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Δευτέρα 24 Οκτωβρίου 2016

Dark money: London’s dirty secret

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An insider at a Swiss bank warned Britain's financial watchdogs that bankers in its UK office were offering services that could facilitate tax evasion and money laundering. Did the regulators turn a blind eye? The FT investigates the City's role as a global hub for illicit finance.

Tom Burgis/ FT

©Harry Haysom

One Monday in March last year, an announcement by the US justice department caught the attention of a former employee of the Swiss bank BSI. BSI's bosses had agreed to violate the first rule of Swiss banking. To escape prosecution for abetting tax evasion, the bank would disclose the names of its clients and reveal the tricks it had used to hide their wealth.

The former BSI employee, who asks to be referred to only as Andrea, had worked in the bank's UK office on Cheapside in the heart of the City of London. In 2008, Andrea was among the industry insiders who were starting to worry about London's role as a global hub for illicit finance. That September, Andrea had warned the UK's financial watchdogs that BSI bankers were using secretive techniques that could allow clients to conceal assets, potentially facilitating tax evasion and money laundering. The regulators took no public action against the bank and, as far as Andrea knew, no private action either.

Andrea had been spurred to contact the City's regulators by a US Senate inquiry into tax evasion. Drawing on the testimony of a whistleblower from UBS, the biggest Swiss bank, the inquiry had exposed some of the chicanery that Swiss bankers used to help their clients hide money. A criminal investigation followed and in 2009 UBS paid a $780m fine to avoid prosecution for complicity in tax evasion. From there, the prosecutors' campaign widened dramatically.Credit Suisse, UBS's main rival, pleaded guilty to conspiring to help Americans evade tax and paid a $2.6bn fine. The onslaught brought down Wegelin, the oldest Swiss bank, which closed its doors in 2013 after 272 years in business. Its final act was to plead guilty to US charges of tax fraud.

In the wake of Wegelin's demise, the US justice department launched a scheme that encouraged Swiss banks to make a clean breast of their complicity in tax evasion. In exchange, the US would forgo criminal charges. Dozens of banks applied. At the time, BSI's owners were trying to close a deal to sell the bank. They knew they would only be able to do so once it had settled with the US. So BSI became the first Swiss bank to come to terms under the new scheme. The bank agreed to pay a fine of $211m, nearly three times its 2013 net profit. It also consented to hand over the account details of clients who should have been paying US tax, to make a "complete disclosure" of its cross-border banking activities, and to inform US prosecutors about any other banks that it knew had moved money into secret accounts.

The settlement documents laid out some of the techniques BSI had used. They closely resembled those described in Andrea's tip-off to the Financial Services Authority, the City watchdog, and HM Revenue & Customs, the UK's tax authority.

BSI bankers, the US settlement documents revealed, had registered client accounts to "sham entities". These were essentially front companies, registered in places such as the British Virgin Islands and Liechtenstein. They used a series of legal manoeuvres to conceal the fact that their true owners were the bank's American clients. When clients wanted to shift money back into the US, BSI bankers used a variety of subterfuges. In one, the bank would issue clients with prepaid debit cards loaded up with money from their Swiss account. The client's name did not appear on the card. That left clients free to spend without leaving clues for the taxman. When clients needed BSI to top up the cards, they sent word in code. "Could you download some tunes for us?" asked one. Another winked, "Gas tank still running on empty."

It was crucial to avoid a paper trail that might allow the authorities to spot a connection between a US taxpayer and a secret account. For an extra quarterly fee, the bank would refer to clients only by a code name on all documents relating to their Swiss accounts. More than a third of the bank's American clients — there were 3,500 in total, with $2.8bn in declared and undeclared accounts — used this service. Two-thirds gave "hold mail" instructions, meaning that nothing should be sent by post to the client's home address. If necessary, BSI bankers would fly from Switzerland to the US to hand-deliver account documents.

Announcing BSI's settlement, Stuart F Delery, then number three at the justice department in Washington, called the initiative to settle with Swiss banks "an innovative effort to get the financial institutions that facilitated a massive fraud on the American tax system to come forward with information about their wrongdoing — and to ensure that they are held responsible for it".

In an age of austerity, protesters had railed aqainst financial structures that they believed kept the rich wealthy at the expense of other taxpayers. Now here was what might have felt to them like a counterpunch against "the 1 per cent". It was as if Thomas Piketty, the economist whose book on inequality had been a runaway bestseller, was meting out justice.

