When sanctions work

THERE IS A MORAL in the Swiss bank saga, say John Authers and Richard Wolffe

THE CLEAREST lesson from the Swiss banks’ $1.25bn settlement with holocaust survivors is this: threatening to impose sanctions can work.

Every important breakthrough in the negotiations came soon after threats from US local government officials to impose sanctions (banning, for example, Swiss banks from certain kinds of business in New York).

The settlement itself came two weeks before a threat to start the sanctions and a week after Moody’s, the rating agency, published a report saying that UBS, Switzerland’s (and Europe’s) biggest bank, might lose its triple-A credit rating if sanctions were imposed.

Given how rarely sanctions work (they seem to have done little or nothing to change the behaviour of Saddam Hussein in Iraq or Slobodan Milosevic in Serbia), it makes sense to ask why and how the threat of local-government sanctions have been so effective with the Swiss banks. This is the more important because the settlement could have implications for other European banks and companies being sued in the US over their actions during the second world war.

Obviously, Swiss banks are not like Iraqi or Serb dictators. They have boards of directors which must respond to shareholders’ concerns. All the same, it is not just a simple matter, when dealing with western companies, of threatening sanctions and expecting them to buckle. The US state department consistently opposed the threat of sanctions. Even Israel Singer, secretary-general of the World Jewish Congress, the principal pressure group acting for the holocaust survivors, frequently made known his distaste for them.

In order to make the threats credible, it was essential to co-ordinate and even limit them. This was the job done by Alan Hevesi, the comptroller of New York City, who was first brought into the campaign by Mr Singer in 1995.

Mr Hevesi spent two years building support among more than 900 officials across the US – mostly drawn from state and city treasurers and pension fund controllers. All of them frequently used the services of investment banks to access the capital markets.

The bulk of his time was taken up dissuading radicals from taking precipitate action. Mr Hevesi and his colleagues never barred Swiss banks from existing business. They merely set deadlines before sanctions would be imposed, in an attempt to increase the pressure on the banks’ negotiators. “I understood that there was always the possibility that the threat of sanctions was stronger than the actual imposition of sanctions,” he says.

Mr Hevesi points out that even when he and his colleagues announced sanctions in early July [1998], they continued to give the Swiss opportunities to compromise before sanctions came into operation. “We didn’t hit them at all for another two months, and we did it in four stages. But the sanctions were all increasing in severity, first on the banks and than later on Swiss business.”

But carefully calibrating the threat was not enough. Mr Hevesi and his colleagues also had to take into account the position of the US government. UBS and Credit Suisse said sanctions were unconstitutional, as foreign policy was the responsibility of the federal government, not states and cities.

Normally the US government would have dismissed the matter as a private lawsuit in which it had no part to play. It remained opposed to the threat of sanctions throughout. All the same, the state department agreed to get involved in negotiations. Indeed, it came close to brokering a settlement, and did lay down the structure for the deal that was eventually struck.

US officials justified their involvement on two different – and sometimes contradictory – grounds: that many thousands of holocaust survivors were now US citizens, and that the dispute threatened to harm relations with a trading and diplomatic partner.

Stuart Eizenstat, the deputy secretary of state concerned, says: “With sanctions, we had to keep our eye on the broader relations with Switzerland, as well as our interest in seeing that the survivors were dealt with fairly. We realised our two goals had inconsistencies, but our job was to narrow the inconsistencies.”

While the state department opposed sanctions throughout the talks, privately officials admit the threat of sanctions – not their imposition – helped bring the Swiss to a compromise. Even Mr Eizenstat, who strongly denies backing sanctions even behind the scenes, concedes that “sometimes having sanctions in the background can produce results, But it is a little bit like the atomic bomb. Once you drop it, there is an awful lot of collateral damage.”

The state department’s views help to explain why the settlement was mediated by a US judge, not a US diplomat. Edward Korman, the federal judge had more power to intervene in the dispute – and all participants agree this gave him a crucial advantage compared with the state department.

“The judge was reading the riot act in ways that I couldn’t. I was convinced that the power of the federal court could make threats to both sides, to make both of them take notice,” says Mr Eizenstat. “It was also important from the defendants’ standpoint that there was a court that was putting pressure on them. That was easier for them politically to go back to their people in Switzerland.”

In short, careful co-ordination, the circumventing of state-department objections and the power of the US courts were all vital in making sanctions effective. But the story still leaves two important questions unanswered.

