UCB Basel (1970), Lloyds Lugano (1974), and the 1988 Shakarchi Inquiry

Lloyds Lugano was one of several banking controversies that challenged Switzerland’s reputation. Between 1970 and 1989, Switzerland’s position as a lightly regulated crossroads for international commodity trading, post-Bretton Woods foreign-exchange dealing, and physical banknote and gold brokerage generated three landmark corporate and political scandals. In September 1970, United California Bank in Basel AG—formerly Salik Bank, run by American economist Paul Erdman—collapsed with more than $40 million in concealed cocoa and silver futures losses, creating an early test of parent-bank cross-border responsibility. Four years later, in August 1974, twenty-eight-year-old chief currency dealer Marc Colombo confessed to hiding CHF 222.3 million (£33 million, or roughly $78 million) in unauthorized forward foreign-exchange losses at the Lugano branch of Lloyds Bank International. Finally, in late 1988, the “Lebanon Connection” investigation into money-laundering allegations involving Zurich bullion and currency house Shakarchi Trading AG forced the resignation of Switzerland’s first female Federal Councillor, Justice Minister Elisabeth Kopp, and propelled the enactment of Article 305bis of the Swiss Criminal Code criminalizing money laundering. ^[1]

1970: Paul Erdman and the United California Bank Basel Cocoa Crash#

The first shock began in 1965 when Paul E. Erdman—a Stanford-educated American economist—and California electronics financier Charles Salik founded Salik Bank in Basel AG as a boutique Swiss merchant bank serving wealthy cross-border clients. Seeking the backing of a major American commercial banking group, Salik sold a controlling 58 percent stake (soon raised above 80 percent) in 1969 to Los Angeles-based United California Bank (UCB), the flagship subsidiary of Western Bancorporation, then one of the largest bank holding companies in the United States. Renamed United California Bank in Basel AG with Erdman serving as president and chief executive, the bank enjoyed the prestige of a major U.S. parent while operating under the decentralized cantonal and federal reporting regime of the Swiss Federal Banking Commission (Eidgenössische Bankenkommission / EBK). ^[2]

Behind its conservative Basel facade, UCB Basel’s trading officers embarked on massive, unauthorized speculative positions in the London and New York cocoa futures and international silver markets during 1969 and 1970. Betting that global cocoa bean prices would move in their favor, bank officers accumulated forward commodity contracts dwarfing the bank’s modest equity capital. When world cocoa prices swung sharply against their positions in the spring and summer of 1970, traders and executives concealed the mounting margin calls through fictitious client accounts, unrecorded forward commitments, and falsified interim balance sheets. ^[3]

In late August and early September 1970, the losses could no longer be hidden: UCB Basel halted operations with a balance-sheet hole of roughly $40 million (over CHF 170 million), more than wiping out its capital and reserves. Basel cantonal prosecutors arrested Erdman and six fellow officers on charges of criminal mismanagement and falsification of documents; Erdman spent ten months in Basel’s Lohnhof prison—where he famously passed the time drafting his bestselling 1973 financial thriller The Billion Dollar Sure Thing—before being released on bail and convicted in absentia in 1973. For international central bankers, the crucial precedent was set in Los Angeles: although UCB Basel was a separately incorporated Swiss joint-stock company with limited liability, the U.S. parent bank, United California Bank, voluntarily absorbed the entire $40 million loss to protect its standing in the international interbank market, establishing a de facto norm of parent-bank moral responsibility that informed the 1975 Basel Concordat. ^[4]

1974: Marc Colombo and the CHF 222.3 Million Lloyds Bank Lugano FX Fraud#

While the UCB Basel affair exposed lax oversight of foreign subsidiaries in commodity futures, the collapse of the Bretton Woods fixed exchange-rate system between 1971 and March 1973 unleashed unprecedented volatility in spot and forward foreign-exchange markets. Following the June 26, 1974 failure of West Germany’s Bankhaus Herstatt, international confidence was shaken a second time in August 1974, when London-based Lloyds Bank International (LBI) disclosed that its small sixteen-person branch in Lugano, in Switzerland’s Italian-speaking Canton of Ticino, had suffered losses of approximately £33 million (CHF 222.3 million, or roughly $78 million) in unauthorized foreign-exchange trading losses—then the largest single loss in British banking history. ^[5]

As financial historian Catherine R. Schenk’s archival investigation of Bank of England and Lloyds records reveals, the losses were accumulated by a single twenty-eight-year-old dealer, Marc Colombo, who joined Lloyds Bank International in March 1973 to begin foreign-exchange dealing at Lugano. Although London headquarters imposed strict overnight open-position limits on its Swiss branches, Lugano operated with archaic manual ledger accounting and virtually no segregation between front-office dealing and back-office settlement confirmations. In the spring and summer of 1974, convinced that the U.S. dollar would weaken against the Deutsche Mark and Swiss franc, Colombo took massive uncovered forward positions selling U.S. dollars and buying marks. Instead, the dollar rallied sharply after May 1974. ^[6]

Rather than closing out his losing positions, Colombo doubled down—eventually holding open open foreign-exchange positions totaling about $550 million—and concealed the losses from Lugano branch manager Egidio Mombelli and internal auditors by withholding deal slips, entering fictitious offsetting spot and forward transactions with friendly counterparty dealers, and exploiting differences in settlement value dates. On August 6, 1974, a correspondent bank alerted Lloyds head office to the unusually large positions. An internal investigation then uncovered the concealed losses. Lloyds Bank International immediately honored every contract in full, dismissed Colombo and Mombelli, and saw Colombo sentenced by a Ticino court in October 1975 to a suspended eighteen-month term for disloyal administration and document falsification. The suspended sentence does not establish that there were no improper personal benefits: archival research separately records a CHF 30,000 commission refund that Colombo disclosed and handed back. In response, both the Bank of England and the Swiss Federal Banking Commission overhauled foreign-exchange internal control rules, requiring strict separation of dealing and back-office settlement and mandatory counterparty confirmations. ^[7]