For Andrea, the contrast between the American and British responses to BSI's activities was striking. A 2002 UK statute obliges anyone who suspects they are witnessing transactions involving the proceeds of crime to notify the authorities, even if they have no hard evidence of wrongdoing. That is what Andrea had done in 2008 — and received assurances from the watchdogs that they were on the case. "Rest assured," wrote one investigator, "we are taking your information seriously and will use this as the basis for further investigation." Andrea handed over internal BSI documents to them and sent emails expanding on the initial warnings.

Andrea left BSI shortly after first contacting the regulators but continued to press them to act. Over the months and years that followed, however, Andrea came to the conclusion that the City's watchdogs were not going to bite. It seemed to Andrea that they were content to turn a blind eye to conduct that their American counterparts considered to be serious crime in the US.

. . . 

Founded in 1873 in the lakeside Alpine city of Lugano as Banca della Svizzera Italiana, BSI ranks among the top 10 Swiss banks. It manages $80bn for some 125,000 clients. It has 2,000 staff and 400 "relationship managers" in offices in Europe, Asia, Latin America and the Middle East. On its website, BSI says it seeks to be "vitally important" to its clients. Until 2008, scores of those clients, including Russian oligarchs and an Arab prince as well as Britons, dealt with the bank's London office. Internal documents from that office, seen by the Financial Times, reveal details of the financial secrecy services that were on offer, just 300 metres from the Bank of England, to the rich, the powerful and, possibly, the criminal.

Many clandestine financial structures are legal to create but, in unscrupulous hands, they can be tools for all manner of financial misdeeds, from bribery to tax fraud. A succession of scandals has raised awareness of the ways in which the western banking system has assisted the world's kleptocrats and tax dodgers. International reforms to force greater transparency on the most secretive offshore centres are gathering support. After last month's Panama Papers leak, David Cameron felt first-hand the public anger about hidden financial dealings as his own family's offshore interests were exposed. On Thursday, the prime minister will seek to burnish his legacy by advancing the transparency campaign as the host of an anti-corruption summit in London.

Cameron has spoken out in the past about tackling abuses of the financial system. In a speech last year, he declared: "I'm determined that the UK must not become a safe haven for corrupt money from around the world."

But those whose job it is to fight corruption raise a troubling question: what if that is precisely what has already happened?

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By the time they graduated from the economics department of Essex university in 2000, Khofiz Shakhidi and Abdumalik Mirakhmedov had already dabbled in business together. They served as directors of a shortlived venture called Newman Solutions Ltd. It is not clear from corporate filings what this company did and it was struck off as defunct in 2001. But the pair, both of whom appear to be of central Asian origin, were destined for bigger things. Over the years that followed, Shakhidi and Mirakhmedov would travel the world, mingle with magnates — and have ringside seats at a scandal that would shake the City. Slim and ambitious, Shakhidi took a job in 2002 as a private banker at BSI's London office. Mirakhmedov, close-cropped and serious-looking, found employment closer to his roots. In 2000, he signed up to work for three central Asian businessmen who had made billions by snapping up chunks of resource-rich Kazakhstan's economy as communism collapsed in the 1990s. They were laying the foundations for a multinational mining company called Eurasian Natural Resources Corporation (ENRC). Mirakhmedov was assigned to the ferro-alloys division.

Shakhidi and Mirakhmedov's paths remained entwined after leaving Essex. Mirakhmedov's day job may have been at ENRC but he was also, the BSI documents reveal, under contract to the bank. He and his old classmate formed a sort of double act.

The currency of private banking is personal connections. To keep up the flow of new clients, BSI's London office recruited what it called "promoters". These were essentially intermediaries between the bank and the rich. Promoters' contracts stipulated that they were not allowed to present themselves as BSI employees but were guaranteed a share of the proceeds the bank made managing the money of clients they brought in. In the US, these middlemen were called "external asset managers". Prosecutors there identified them as having played a key role in the tax evasion schemes BSI provided for its clients.

In 2002, Mirakhmedov joined BSI London's roster of promoters. And he was not just any old promoter. Mirakhmedov was a star. "He's a friend of everybody, a fixer," says a person familiar with BSI's London operation.

