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Capitalism's mistress:
Private banking
By Phar Kim Beng
HONG KONG - Capitalism is known to be a
good wealth generator. Edward Luttwark, a noted
political scientist at Johns Hopkins University, quaintly
called it turbo-capitalism. His rationale? Once
properly charged, capitalism can dismantle many old
industries, while at the same time produce new ones, a
cycle of creative destruction.
At the height of
the Asian financial crisis five years ago, when
free-market capitalism went literally haywire, blame was
not placed on the market mechanism nor its ideological
trajectory.
Rather, pundits of all stripes
pointed to corruption and lack of accountability as the
root cause of the systemic failure. In the post-Enron
period, many continue to affirm that in the global age,
commercial entities could only succeed when more
information is divulged. Capitalism works best when
balance sheets are not cooked.
The calls for
greater transparency, thus, amount to the need to create
a see-through, glass-like company that can live up to
public expectation and scrutiny.
Be that as it
may, in the lucrative world of private banking, this
sector remains oblivious to this need. In fact, there
are legal institutional factors that do not permit firms
engaged in private banking to do what globalization
expects: make financial information available to all and
sundry.
To this date, highly secretive private
banking continues to be the world's biggest business.
According to a report released by Gemini Consulting and
Private Banker International, the amount of money
deposited in the world's private institutions -
currently numbering 4,000 - has increased steadily over
the past decade.
In 1986, the amount was said to
be US$4.3 trillion. A decade later, the figure has more
than doubled to $10 trillion. In year 2000 alone, the
figure hit $13.6 trillion, and is currently still
growing at a rate of 30 percent per year.
To be
sure, if private banking can serve as a corral for safe
and clean banking, then all would be well. The specter
of money laundering would be absent. But it is not.
However, private banking is susceptible to
abuse. Indeed, due to the institutional incentives for
greater discretion, private banking runs the full gamut
of services that are not liable to disclosure; not
unless confronted with legal orders, which are not easy
to obtain. A case in point is Switzerland, the haven of
private banking.
In the so-called Due Diligence
Convention signed by the Swiss National Bank and Swiss
Bankers Association in 1977, the banks agreed not to
open any account or deposit without first establishing
the identity of the potential client.
The
convention also agreed not to provide any active
assistance in capital flight or tax fraud. In other
words, Swiss banks agreed not to help others fleece
their own countries or engage in criminal activities.
However, to the extent that the private banks do
not ask and the clients do not tell, the assumption of
innocence is also maintained.
Furthermore, Swiss
lawyers may, for reasons of professional secrecy,
withhold the name of the person they represent. This
itself constitutes a serious loophole.
In the
United States, the federal government is wary of what
private banking can do. Currently, the Federal Reserve
System, three congressional committees, the General
Accounting Office, the Comptroller of Currency, the
Treasury Department and the US Attorney's Office for the
Southern District of New York are all investigating just
how private banking works.
In light of the
attempt to stop money laundering from reaching active or
would-be terrorists after September 11, 2001, their
efforts have been intensified.
But the review
has not been effective. The original rationale of the US
scrutiny remain guided by attempts to find out how
private banking serves the wealthy clients in the United
States, not those abroad.
Indeed, a parallel goal
of the comprehensive review is to find out what sort of
safeguards could be put in place to keep private banking
in the US from facilitating, even inadvertently, the
designs of tax cheats and drug lords.
Tax
non-compliance of all sorts costs the US Treasury $300
billion each year, of which it then seeks to recover
some $50 billion.
It is estimated that in the US
an average taxpayer had to put up $2,000 to cover that
shortfall. And the problem goes beyond the US
alone.
Of all the ways to cheat on taxes, one of
the fastest-growing methods, according to a recent
United Nations report, is the transfer of money into
foreign accounts and front companies in so-called haven
countries such as Switzerland and the Cayman Islands.
These are places with strong private banking.
When one considers the gargantuan size of
private banking, the problem of supervision seems
endless. In Switzerland alone, its 400 banks manage
close to $2 trillion, or one-third of the world's wealth
that resides outside its country of origin.
It
also boasts what are, by far, the two largest private
banks in the world: Union Bank of Switzerland, with
close to $600 billion in private-banking assets, and
Credit Suisse, with $295 billion.
Given the
increasing competition for a share of lucrative private
banking, estimated at $17 trillion, it remains a
question if these banks can retain their integrity at
all times.
In fact, there is now an emerging
consensus in the banking world that, in order for top
banks to stay lean, they must beef up their private
banking portfolio.
Citibank, Chase Manhattan and
Merrill Lynch are currently managing $100 billion each.
In the race to the top, they have pulled no punches.
While one should not ascribe nefarious motives to the
entire sector of private banking which is often staffed
by highly qualified bankers, lapses have, and do, occur.
When Amy Elliot of Citibank helped Raul Salinas,
the brother of deposed president Carlos Salinas of
Mexico, move some $100 million into "untraceable"
offshore accounts, alarm bells went off. The Salinas
case was a sign that things could go wrong within the
cozy world of private banking.
Historically,
private banking has had few qualms about its clientele's
background. In 1796, Napoleon Bonaparte's army was
bankrolled by Darier Hentsch, one of the oldest private
banks, which still handles $35 billion.
During
the Cold War, dictators and corrupt leaders made Swiss
and other European private banks their regular ports of
call. The Soviet and Chinese governments did not dare to
deposit in US banks nor in US dollars, for fear of
having their assets seized.
To the extent wealth
is generated, either in legal and illegal forms, private
banking would be around to cater to high-net-worth
individuals. High-net-worth individuals have liquid
wealth that exceeds $1 million.
In serving the
rich and powerful, there is obviously the risk that
private banking would serve the unscrupulous. Thus, as
globalization intensifies, private banking remains the
one isolated area that is still untouched. It will
probably remain so.
This is why Switzerland for
one has not shown much interest in being a member of
European Union. Nor do small countries such as the
Bahamas want to be a part of North American Free Trade
Agreement (NAFTA). Their banking businesses are too
lucrative to be subject to any institutional or legal
scrutiny.
Given its potential for abuse, it is
high time that the world kept a keen watch on the sector
of private banking. The goal is to keep it from spinning
into a morass of deceit, as is the risk with anything
done in secrecy. This includes creating strong laws to
deter illicit money from having a place to incubate any
returns at all.
(Copyright 2003 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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