Last night, I shared a glass over Zoom with my old friend Ned, whom I met when he was my compliance officer at our old bank in London. Compliance officers are the trading floor’s cops; they ensure no funny business is happening.

“Seanie, I need to see your trade blotter for today,” he’d say as I’d frantically fill in the details I had missed during a fast market.

We’ve been friends for over twenty years now. He traded in his most excellent Tabard Street flat (oh, the parties there!) for a house in the country with his lovely wife and two beautiful daughters. The last time he’d seen my son was at his wedding when Micah was only 5 months old.

Ned’s still in the business as a compliance officer for one of the U.S. megabanks in London, commuting only three days a week while working home the other two.

I must admit I get a bit envious when I hear my old friends still working at the center of it all… for about ten minutes. Then I realize how lucky I am not to be there.

I relay all this to you because Bill Hwang's sentence of 18 years in prison, speaking to Ned, and reading about Morgan Stanley’s private banking mess in the Journal today brought me back to the heady days when I was amongst it all.

The Preface

After I left my job as a broker in London, I went into financial training. But a few years later, I stupidly returned to my old bank in a “talent development” role in Hong Kong. There, I got my first taste of private banking, something very different from what I had done in London.

Private banking services high net worth individuals (HWNIs) and ultra-high net worth individuals (UHNWIs). After you’ve got about $3 million in investible assets, not including your primary residence, you’re an HWNI. After $30 million, you’re an UHNWI. (Those numbers vary somewhat on the bank.)

The referenced Journal article opens this way:

Morgan Stanley discovered last year that a yearslong brokerage customer had been convicted in 2005 in a U.S. court—for lying about terrorism investigations—and had links to al Qaeda bombings of U.S. embassies.

The bank informed law enforcement and shut down the accounts. By then, at least tens of thousands of dollars had been withdrawn from ATMs in Pakistan.

It wasn’t a rare oversight.

They never are. Trust me, I worked for a Swiss bank.

Let’s open the kimono on this murky world, so you understand where not to put your money.

A Velvet Rope in Front of a Questionable Facade

Private bankers are incentivized to offer seamless, all-encompassing solutions for their wealthy clients. In doing so, they often cultivate close relationships with their clientele—relationships where discretion isn't just a courtesy; it's part of the business model.

This discretion, however, opens the door to temptations that stretch the boundaries of legality.

The Regulatory Dilemma: KYC and Source of Funds

Banks are legally obligated to follow Know Your Customer (KYC) protocols to prevent financial systems from becoming conduits for money laundering and other illegal activities. KYC verifies a client's identity, understands the nature of their financial activities, and assesses potential risks of unlawful behavior.

The most crucial aspect of KYC is identifying the source of funds. Where did the money come from?

Was it through legitimate business operations, investments, or inheritances? While the intent is to ensure transparency, this process often falls short in practice.

Why? Private banks are businesses first and regulators second. The temptation to onboard wealthy clients—especially those bringing massive deposits—outweighs compliance considerations. For instance:

Wealthy individuals often conceal their assets through shell companies, offshore trusts, and other vehicles. Private bankers may overlook red flags to maintain lucrative relationships.

In the cutthroat world of wealth management, refusing a client because their money seems “a bit dodgy” could mean losing that client to a less scrupulous competitor.

Bankers are also evaluated on their ability to attract and retain assets. When performance targets loom large, the incentive to look the other way grows stronger.

Asset Protection: A “Legitimate” Gray Area

One of private banking’s main attractions is asset protection, a broad category encompassing portfolio management, tax avoidance, succession planning, and philanthropy. While these services are theoretically legitimate, they can sometimes tread dangerously close to dubious territory.

Portfolio Management

Private banks offer customized investment strategies to grow clients' wealth. Whether diversifying into alternative assets like hedge funds or targeting emerging markets, the bank's role is first to protect assets and then grow them.

The gray area arises when private bankers structure investments in opaque ways to minimize scrutiny. For example, some may recommend investments in offshore jurisdictions with lax reporting requirements, making it harder for tax authorities to understand the client’s portfolio.

Tax Avoidance (Not to Be Confused with Tax Evasion)

One of the biggest draws of private banking is tax efficiency. Tax avoidance is legal. Tax evasion is not. 

Avoidance involves using loopholes and incentives within the law—think offshore trusts, holding companies, and dual-residency status.

Tax evasion involves failing to report income or using fraudulent methods to reduce tax liability.

Succession Planning

Succession planning is another cornerstone of private banking. It ensures a client’s wealth is passed to heirs with minimal legal or tax complications. Private banks often structure trusts to transfer assets without going through probate (the courts).

While this service seems innocuous, it can mask questionable activities. Clients could use a trust to launder money by distancing it from its source while ensuring it remains under the client’s control.

Philanthropy

Philanthropy is marketed as the ultimate noble endeavor in private banking. Setting up charitable foundations allows HNWIs to give back to society while enjoying tax breaks.

However, not all philanthropy is pure-hearted. Some wealthy individuals use charitable foundations for tax avoidance or reputation laundering.

Why Private Banks Are Tempted to Bend the Rules

HNWIs operate where influence, secrecy, and efficiency are paramount. They expect their bankers to deliver results without raising inconvenient questions. A client threatening to pull their funds could make even the most ethical banker hesitate before flagging a suspicious transaction.

Private banks derive significant income from assets under management (AUM). A single wealthy client contributes millions in fees annually. Losing that client over compliance issues directly hurts the bottom line.

The exclusivity and personal relationships that define private banking can foster a culture of collaboration. When clients and bankers dine, vacation, and engage in social circles, the line between professional and personal loyalty can blur.

In 2015, HSBC’s Swiss private banking arm helped clients evade taxes by concealing assets in secret accounts. Internal leaks showed that HSBC actively aided clients in circumventing tax authorities while turning a blind eye to suspicious activities. 

In 2018, the Estonian branch of Danske Bank laundered over €200 billion through high-net-worth accounts. Weak KYC protocols and negligence were at the heart of the scandal.

Wrap Up

Private banking creates exclusivity. But it’s not supposed to do that at the bank’s risk.

At its best, private banking offers asset protection, efficient tax planning, and legacy building. 

At its worst, it facilitates money laundering, tax evasion, and reputational cover-ups.

Nothing will change until laws are enforced and bad bankers go to jail.