Mirakhmedov used an address in Uzbekistan and, at some point, acquired a passport from St Kitts and Nevis, Caribbean islands that sell citizenship to wealthy foreigners (a practice the US describes as "attractive to illicit actors"). Evidently, Mirakhmedov enjoyed access to the global class of what bankers call "high-net-worth individuals". He brought in at least 19 clients with $47m in assets, making him one of BSI London's most valuable promoters, according to internal documents.

By 2006, Mirakhmedov had earned a raise. Under a new contract, he would receive 35 per cent of the income on client accounts he brought in for BSI, rising on a scale until, for client assets of more than $500m, bank and promoter would split the takings 50/50.

And there was a sweetener in the contract, one that indicates that BSI preferred to use a promoter even when it had already identified the new clients it wanted. According to the contract, Mirakhmedov would automatically receive a 50 per cent share of revenues if he signed up any of four named Russians, two of whom ranked among the wealthiest tycoons in Vladimir Putin's Moscow. (At least one appears to have become a BSI client, with a Swiss account held via a Guernsey trust.)

Sometimes working in tandem with Mirakhmedov, sometimes on his own, Shakhidi demonstrated a talent for courting clients from the former Soviet Union. By 2006, he had his sights on some new, heavyweight targets — Mirakhmedov's employers.

That September, Shakhidi boarded a KLM flight for Almaty, the Kazakh metropolis framed by snow-topped mountains. On arriving, he checked in to the luxury Hyatt hotel and prepared to attend a high-society wedding. The 24-year-old groom was called Davran Ibragimov; his father, Alijan, was Shakhidi's target.

Alijan Ibragimov was one of the three oligarch founders of ENRC. The trio, as they were known, were riding high. Prices for the commodities that ENRC mined were booming. In 2006 it reported revenues of $3.3bn.

BSI emails show Shakhidi was confident that a plan to list ENRC's shares on the London Stock Exchange the following year would prove a spectacular success. He believed that winning Ibragimov as a client and securing other business connected to ENRC could bring in at least $85m of assets for the bank. But his bosses were nervous.


The Hyatt hotel in Almaty, Kazakhstan, where Khofiz Shakhidi stayed during a trip to seek new clients

BSI had taken on lots of clients from Russia and other post-Soviet states where the mixture of politics and business tainted many a fortune. It had already managed accounts for members of Ibragimov's family, partly thanks to an introduction from Mirakhmedov, but had closed them in 2004. A background check by a British business intelligence firm in 2003 had warned about suspicions of money laundering in relation to Ibragimov. (Similar allegations against the trio by Belgian prosecutors would be settled in 2011 with the payment of a fine and no admission of guilt.)

The private investigators reassured BSI that "our contacts advise that [Ibragimov] should not be seen as worse than any other" leading businessman in the region. Nonetheless, around the start of 2006, when Shakhidi tried to get BSI's Lugano headquarters to approve Ibragimov as a client, the bosses had deemed it too risky. Shakhidi was not deterred. In emails, he repeatedly urged them to change their minds. Following ENRC's London listing in December 2007, he appears to have convinced them to accept funds linked to the trio.

©Kommersant Photo

Alijan Ibragimov, one of ENRC's founders

The internal BSI documents do not confirm that the bank signed up Alijan Ibragimov himself. But they reveal that BSI's London office gave a work placement to another of his sons in May 2008. The documents also indicate that BSI won business from other relatives of the ENRC trio. And they show that BSI's UK unit handled offshore vehicles for Mehmet Dalman, a Cyprus-born investment banker who became a non-executive director of ENRC when it listed in 2007 and chairman in 2012.Ibragimov and Dalman did not respond to questions from the FT.

ENRC's London flotation propelled the company into the FTSE 100. But the trio's triumph soon soured. Their tussles for control of the company with the directors appointed following the listing triggered messy boardroom battles. Investors lost heavily as the shares tumbled. Some, including City analysts and business professors, took the admission of ENRC and other contentious companies to the British bourse as a sign that London was letting its standards slip in its eagerness to win business from fast-growing emerging markets.

Worse was to follow. In 2013, the UK's Serious Fraud Office announced a criminal investigation into allegations of fraud, bribery and corruption at ENRC. The company denied any wrongdoing — and departed London. The trio, along with the Kazakh government, took ENRC private again, buying back shares at half the price at which they had listed six years earlier.

