Crackdown on The Swiss Laundry

By Christine Gorman

Behind every successful drug syndicate lies a complex mechanism for recycling bundles of tainted cash into respectable assets. But until two years ago, when Los Angeles narcotics officers seized three Zurich-bound suitcases stuffed with $2 million in currency, there was little hard evidence to implicate the venerable granite-walled banks of Switzerland in such schemes. Since then Swiss banks have been chastened by the disclosure that their accounts were used in a billion-dollar money-laundering operation. The resulting political scandal, in which the Justice Minister was forced to resign, ranks as the worst in modern Swiss history.

In response, the Swiss government has promised to draft tough anti- laundering legislation by mid-May. Last week the federal banking commission announced that it will introduce stiff regulations on bank-note trading to prevent drug traffickers and other criminals from using the country's famed secret bank accounts. The commission also published a 28-page report that faulted Credit Suisse, which handled the bulk of the money in the billion- dollar scheme, for inadequately supervising its accounts.

Money laundering is not a crime in Switzerland unless it can be shown that the cash flows from criminal activities. Yet Switzerland is a magnet for money launderers because of its legitimate multibillion-dollar trade in foreign bank notes. As much as 3,000 lbs. of foreign currency arrives daily at Zurich's Kloten airport. Much of the cash represents earnings from tourism, which each country's banks exchange for local currency. Swiss authorities are investigating charges that Lebanese currency dealer Barkev Magharian, 35, and his brother Jean, 44, both of whom are now in custody, took advantage of that market by laundering around $1 billion, a sum that allegedly included drug profits. At least some of the proceeds were reportedly sent back to drug kingpins in Los Angeles.

In a report last year on the money-laundering affair, Swiss Federal Prosecutor Dick Marty mentioned the Zurich currency-dealing firm Sharkarchi Trading. The company denies any involvement in money laundering. Shortly before publication of the prosecutor's report, Hans Kopp, a prominent Zurich lawyer and husband of Justice Minister Elisabeth Kopp, resigned his positions as a director and vice chairman of Sharkarchi. Mrs. Kopp later resigned after admitting that she had warned her husband of the impending scandal. A criminal probe will determine whether she violated official strictures of secrecy.

The laundering affair has focused attention on the need for other Swiss banking reforms. One possible target: the absence of requirements for full, consolidated financial statements. Most Swiss banks use evasive but perfectly legal bookkeeping that eliminates disclosures about the performance of parts of their holdings. What remains to be seen is how vigorously the banks will defend themselves against the reform wave and whether their reputation for probity and prudence will survive the fray.

With reporting by Margaret Studer/Zurich and Adam Zagorin/Bern