by Saeed Patel
The Credit Suisse banking debacle continues to make headlines. While some are now suggesting that the market is calming, only time will tell if this is the calm before another storm. UBS has agreed to pick up the tab for Credit Suisse to the tune of $3.2 billion. However, the fall of Credit Suisse, a bank founded in 1856, has left ripples of fear, uncertainty, and doubt across the banking sector and beyond. Here is a look at the backstory of Credit Suisse and the demise of this once giant in the banking sector. This is a tale of scandal, fraud, poor risk management, and bad decisions. The fall of Credit Suisse has been a long time coming, as a history of scandals has plagued the bank. One of the possible drivers of this is that Swiss banks are typically associated with privacy because of the stringent banking secrecy laws in the country. As such, Swiss banks have historically been chosen by specific individuals and organisations to protect financial transactions and, in some cases, avoid taxation in their own country.
However, in 2018, the bank secrecy that helped to obfuscate tax ended with the enactment of the OECD treaty network based on the Automatic Exchange of Information (AEOI) and Common Reporting Standard (CRS). These changes made it much more difficult for entities to ‘stash cash.’ Unfortunately, however, Credit Suisse has been involved in several breaches of OECD guidelines, including a recent action brought about by the Society for Threatened Peoples. The organisation filed a motion against Credit Suisse for its involvement with the North Dakota Access Pipeline (DAPL) in the United States for alleged leaks of a pipeline that could affect 17 million people.
Banking sector investigative resource, BankTrack, lists 28 ‘dodgy deals’ under a Credit Suisse search. These deals resulted in an investigation into Credit Suisse dealings by the Organized Crime and Corruption Reporting Project (OCCRP); the investigation’s revelations are contained in the group’s dossier ‘Suisse Secrets’. The OCCRP worked alongside its German partner, the newspaper Süddeutsche Zeitung to reveal the extent of Credit Suisse’s scandals.
The revelations made by OCCRP were based on a leak of 18,000 Credit Suisse banking records. The analysis of the bank account data identified several dubious characters including Hassan Tatanaki, who was involved in the Gadafi regime and has corruption allegations, Rodoljub Radulović, a Serbian drug baron, and the Talibov brothers who received dozens of wire transfers from shell companies that were part of major Azerbaijani and Troika money laundering systems.
Scandals have plagued Credit Suisse, with corruption and money laundering allegations resulting in fines and prison sentences for employees, for example:
• In 2021, Credit Suisse paid US and UK authorities $475 million for the bank’s part in a corruption scandal in Mozambique.
• In 2022, Credit Suisse was fined $22 million, and an employee given a jail sentence when the bank failed to prevent money laundering by a Bulgarian cocaine trafficking gang. Credit Suisse shares took a nosedive soon after.
All these scandals have led to questions about internal controls and anti-money laundering. A PwC auditor made this statement after a review of the bank’s 2022 annual report describing the bank’s internal processes as ‘not effective’, given it did not ‘design and maintain an effective risk assessment process’ used to identify and analyse the risk of ‘material misstatements’.
The final act of Credit Suisse was ultimately caused by the PwC auditor’s comments on ineffective internal processes. Finally, however, the death knell sounded out when Saudi National Bank (SNB) ruled that it would discontinue its assistance for the failing bank. The result was a sudden drop in Credit Suisse shares by more than 30%, at which point, Credit Suisse clients twisted the knife by withdrawing funds; then it was game over.
Takeaways from the failure of Credit Suisse
The question must be asked, could this banking debacle have been prevented? Indeed, the notes from the PwC auditor on the lack of risk management are critical to this. The inability to design and maintain effective monitoring of processes is a core problem within Credit Suisse that other financial institutions must take note of.
Stringent monitoring and reporting are closely aligned with effective risk management. With the correct processes and supporting tools, the bank would have been protected from unscrupulous insiders and not left at severe risk of non-compliance with banking regulations. It could be argued that the long history of banking secrecy in Switzerland led to a banking culture that meant robust checks was not performed. If Credit Suisse had done robust due diligence and established the beneficial ownership of accounts, many scandals could have been avoided or mitigated.
Fraud collapses banks. This happened in 2008, and it has now been integral to the demise of Credit Suisse in 2023. A paper published by the American Economic Association by John M. Griffin in 2021 concludes: “A careful examination of the empirical academic evidence indicates that conflicts of interest, misreporting, and fraud were central features of the securitization chain leading up to the 2007-2009 financial crisis.”
The full repercussions of the fallout from the demise of Credit Suisse are yet to be determined. And the recent comments of a ‘calming’ of the situation may or may not transpire. However, one thing is sure, this collapse of Credit Suisse is not a sudden fall from grace; the long history of poor risk management and investments in ‘dodgy dealings and dodgy people’ has contributed to the bank’s untimely takeover by UBS. The world cannot afford another banking crash like the late 2000s.
Transparency and de-risking of accounts are now possible on a scale and with a capability not available in 2008 using intelligent solutions that handle AML and CDD. Banking in the 2020s should not fail for the same reasons that banking collapsed in the late 2000s. Stability comes from recognizing that banks are a custodian of both money and world economic stability. This responsibility is a burden but shared across all financial institutions. The tools for transparency and robust checks must be mandated to prevent insider collusion and external fraud.
The author, Saeed Patel, is Group Director at Eastnets.