The criminal investigation is still ongoing. It relates in part to ENRC's acquisition of African mining assets following its London listing. Those deals have attracted attention — including from a panel led by former UN chief Kofi Annan — to a series of secretive offshore transactions through which ENRC bought Congolese copper rights from Dan Gertler, an Israeli mining tycoon close to the country's president. Gertler has denied any wrongdoing.

There is nothing in the BSI files to show that the bank played a part in any alleged wrongdoing at ENRC. But they do offer a glimpse into an opaque financial world linked to the company — a glimpse that the UK authorities might have gained had they followed Andrea's tip in 2008.

. . . 

Between 2000, when BSI signed up Mirakhmedov as a promoter, and 2008, when the leaked documents end, the files show that the bank helped him construct and maintain an offshore network wrapped in layer upon layer of secrecy. During this period, Mirakhmedov was rising through ENRC's ranks. He spoke for the company at conferences, dressed in a pinstriped suit.

Files from BSI's London office show that Mirakhmedov was linked to at least three offshore companies. One of them changed names, from Mayfair Solutions Ltd to Private Equity Group Ltd, while maintaining its registration in the British Virgin Islands, a favoured destination for those seeking to disguise their ownership of companies. Wealth Management Group Ltd, the vehicle through which Mirakhmedov signed his 2006 promoter agreement with BSI, was registered to a post-office box at an address used by multiple companies in Belize.

Shell companies behind shell companies, as well as nominee directors provided by law firms, added more disguise to Mirakhmedov's holdings. For him as for other clients, BSI turned to a Panamanian law firm to supply the nuts and bolts of secrecy. Not Mossack Fonseca, whose files formed the vast Panama Papers leak of the past month, but another leading firm in the former Spanish colony, Alemán, Cordero, Galindo & Lee.

In one typical example, Alemán lawyers conducted a series of five interrelated transactions in a single day. First, they incorporated a new company in the British Virgin Islands, where corporate records are closely guarded. Next, they appointed Alemán agents as directors. Those directors arranged for the BVI company to issue 50,000 shares and transferred them to a company in Panama controlled by Alemán. That Panama company then signed declarations that it held those shares on behalf of Mirakhmedov and an associate. Finally, the BVI company granted the two men power of attorney over its affairs. By the end of the day, Mirakhmedov enjoyed control of an offshore company in which his interest was visible only to those privy to the law firm's confidential files. Alemán did not respond to questions about its work for BSI clients.

In 2008, another BVI company linked to Mirakhmedov signed a confidential deal under which it would receive $150,000 a year from a company in the Marshall Islands in the Pacific as consultancy fees for an unspecified "project". The Mirakhmedov company signed with a BSI address in Switzerland; the Marshall Islands company provided a Latvian account number at the Ukrainian-owned Privat Bank, an institution that would years later become notorious for its alleged role in one of eastern Europe's biggest money laundering scandals. The two-page agreement does not name a single person.

Mirakhmedov's relationship with BSI appears to have continued beyond 2008, when the documents end. They indicate he was among the promoters the bank was keen to retain. By 2013 he had been elevated to ENRC's executive committee, in charge of sales, marketing and logistics. He stepped down in 2015, reportedly moving to another company owned by the trio.

Although the documents do not show Mirakhmedov as having done anything illegal, they invite questions about why City bankers and their clients feel the need to add so many opaque veneers to their activities.

Eurasian Resources Group, the successor company to ENRC, did not respond to questions from the FT, including ones about whether ENRC made use of any of Mirakhmedov's offshore companies. It did not respond to a request to pass questions to him and the FT was unable to reach him directly. Attempts to obtain comment from Shakhidi were unsuccessful.

. . . 

The BSI files provide an insight into a phenomenon that was widespread before 2008 but has only begun to stir public outrage in the years since the financial crisis: very large amounts of money moving around the world incognito.

Clients of BSI's London office took advantage of services that could hide their identities. They asked for "hold mail" secrecy, the technique that avoids a paper trail. Many London clients, the documents show, also had American Express or Barclays credit cards linked to an offshore company, some with credit limits in six figures.

Experts on financial secrecy tend to agree that the key to understanding whether such secretive services are likely to be used for nefarious purposes is this: how much did the bank know about the client and the source of his or her funds?