First, will the US legal system be the forum for remaining holocaust-era disputes? Mr Korman did not think the case belonged in his court, and thought it should be settled. The lawsuits were never even registered as a class action.

The other is: was the settlement fair? Some estimates suggested that the debts of UBS and Credit Suisse to holocaust survivors could be as high as $16bn. If so, the Swiss drove a hard bargain. For $1.25bn, they prevented sanctions and also settled on behalf of the Swiss National Bank, which a Swiss historical panel showed handled far more stolen gold than any of the commercial banks.

On the other hand, an investigation by Paul Volcker, the former chairman of the US federal reserve, appears to have found barely SFr100m ($65.7m) in so-called “dormant accounts” in Swiss banks. This was a tiny proportion of the settlement agreed last month. On those grounds, the threat of sanctions extracted much more from the banks than could ever be proved as a debt.

It is true that the settlement covers more than dormant accounts. It is also true, as Michael Hausfeld, one of the plaintiff’s lawyers [right] puts it: “We said from the beginning and throughout that this was not just a matter of money. Once the psychological barrier [of $1bn] was broken, it was clear that the amount became a admission of guilt.”

All the same, mismatch between the Volcker report and the settlement would seem to vindicate the lawyers who insisted on litigation rather than consensus (Mr Volcker’s investigation was backed by the World Jewish Congress and the Swiss Bankers’ Association). It might also support the belief in Switzerland that the banks paid too much.   

RELATED ARTICLES  see panel below: Swiss “Holocaust” accounts values at $71m© Copyright the Financial Times Limited 1998

THIS JUST goes to show that Al Capone used the wrong arguments when the world’s press labelled him an extortionist and protection-racketeer. “You can get more with a kind word and a gun,” he used to say, “than kind word alone. . .”

Swiss Holocaust accounts values at $71m

  By Frances Williams in Geneva, David Buchan in Paris and Eric Frey in Vienna

THE VALUE of dormant Swiss bank accounts that may have belonged to Holocaust victims could be about SFr100m ($71m), far from the “billions of dollars” originally claimed by Jewish organisations.

If the estimate – the preliminary result of a detailed audit of Swiss bank records – is correct, last month’s deal between Switzerland’s two big banks and victims’ lawyers doubled the amount the banks earlier offered to resolve the issue of the victims’ assets.

UBS and Credit Suisse reached a $1.25bn “global settlement” with US lawyers representing thousands of Holocaust victims and their relatives, to settle all present and future Holocaust-related claims against Swiss banks, industry and the Swiss state.

In June the banks offered $530m, plus whatever sum was found by the audit being carried out under the auspices of a committee chaired by Paul Volcker, former head of the US Federal Reserve Board. In the event, a lump-sum payment was agreed. Jacques Rossier, of Geneva-based bank Darier Hentsch, said this week that the amount owing as a result of the Volcker inquiry, due to be completed by the end of this year, would be relatively small.

Mr Rossier, who is handling the dormant account dossier for Switzerland’s private bankers, said this week that the Volcker committee had so far found “no evidence of systematic misappropriation of funds” by the banks, as some Jewish representatives have claimed.

Some of the victims’ lawyers argued that the Volcker commission’s task was complicated by the possible loss or destruction of documents over the past 50 years.

Mr Rossier said some dormant accounts missed by previous trawls could be uncovered but were expected to be worth no more than several million francs.

The Swiss banks have already published the names of foreign holders of unclaimed accounts worth about SFr70m, of which some 10-15 per cent may have belonged to Holocaust victims. These accounts are likely to have interest added at the rate of about 3.5 per cent a year, multiplying their value roughly by eight.

This would result in a total restitution of around SFr100m for identified Holocaust-related accounts. Nine out of 10 of all known dormant accounts are held with the two big banks. In another move towards the resolution of grievances dating from the second world war, the US, France and Britain will wind up a tripartite commission on the restitution of gold looted by the Nazis at a ceremony today in the French foreign ministry.

Since 1946 the commission has returned some 337 tonnes of gold to 11 countries occupied by the Nazis. Its archives will be opened to the public. The Austrian government also plans to return almost 1,000 works of art from the collection of the Museum of Art History in Vienna taken from Holocaust victims.

The Cabinet is expected to approve the plans tomorrow.

RELATED ARTICLES  When sanctions work [above]     © Copyright the Financial Times Limited1998