities, although a plane has been returned to Tunisia. The official said that, based on previous experience, he expected the process to take up to five years.

Zellweger explained that the Libyan issue was an easier problem to solve than the Egyptian or Tunisian matters. He said that once the U.N Security Council had given Switzerland the go-ahead to unblock the Libyan money the Swiss could simply return the money to the new government. The situation was much more difficult when individuals were involved.

He said: "If you freeze money from individuals there is a need for a criminal prosecution in the country of origin, or where the funds are for that matter, in order to return it. You then have a court decision to confiscate the money and send it back. In the Libyan case there are funds held by individuals and we wish to send them back, but before we do that we will need to have some mutual legal assistance going with Libya."

The Swiss legislative framework means that overseas countries have first to prosecute corrupt leaders and then ask the Swiss for evidence that the money exists. The dirty money can then be frozen through a mutual legal assistance request. Zellweger said that although the correct laws are on the statute book it will be important for the countries to communicate properly if the legislation is to work effectively. Zellweger pointed out that the recent seminar was an example of the cooperation needed.

Over the past year Egyptian and Tunisian officials have visited Switzerland to discuss the return of corrupt money and to gain an understanding of the legal processes involved. Swiss officials have also visited both countries. Zellweger revealed that the Swiss sent a senior legal expert to Tunisia to help them draft their request for money. "It is a long process because there are legal requirements you have to meet. You also have the involved parties with their rights. They can appeal the decisions and they have done so in the past. This can go as high as the Supreme Court," he said.

Zellweger said that although Tunisia and Egypt had experienced prosecutors they tended to lack experience in corruption matters as there have been no previous cases from which to learn. They also needed to develop their understanding of asset tracing as former members of these governments had used very sophisticated schemes to hide and embezzle funds.

One of the issues with returning corrupt money is ensuring that it actually goes back to legitimate sources and is not stolen again. Zellweger said he was well aware of that problem but said that the issue has not yet been discussed with Egypt and Tunisia.

"In the past we have in most cases found a solution with the concerned country," he said. In 2008 Switzerland, along with the World Bank and the U.S., established the BOTA Foundation to ensure that corrupt money was properly returned to Kazakhstan.

Not the whole story?

Zellweger said that Switzerland had in many respects taken the lead in ensuring that illicit gains were returned to the victims of corruption. He explained why the country had made a stand. "In the beginning there was certainly a reputational issue. The Swiss government decided to get involved in these issues and proactively solve the cases because of reputational issues like the Marcos case which had worldwide attention. Since then we have built on it. It is a reputational issue still but there is increased awareness about the developmental impact of corruption and the need to send this money back."

Over the past decade or so Switzerland has returned around 1.7 billion Swiss francs in corrupt assets seized from corrupt leaders such as former Nigerian military leader Sani Abacha, where $700 million was returned, and Filipino dictator Ferdinand Marcos.

Alan Bacarese, special counsel at Peters & Peters and an expert on asset recovery, said that the Swiss had been active in returning money and had done much more than many countries in trying to free stolen assets, although he explained that recent efforts did not tell the whole story.

He told Thomson Reuters: "The Swiss were streets ahead in terms of putting sanctions in place on Libya, Egypt and Tunisia and have been very proactive in getting freezing orders but the question is, why is it always Switzerland that puts the sanctions in place first?

"The Swiss do a fantastic job of chasing dirty money through the system but the money is still in the system and in many circumstances continues to enter the system, in much the same way as it does here in the UK . They are happy to root out this dirty money but in terms of stopping it in the first place the Swiss authorities still have work to do," he said.

Bacarese, who was previously head of legal and case consultancy at the International Centre for Asset Recovery (ICAR) in Basel, Switzerland, said that the country had made overt displays of returning money but the fact remained that the money had got into the banking system in the first place. "You can have all the anti-money laundering processes in place that you want but if the banks are still continuing to ignore all the red flags that are being held up then frankly what is the point?" he said.

Bacarese explained that the situation in Switzerland was much better than it used to be but said recent reports had shown that Swiss banks were still prepared to take disproportionate risks with politically exposed persons (PEPs). "There is still a feeling that the Swiss regulators are not putting enough pressure on those responsible for allowing the suspicious monies into the system in the first place" he said.

Reputation laundering?

Robert Palmer, a campaigner at anti-corruption group Global Witness, said that Swiss efforts to return money were laudable but that the country was attempting to bolster its reputation in this area. He suggested that the Swiss had learnt that being found to have taken dictators' loot was very bad for their country's reputation. He said they had nevertheless become very adept at identifying, freezing and returning assets and added that they probably had a better record than almost any other country in the world for returning these assets.

Palmer told Thomson Reuters: "The biggest problem is how this money ends up there in the first place. It's a good case of reputation laundering. They have been very welcoming in allowing assets to come in and then learnt it helps their reputation to return the assets as well. They have become fairly adept at that."

Palmer pointed out that the Swiss financial regulator, the Swiss Financial Market Supervisory Authority (FINMA), had found significant weaknesses in the due diligence processes at Swiss banks holding frozen assets. The regulator found that 30 to 40 suspicious activity reports (SARs) were filed after the assets were frozen. Palmer noted: "SARs are supposed to be filed when you have the suspicion."

Palmer said that it was important for banks to ensure their ongoing monitoring processes worked properly. "The fact that an asset has been frozen due to political sanctions shouldn't lead to the filing of a SAR necessarily because banks should be doing ongoing due diligence to find out what stuff is potentially dodgy," he said.

Zellweger dismissed suggestions that Switzerland had been lax in allowing corrupt money into its banking system. He said that the country had strengthened its legislation over the years to prevent the flow of dirty money. "We have very strict legislation on money laundering. For example our know your customer (KYC) requirements are some of the strictest in the world.

"The banking secrecy laws do not apply to criminal offences which means we have developed a very strong practice over the past years to cooperate with other countries," he added.

Zellweger said that Switzerland was able to move much more quickly than other countries to return money because its KYC rules enabled the country to discover the economic beneficiaries behind transactions. He said that Egypt and Tunisia had sent "dozens" of requests for information to other countries but so far, only Switzerland had responded. He conceded that problems remained.

"Switzerland is the seventh biggest financial centre in the world, and like other financial centres you will never be able to avoid totally having these funds in Switzerland. What we can say is that we have sent back far more money than others," he said.

Problems remain

Bacarese accepted that the problem was not solely Swiss. He pointed to the Financial Services Authority (FSA)'s recent report into UK banks that showed that institutions were still having big problems handling PEPs. He had hoped that the penny might have dropped after a similar report into the UK's handling of the Abacha money a decade ago, but said: "Sadly little appears to have changed. We continue to have problems here and this is a debate that the Swiss should also be having."

Zellweger thought that there was an increased awareness of corruption issues among Swiss bankers and said sophisticated compliance and screening processes had been put in place to prevent money getting through the banking system. He said that he had spoken to many bankers who were suspicious of the money flows from Tunisia, perhaps reflecting the fact that only £60 million had ended up in the country.

He explained that the fight against corruption was a relatively recent phenomenon and said countries were now taking more of an interest in solving the issues; the country was hoping to tackle the problems more adequately and strengthened legal frameworks had been put in place. "Bribes in foreign jurisdictions used to be tax-deductible in many countries while now it is a punishable offence under law. I think that shows a change in paradigm," he said.