Client lists for BSI's London office are peppered with names that might have been expected to cause concern. They include those of a construction magnate from the Balkans implicated in an alleged kickback scheme tied to Boris Yeltsin's Kremlin and an art-dealing Qatari royal described as a "modern-day Medici", who faced corruption allegations (though only after his BSI account was closed in 2004).

One London-based BSI banker ran an account (via Zurich and Gibraltar) for a Russian-Ukrainian businessman. A 2002 due diligence report on the client informed the bank that, while there was no further information linking the client to "criminal activities or associations", he had a known connection to the St Petersburg mafia. A handwritten note in the margin, apparently penned by a BSI banker, dismisses the "tenuous link" as "not relevant".

©Jason Hawkes

Britain's private bankers manage $1.65tn of client assets, the biggest tally after Switzerland. That is enough money to buy Apple three times over

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By definition, we do not know how much money passes through the hidden conduits of the global financial system. Gabriel Zucman, a French economist who studied under Piketty, estimated last year in his book The Hidden Wealth of Nations that tax havens hold $7.6tn, equivalent to the entire US budget for two years. While the vast leak of confidential documents from Panama has reinforced the notion that such outposts are the core of the secrecy industry, some experts argue that the real capitals of clandestine finance are in much less exotic places.

Britain's private bankers manage $1.65tn of client assets, according to the professional services firm Deloitte, the biggest tally after Switzerland. That is enough money to buy Apple three times over. The City is intimately connected to British Crown dependencies and overseas territories such as Guernsey and the Virgin Islands that supply front companies, anonymous trusts and other types of financial camouflage.

"If you lump them all together," says Alex Cobham, head of research at the Tax Justice Network campaign group, "the British secrecy network is the biggest in the world." The National Crime Agency estimated in a report last year that "hundreds of billions of US dollars of criminal money almost certainly continue to be laundered through UK banks, including their subsidiaries, each year".

Defenders of offshore secrecy argue that it can have legitimate purposes, such as, say, allowing a politically active businesswoman in Belarus or Egypt or Venezuela to ensure that, even if the authorities come for her, they will not be able to track down the funds she has hidden away to provide for her family.

But Andrea, for one, struggled to think of legitimate reasons why clients of BSI's UK unit went to such trouble to shroud their banking affairs in secrecy. Even before Andrea contacted the British regulators, BSI had attracted the authorities' attention. Between 2003 and 2005, the FSA reviewed the private banking operations of the bank's London office. According to a person with knowledge of that investigation, a 10-strong team from the regulator pored over the bank's client records. The investigation ended with no public sanction, but the bank was ordered to improve its procedures for screening clients from "high-risk jurisdictions", a term used to refer to countries where corruption is rife.

By the time of Andrea's disclosures to the City's watchdogs in September 2008, BSI's London office was in its final weeks, the internal documents show. The bank had already moved all client money held in the UK to Swiss accounts. Then, Generali, the Italian insurer that owned BSI at the time, decided to end the bank's formal presence in London altogether (though it retained its own UK office).

BSI did not, however, sever relations with the clients it had served from London. On the contrary, bankers in the London office wrote to clients and promoters telling them that their relationship with the bank as a whole would not be affected. Shakhidi and some of his colleagues in London moved to BSI's Monaco office. Others from BSI London went to Dubai or took redundancy.

Perhaps the reason any investigation into BSI stemming from Andrea's warning came to nothing was that the regulators deemed that the bank had done nothing wrong.

"We do not comment on our interactions with the authorities," BSI told the FT in answer to questions about whether the regulators had contacted the bank following Andrea's warnings. "But we can confirm that BSI is strongly committed in [anti-money laundering] controls and co-operates with the authorities if and when requested."

Hundreds of billions of US dollars of criminal money almost certainly continue to be laundered through UK banks each year

- National Crime Agency report

The FT also asked the bank about the ENRC trio and its relationship with politically connected clients, about Mirakhmedov's offshore vehicles and about other secrecy services that BSI provided. The bank responded that "it is not our practice to give such details" and that BSI was "prohibited by [Swiss] law" from commenting on whether or not a particular person or entity is a client.

The FT sent questions to the Financial Conduct Authority (the FSA's successor) and HMRC about their promises to Andrea to investigate BSI's activities in London.

