Peeking into Those Swiss Vaults

Loosening the bank-secrecy laws in cases of insider trading

"This is a historic occasion," proclaimed Securities and Exchange Commissioner Barbara Thomas. "What we have done is got the Swiss to cooperate with us to help fight insider trading and preserve the integrity of international banking. I'm elated."

Thomas had good reason for elation. After six months of negotiation, the U.S. and Swiss governments last week jointly announced an agreement that will make it harder for criminals to hide behind Switzerland's strict banking-secrecy laws. The accord marks the first time that Swiss authorities have agreed to cooperate in tracking down those who break U.S. laws against trading securities with insider information. Said Thomas: "Insider trading has been proliferating at an alarming rate. But the agreement we have made with the Swiss should prove to be a significant deterrent."

In the past two years the Securities and Exchange Commission has prosecuted more cases of insider trading than it had in the previous 40 years. Two of the most important ones involved investors who had bought stock in St. Joe Minerals and Santa Fe International just before the companies became takeover targets. The traders then made large profits after the merger bids were announced. In both cases American investigators followed trails leading to Swiss banks.

Last week's agreement outlines a complicated procedure by which the SEC in cases of insider trading is allowed to make a formal request for information to Swiss authorities through the U.S. Justice Department. Under the new accord, Swiss banks will now ask customers who wish to trade in American stocks to sign a waiver that would allow the banks to reveal their names if they are suspected of insider trading. Without that waiver, Swiss financiers, under the country's bank-secrecy law, would face up to six months' imprisonment or a fine of up to 50,000 Swiss francs (about $23,600). Switzerland's famed banking-secrecy laws date back to 1934, when they were passed in order to protect Jewish account holders from Nazi persecution.

SEC General Counsel Edward Greene said that the new accord will make it easier to solve the cases quietly. Said he: "The alternative, if we suspect insider trading, is to sue the banks, which is public, freeze their funds, which is public, and subject them to embarrassment. The agreement provides a procedure whereby we can conduct an investigation privately and keep the funds frozen until we can work out disclosure of the information. The banks would rather work things out in private. So would we. And that's the beauty of this decision."

Nonetheless, some banking experts maintain that the agreement will not deter insider trading, but merely force the illegal transactions to be conducted in other banking havens, such as Liechtenstein, Panama or the Caribbean. Says Paul Erdman, a bestselling financial novelist (The Crash of 79, The Last Days of America), who spent ten months in jail for violating Swiss financial laws: "Insider trading will just have to be done a little more cleverly now."

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