Stung by loss of secrecy at home, Swiss banks run into trouble in Asia

The logo of Swiss bank BSI is seen at a branch office in Zurich, Switzerland May 24, 2016. REUTERS/Arnd Wiegmann

Regulators’ closure of the Swiss BSI bank’s Asian outpost for failing in its duty to prevent money-laundering has highlighted the risks of hunting wealthy clients farther afield as Swiss banks’ traditional line in hiding money from foreign tax men is choked off.

The Swiss banking watchdog FINMA has already opened enforcement proceedings against no fewer than six other unnamed Swiss banks in relation to either the Malaysian fund that tripped up BSI or a separate scandal involving Brazil’s state-controlled oil producer, Petrobras.

“We’ve made clear over recent years and months that we see money-laundering risk as having risen in our country,” FINMA Chief Executive Mark Branson told reporters.

“We’re concerned that not all organizations have matched their control processes to this increased risk.”

The head of Singapore’s central bank accused BSI of the “worst case of control lapses and gross misconduct” ever seen in the city-state’s financial sector for its dealings with the scandal-hit Malaysian government fund 1 Malaysia Development Bhd (1MDB).

Looking For Wealth

In recent years, Swiss banks have paid billions of dollars in fines as global prosecutors, led by the United States, chipped away at the secrecy that for decades enabled the world’s wealthy to keep their cash in Switzerland, out of sight of the tax man.

Faced with the prospect of a sharp decline in their wealth management business at home, and an economic slowdown in Europe, BSI and other Swiss private banks expanded rapidly into Asia, where economies – and the number of ultra-rich individuals – were growing much faster.

In 2009, BSI made clear its intentions by hiring around 100 Asian-based bankers from its rival RBS Coutts.

What BSI and perhaps others failed to take account of was the higher prevalence of corruption in the region, and the greater difficulty of making compliance checks.

“You end up kicking out clients who suddenly are unacceptable because of tax issues, but you replace them with clients who are far worse,” said Carlo Lombardini, a banking lawyer and professor of banking law at the University of Lausanne. “They have no tax issues but have corruption issues.”

As well as courting wealthy individuals, BSI took on a group of state-owned wealth funds as clients, including 1MDB. They became, according to FINMA, its most profitable client group, paying fees well above the norm.

The wheels began to come off last year when Singaporean and Swiss regulators began questioning transactions linked to 1MDB.

FINMA said BSI had repeatedly missed red flags in various transfers involving 1MDB over several years, and failed to double-check potentially suspect transactions, including a deposit of $20 million described by the client as a “gift”.

1MDB is now at the center of a multi-billion-dollar graft scandal, and its transactions have triggered investigations on three continents.

Illegal Earnings

While Singapore shut down BSI’s branch there, FINMA confiscated 95 million Swiss francs ($96 million) that it said BSI had earned illegally through suspect transactions.

BSI’s chief executive, Stefano Coduri, resigned and the bank said it would, among other measures, appoint a new chief risk officer and group legal counsel.

“BSI acknowledges that these events are important steps with regard to the regulators to resolve legacy issues and removing uncertainty for clients and staff in relation to 1MDB,” it said in a statement.

More than a dozen executives who were associated with the 1MDB account or related accounts have left BSI over the past year, sources familiar with the matter told Reuters – something on which BSI declined to comment.

1MDB for its part said on Tuesday that it had not been contacted by any foreign authority after the Singapore and Swiss actions.

For now, 143-year-old BSI’s ongoing business, with total client assets of 84.3 billion Swissfrancs at the end of 2015, will be salvaged through an already-agreed takeover by its Swiss peer EFG International.

Swiss regulators said the deal could still go ahead on condition that BSI, currently owned by Brazil’s BTG Pactual, was fully integrated into EFG and then dissolved.

But Bradley Birkenfeld, an American whistleblower in a breakthrough tax fraud case against UBS who later won a $104 million reward from the U.S. Internal Revenue Service, said it had taken too long to bring the issue into focus. “If you don’t fix a problem, it will fester,” he said. “And this is exactly what we have now.”

Also Read:

Singapore orders BSI bank unit to close as 1MDB probe widens

Singapore charges ex-BSI banker with forgery in 1MDB-linked probe

Reuters

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.