1988: The Shakarchi Inquiry and the “Lebanon Connection” Allegations#

Even after tightening internal bank audits in the 1970s, Swiss law throughout the 1980s contained a glaring statutory gap: money laundering itself was not an independent criminal offense under the Swiss Criminal Code (Strafgesetzbuch / StGB), and non-bank currency and precious-metals dealers (para-banking financial intermediaries) operated largely outside the 1977 Swiss banks’ Due Diligence Agreement (CDB). That loophole collided with high politics in the autumn of 1988 in the “Lebanon Connection” inquiry involving Shakarchi Trading AG. ^[8]

Based in Zurich and founded in 1957 by Lebanese currency trader Mohamed Shakarchi, Shakarchi Trading AG was one of Switzerland’s largest non-bank wholesale bullion and foreign-banknote trading houses, with prominent Zurich corporate lawyer Hans W. Kopp serving as vice-chairman of its board of directors. Hans W. Kopp was the husband of Elisabeth Kopp (Free Democratic Party), who in October 1984 had made history as the first woman elected to the seven-member Swiss Federal Council, heading the Federal Department of Justice and Police (FDJP). ^[9]

In 1988, the wider “Lebanon Connection” investigation raised allegations about drug proceeds moving through Switzerland. Shakarchi Trading AG was publicly drawn into the allegations, but the fact of an investigation was not proof that the firm had laundered money. Swiss reporting later stated that the suspicions against the company had not been substantiated. The political crisis centered on whether Justice Minister Elisabeth Kopp had improperly warned her husband, who sat on the company’s board. On October 27, 1988, after learning from a senior staff member inside her own Justice Department that criminal authorities were investigating Shakarchi Trading AG for suspected money laundering, Justice Minister Elisabeth Kopp telephoned her husband to warn him and urge him to step down immediately; Hans W. Kopp resigned from Shakarchi’s board that same afternoon.

The Kopp Resignation and Article 305bis of the Swiss Criminal Code#

When the Zurich newspaper Tages-Anzeiger began exposing the investigation and Kopp finally disclosed her October 27 phone call to the Federal Council on December 9, 1988—just two days after parliament had elected her Vice-President of the Confederation for 1989—a political earthquake erupted. On December 12, 1988, Kopp announced her resignation from the Federal Council and left office in January 1989, and the Swiss Parliament established only the second Parliamentary Investigation Commission (PUK) in modern Swiss history to probe the Justice Department’s handling of financial crime and political surveillance. Although the Swiss Federal Supreme Court acquitted Elisabeth Kopp in February 1990 of intentionally breaching official secrecy (and the European Court of Human Rights later ruled in Kopp v. Switzerland in March 1998 that federal wiretapping of her husband’s law office had lacked adequate statutory safeguards), the scandal sharpened public debate on anti-money-laundering legislation that had already been in preparation. On March 23, 1990, the Swiss Parliament enacted Articles 305bis and 305ter of the Swiss Criminal Code (effective August 1, 1990), making the laundering of criminal proceeds and failure to verify beneficial ownership punishable by imprisonment across both banks and non-bank financial intermediaries.

Theoretical & Balance-Sheet Transmission Mechanism#

In the Kindleberger–Minsky taxonomy of financial instability (Kindleberger, 1978; Minsky, 1986) and Irving Fisher’s (1933) debt-deflation framework, speculative asset booms become systemic crises when credit expansion shifts balance sheets from hedge finance (cash flows covering principal and interest) to speculative and Ponzi finance (relying on rising asset prices and short-term margin roll-overs).

Once monetary tightening or an exogenous shock halts price appreciation, forced margin liquidations trigger Fisherian debt-deflation: fire-sale asset discounts erode bank collateral values, contracting credit supply across the real economy.

Sources and Further Reading

1. Catherine R. Schenk, Rogue Trading at Lloyds Bank International, 1974: Operational Risk in Volatile Markets, Business History Review (Cambridge University Press), 2017-04. Peer-Reviewed / Academic Research
2. European Court of Human Rights, Case of Kopp v. Switzerland (Application no. 23224/94), Judgment, Council of Europe / HUDOC, 1998-03-25. Historical & Financial Reference
3. Le News Editorial Staff, Switzerland's first female minister dies, Le News (Switzerland), 2023-04-14. Historical & Financial Reference
4. U.S. Court of Appeals, United California Bank v. Charles E. Salik, 481 F.2d 1012 (9th Cir. 1973), United States Court of Appeals for the Ninth Circuit, 1973-09-17. Historical & Financial Reference
5. SWI swissinfo.ch, Swiss first female Federal Councillor Elisabeth Kopp and Shakarchi retrospective, SWI swissinfo.ch, 2007. Historical & Financial Reference
6. SRF, Elisabeth Kopp ist tot – Die erste Schweizer Bundesrätin, Schweizer Radio und Fernsehen (SRF), 2023-04-14. Historical & Financial Reference
7. Swiss Federal Law, Swiss Criminal Code, Article 305bis (Legislative amendment and effective date), Swiss Confederation bilingual statute, 1990-03-23. Historical & Financial Reference
8. Irving Fisher — "The Debt-Deflation Theory of Great Depressions," Econometrica 1, no. 4 (FRASER Federal Reserve Archive, 1933): 337–357 Central Bank / Monetary Authority
9. Charles P. Kindleberger & Robert Z. Aliber — Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan) Peer-Reviewed / Academic Research

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