“Gnomes Of Zurich” In Panic As Saudi Corruption Crackdown Sparks Flood Of Money Laundering Inquiries

There are two divergent views on the crackdown on corruption by Saudi Arabia’s crown prince, Mohammed bin Salman (MBS), which led to the arrest and detention of 200 princes, ministers and former ministers.

On one hand, it was a masterstroke which will earn political capital with the Saudi people and catalyse an Arab Spring in which MBS is a modernizing reformer who will liberalise Islam.

On the other, it was nothing other than a cynical and desperate attempt to tighten his grip on power and weaken competing clans within the ruling family (especially sons of former King Abdullah) as the nation risks splitting apart due to political and economic fissures. Last week, we noted that former head of the National Guard and senior member of the Abdullah clan, Prince Miteb bin Abdullah, purchased his freedom for a cool $1 billion.

If you put yourself in the position of being a Saudi prince or wealthy Saudi official, whatever your opinion of MBS’s motivation, you would be forgiven for taking additional measures to make it harder for his henchmen to seize your wealth if you found yourself in the crosshairs.

Alternatively, if you suddenly need to write a check for, let’s say $1 billion, it might require some questions, a few portfolio adjustments and lots of paperwork. Switzerland has been a popular place for wealthy Saudis to store their wealth since the 1970s and MBS’s crackdown is already rippling through the offices of Swiss-based private banks. In fact, there has been a flood of submissions regarding potential money laundering. According to the Financial Times.

Switzerland’s banks have begun reporting suspicious account activity among some of their Saudi Arabian clients to the Swiss Money Laundering Reporting Office, part of the federal police service, according to people close to the situation. Lawyers acting for the banks have submitted information over the past week and expect several dozen submissions to be made in total, said two people involved in the process.

The exercise reflects the banks’ nervousness about being found in breach of rules governing money laundering and corruption. It follows the arrest last month of more than 200 people, including some of Saudi Arabia’s richest businessmen and princes. They were detained at the Ritz-Carlton hotel in Riyadh as part of an anti-graft operation launched by Crown Prince Mohammed bin Salman, the kingdom’s powerful heir apparent.

Our suspicion is that Swiss banks are being hypersensitive given their history as safe havens for ill-gotten gains and the parabolic reach and power of financial regulators these days. At the same time, we doubt that some of their Saudi clients would, or could, tolerate much probing as to the source of some of their assets. Furthermore, the belief that some of these assets were acquired illegally – at least under MBS’s “new” definition which has overturned previously normal business practice – will have been heightened by enquiries from the Saudi regulator asking whether any of the 200 arrestees have credit facilities or safety deposit boxes. We can only imagine how this must have sent the “Gnomes of Zurich” into a state of mass panic. The FT continues.

While Swiss banks strive to protect client confidentiality, they are obliged to report suspect transactions. So far the account reports have not led to action by Swiss authorities, such as searches or freezing accounts. Saudi officials must submit a formal request if they want access to the data, which is being analysed by the Swiss authorities.“

As is standard procedure, incoming information is currently being assessed,” the office of the Swiss attorney-general told the Financial Times. “At this time, criminal proceedings in this connection have not been opened. ”Swiss bankers also say they have begun to prepare cash transfers on behalf of clients, as princes and business people seek to settle allegations against them. The crown prince is seeking to recover at least $100bn through the crackdown in “systematic corruption and embezzlement” that took place over several decades.

If MBS redefines “illegal”, will prosecutions be forthcoming? Time will tell. An unnamed source told the FT that the process of looking into recent activity in Saudi accounts is similar to those which followed the allegations of corruption regarding the scandals at Fifa, soccer’s governing body, and Petrobras, the state-owned Brazilian oil company. Not surprisingly, the major Swiss banks are not appreciating the media attention.

Large volumes of Saudi money are held in the Alpine country, much of it old wealth. “It’s been here for 30 or 50 years, it’s not nouveaux riches,” said the person familiar with the process. The banks were coy about the issue. Credit Suisse said: “With regards to the recent developments in Saudi Arabia, so far there are no implications on our business, but we will continue to monitor the situation closely.” UBS declined to comment on its clients.

We will be fascinated to watch what comes to light as MBS opens this particular can of worms (if it’s made public) which, according to the FT, might draw in past actions of some bankers.

The FT reported 10 days ago that Prince Mohammed had brought in western investigators to work alongside finance ministry officials as they parse documents to analyse the extent of alleged corruption and prospective penalties. Foreign bankers have also been brought in for questioning.

Who would have thought bankers might facilitate a bit of wrongdoing on the part of wealthy Saudis.