Rude Surprise

For months U.S. congressional committees have been brooding about the shadowy role of Swiss banks in U.S. financial life. In the past seven years, purchases by anonymous Swiss clients have accounted for more than two-thirds of the increase in foreign purchases of U.S. corporate securities.

Yet Swiss law makes it a crime to reveal any information about them--or about any depositors in Swiss banks. SEC Chairman J. Sinclair Armstrong has also expressed worry, complained to a Senate security subcommittee investigating possible Communist stock buying in vital U.S. industries about "the difficulty of ascertaining the identity" of those buying stock through Swiss banks, notably in U.S. proxy fights.

To remedy this situation, Indiana's Republican Senator Homer Capehart introduced a bill to require the beneficial (i.e., actual) stockholders to be identified before voting in any U.S. proxy fight. But if Senator Capehart thought he was doing the SEC a favor, he got a rude surprise. Last week, at the Senate Banking subcommittee hearings on the use of foreign banks in U.S. proxy fights, SEChairman Armstrong flatly opposed the measure. Present SEC laws permit stock owners of record, such as banks or brokers, to vote stock in proxy battles, and they require disclosure of beneficial ownership only by those directly involved in the fight or owning more than 10% of the stock. Armstrong said that SEC's small staff would be swamped if it had to check on all owners.

Cloak of Anonymity. Armstrong's objection overlooked the fact that Capehart merely wants to force stockholders represented by foreign banks to abide by U.S. regulations. Where illegal activity is suspected, the SEC can usually identify beneficial owners of stock held by U.S. banks--by subpoena if necessary. But it has no sure way of determining what part anonymous Swiss bank clients play in American proxy battles, therefore does not know when the law is broken. In a recent proxy battle for control of Fairbanks, Morse & Co. by Penn-Texas Corp. involving stocks purchased through Swiss banks, Armstrong admitted that the SEC was powerless to get information that would have been easily available through U.S. banks. Armstrong's concern for the reluctance of beneficial owners to identify themselves only served to point up another complaint against Swiss banks: an Internal Revenue Service representative told the subcommittee that U.S. investors can easily avoid paying taxes on stock and profits by trading through the Swiss.

Unmarked Envelopes. Worried by such criticism, the Swiss last week were discussing with the U.S. the request for an agreement allowing Swiss banks to reveal certain information involving U.S. interests. Most Swiss bankers are dead-set against any major change, but seem willing to offer some concessions, such as not voting U.S. stock when the owner's identity cannot be revealed, not buying U.S. stock for clients when they suspect it will be used in proxy battles.

The chief reason the Swiss will not change their secrecy code is that it has made them the custodians of a huge financial empire, given their tiny country 4,000 banks for a population of 5,000,000 --six times as many per capita as the U.S. They started their secrecy policy in the days of the Napoleonic Wars to guard the endangered fortunes of Europe's capitalists, in 1934 wrote it into law to protect the funds of victims of Nazi and Fascist persecution. Anyone can open a secret account in a Swiss bank, get a code number for all his transactions. The secrecy code is so stringent that the Swiss tax collector himself dares not inquire about a depositor's account.

Financial Shenanigans. But not even the Swiss deny that secrecy has sheltered some fancy financial shenanigans. Egypt reportedly financed arms deals through Swiss banks. Each year the Soviet Union ships about $100 million worth of gold to Switzerland, presumably to finance such undercover operations as its spying and propaganda network in the West, trade deals to get around the embargo on strategic goods. Such ousted rulers as Egypt's Farouk, ex-President Jacobo Arbenz of Guatemala and Argentina's ousted Dictator Juan Peron keep fortunes in Swiss banks all presumably pilfered from public funds. But sometimes the secrecy of Swiss banks defeats itself. Many an owner of a secret account has simply disappeared, leaving his money still on deposit. Estimated amount of unclaimed funds still in Swiss banks: $30 million.

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