The City watchdog said: "The FCA, and previously the FSA, cannot confirm or deny any investigation. We are also prevented [from] commenting on any specific firm issues or any dealings we may or may not have had with individual employees."

The tax authority said it received 86,000 leads last year, adding: "HMRC do not comment on individual taxpayers. We receive information from a very wide range of sources and we always use this information to identify abuse and intervene to ensure the tax laws are respected and that everyone pays what they owe."


Margaret Hodge chairing parliament's public accounts committee in March last year

Concerned that the regulators were not going to act, in July 2014 and twice thereafter Andrea wrote to Margaret Hodge, who then chaired parliament's public accounts committee. Hodge had used the committee to vent public anger over tax dodging. In one memorable exchange, she roasted tax officials after only a single prosecution resulted from the revelation that thousands of Britons had held undisclosed accounts at HSBC's Swiss bank. But Andrea's correspondence was overlooked in the hectic final months of Hodge's tenure, which ended at last year's election. Hodge says she regrets a missed opportunity.

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One person familiar with BSI's operations (who, like many of the bank's clients, insisted on anonymity) says Swiss banks have been unfairly singled out for criticism. He points out that the US state of Delaware allows the incorporation of vast numbers of companies whose true owners are hidden. "The real problem in the City of London", he contends, "is not Swiss banks but the US and UK ones."

Asked about some of the details in the BSI files, this person says the bank's checks on prospective clients' probity were "stringent". He says practices such as hold mail were standard across private banking in the years that BSI maintained its London office. "Most banks in the City of London had oligarchs and PEPs [politically exposed persons] amongst their clients, including major UK banks. Things have changed since, and certain practices which were allowed at the time have been criticised and as a result discouraged. However, law does not apply retroactively."

Some critics perceive a cynical rationale to the British authorities' apparent reluctance to counter flows of dirty money into the UK. They are, after all, precisely that — flows of money into the UK.

The US went after the financial secrecy provided by BSI and others because they were directly depriving the American treasury of revenue. But if the BSI files and other leaks are any guide, many of the customers for secrecy services offered in the City are not British. So if those clients are evading taxes, they are defrauding not the British exchequer but the treasuries of Ukraine or Nigeria or Pakistan. Likewise, laundered money might be blamed for making property unaffordable, but it is also boosting the assets of affluent voters. Russian fortunes might be linked back to Putin's circle, but they bring some fine footballers to the Premier League. All of which leaves those who study illicit finance wondering whether the UK really wants to clean up the City.

"The concern is that the UK is a black hole," says a British barrister who specialises in money laundering and tax evasion. Roberto Saviano, a best-selling author on organised crime, has said of illicit financial flows through the UK: "The British treat it as not their problem because there aren't corpses on the street."

In the 14 months since it settled with the US, BSI has changed hands twice. First, as soon as the bank had reached its settlement, Generali sold it for SFr1.25bn (£900m) to Brazil's BTG Pactual. Then, last November, BTG suffered a crisis when its boss, André Esteves, stepped down to fight charges that he tried to obstruct the investigation into a corruption scandal that has convulsed Brazil. BTG sought to sell assets and, in February, EFG International, which has its headquarters in Zurich and wealth management units from Singapore to the Cayman Islands to Mayfair, agreed to buy BSI for SFr1.3bn. If completed, the deal will create one of the biggest Swiss private banks, managing $170bn.

EFG, BTG and Generali — none of which answered questions from the FT — are already grappling over who is responsible for liabilities arising from BSI's past conduct. An investigation into allegations of corruption connected to the Malaysian state investment fund 1MDB has revealed that BSI's Singapore unit handled accounts related to the fund. Yeo Jiawei, a former banker from that unit, was last month charged with money-laundering offences in Singapore. The bank has not been accused of wrongdoing but its past and present owners have each argued that one of the others should be on the hook if there are fines to be paid.

Some 80 Swiss banks ended up following BSI's lead and striking deals with the US. That, alongside international agreements to share tax information and moves to combat the use of shell companies, has prompted suggestions that a new era of transparency is at hand. But clandestine finance has been challenged before — and it has evolved. Nearly eight years after warning that the City's integrity was at risk, Andrea, now retired, has little time for suggestions that secrecy is on the way out. "That is to ignore the lessons of history."