Black money: Swiss banks tell Indian clients to sign undertakings

As probe into suspected black money stashed abroad by Indians gathers steam, banks in Switzerland are running from pillar to post to safeguard their interest while some are also considering financial provisions in their books for possible penal actions and legal costs.

At the same time, banks are also lobbying with the Swiss government to insist on putting in place necessary measures in their information-exchange and administrative assistance frameworks with India for safeguarding the interest of banking institutions during the subsequent prosecution and other legal or regulatory proceedings in the black money cases.

Sources, however, said that the role of some banks, as also that of certain bankers, has already come under scanner for acting in concert with the suspected black money hoarders and also for making 'safe haven' promises for their funds.

The suspected lapses on the part of at least three large European banks, including two from Switzerland itself and the third having a significant presence in the Alpine nation, are also being probed for allegedly facilitating re-routing funds of certain Indian corporate houses back into their listed companies as foreign investments.

Capital market watchdog Sebi is probing at least three large global banks and many Indian companies for alleged round tripping of funds by way of multi-layered transactions, while the regulatory noose has further tightened in these cases with involvement of other regulatory and enforcement agencies.

Such transactions are suspected to have taken place in case of 15-20 Indian companies, a senior official said, but refused to disclose their names as also that of the banks saying it might impede the investigations.

Some portfolio managers at some banks, which have a significant presence in the Indian financial markets, could have helped clients route money back into the country as foreign funds using investment vehicles across jurisdictions.

So far, the focus of this Supreme Court monitored probe has mainly remained on the persons and entities from India suspected to have stashed illicit wealth in overseas locations including Swiss banks.

However, as the probe moves further, including by a Special Investigation Team (SIT) with two former Supreme Court judges as Chairman and Vice-Chairman along with members from various investigative and regulatory agencies, the banks are turning wary about possible action against them going ahead.

Senior executives at various banks, including three large ones headquartered in Switzerland and the Swiss units of some major European banks, said that they are considering making financial provisions as anticipatory measures to deal with any action involving them in India's black money probe.

The banks are also said to be lobbying with the Swiss government that it should ask the Indian authorities to put in place a 'settlement' mechanism to deal with the suspected entities, including the banks and their customers, before seeking any assistance in its black money probe.

On the other hand, some banks are said to be advising their clients to use various 'layering' methods, including by way of share market and export-import routes, to move funds from Switzerland to other locations including India.

Other risk-wary banks are, however, have turned cautious about dealing with their Indian clients in the wake of a growing scrutiny of such accounts, as a huge public outcry has made even genuine Swiss bank accounts look like suspicious.

A number of Swiss banks, including three with significant global presence, have begun telling their Indian clients to sign undertakings that are aimed at 'derisking' the banking institutions from potential risks arising out of regulatory actions against the bank customers by foreign governments.

Some banks are also telling their clients to close their accounts if they are not ready to take such risks, or if they have apprehensions about such accounts not being compliant to regulatory requirements in their home countries.

Through these 'derisking' undertakings, the customer agrees to take responsibility for any possible regulatory or administrative compliance with international norms.

At the same time, the bankers are also lobbying with the Swiss government to ensure that any information would be shared with their Indian counterpart about accounts held in Swiss banks only after necessary provisions are made to safeguard the interest of the concerned banking institution.

Following a high-level delegation visit from India, Switzerland last month agreed to cooperate on matters related to verification of genuineness of accounts and reply to requests for banking account details in a time-bound manner, and also to initiate a process to include India among the countries eligible for 'automatic exchange of information'.

Under this new agreement, Switzerland has also promised to assist Indian authorities on a priority basis.

There has been a huge political uproar over Indian black money allegedly stashed in Swiss banks and the new government has said it is committed to tackling this menace.

As per Swiss National Bank's latest data, the total money held by Indians in Swiss banks stood at over Rs 14,000 crore (Rs 140 billion) as on December 2013, up by nearly 42 per cent from a year ago.

While banks put in place necessary safeguards, there are apprehensions that many of their clients are being advised to move the funds through gold, diamond and other routes.

A new strategy of 'layering' has also come to light at Swiss banks to thwart any attempt for identification of real beneficiary owners of funds entrusted with them, as per government and banking sources.

'Layering' is a key stage in money laundering and involves moving illicit funds around financial system through a complex series of deals to complicate the paper trail.

This layering typically takes place between the first stage -- placement of black money in the financial system either in cash vaults, or through a series of cash or sham financial transactions -- and before the final 'integration' stage when money is put back into the financial system through various transactions for the benefit of its final recipient.