Ordered to shut down in Singapore, fined in multiple jurisdictions.

BSI Bank is the sort of old school private client and wealth management institution associated with the finest traditions of Swiss banking. Established in 1873 in Lugano Switzerland, it promises its clients “Flexibility” as one of its core values. As the bank puts it:

“At BSI we are respectful of the different needs of our clients and recognise the importance of a tailor-made approach.   Our flexibility allows us to manage unforeseen events and complex projects in the uncertain and challenging business of wealth management. We listen to other people and actively seek to understand their different ideas and perspectives with the intention of reaching shared goals. We are able to modify our own opinion and encourage colleagues to see other points of view and focus on creating an optimal solution for the client.”

 

So when 1MDB came a knocking, BSI Bank was all to happy to flexibly oblige, even though why a sovereign wealth fund like 1MDB should be using the services of a private client bank to provide institutional services was a bit of a mystery, even to the bank’s Swiss regulators, FINMA.

Notwithstanding the unusual nature of the relationship, the hard work and ingenuity of BSI Bank’s employees made the Malaysian sovereign wealth fund BSI Bank’s largest and most profitable client group. And the people responsible were handsomely rewarded for their efforts.

BSI Bank also lists “Integrity” as another of its core values:

“BSI’s relationship with its clients and employees is based on the utmost clarity, trustworthiness and compliance with applicable law.   We keep our promises, fulfil our commitments and are reliable in our partnerships with clients, employees and other stakeholders. We believe integrity is lived in our relationships and through our collaborations we build trust and foster transparency for long-term reliable partnerships.”

That apparently didn’t trouble senior management at BSI Bank, who were apparently all to happy to charge 1MDB fees described by FINMA as “excessive” and “above average and out of line with normal market rates“.

It was no surprise then that FINMA was able to announce on 24 May 2016 that:

“Through business relationships and transactions linked to the corruption scandals surrounding the Malaysian sovereign wealth fund 1MDB, [BSI Bank] committed serious breaches of money laundering regulations  … [i]n the case of 1MDB, the bank executed numerous large transactions with unclear purpose over a period of several years and, despite clearly suspicious indications, did not clarify the background to these transactions.”

FINMA has now ordered BSI Bank to disgorge profits of CHF 95 million. Meanwhile, halfway across the world, MAS has fined BSI Bank $13.3 million and ordered the bank to shut down its Singapore branch for:

“[…]serious breaches of anti-money laundering requirements, poor management oversight of the bank’s operations, and gross misconduct by some of the bank’s staff.”

What kind of naughtiness did BSI Bank get up to? Among other incidents:

• The bank was happy to accept the client’s explanation that the funds involved in a deposit of 20 million US dollars were a “gift”.
• An account was credited with more than 98 million US dollars without any effort to clarify the commercial context.
• The bank executed transactions involving similar amounts even though sometimes the explanations and contractual documents obtained contradicted the purpose of the account as stated when it was opened.
• Transactions were often generically justified on the basis of loan agreements, although the agreements provided insufficient explanation.
• There were many indications of “pass-through” transactions. For example, in one instance, 20 million US dollars were routed through a number of accounts within the bank on the same day before eventually being transferred out to another bank. Yet no proper documentation or plausibility checks were carried out, even though this sort of stuff is often a clear indication of money laundering.
• The bank supported the development of specially created intermediate structures for sovereign wealth funds with the aim of achieving a higher level of confidentiality for the investment activities. This meant that the bank was unable to determine how the funds’ wealth was invested. While this was flagged up as an issue by junior employees, no action by management was taken.

But where was compliance and BSI Bank management in all this?  Apparently, 1MDB was too good a client to ask too many questions. As FINMA put it:

“The client advisor responsible for these relationships was repeatedly notably uncooperative in terms of compliance, particularly in dealing with the inadequate clarification of transactions. Management was aware of the situation but gave their support to the client advisor instead of the Compliance department. Consequently, no corrective action was taken and bonuses, for example, were unaffected. In fact, the opposite was the case. The client advisor in question was one of the bank’s top earners.”

After all, some clients were too important to not bend the rules for:

“Exceptions to the bank’s internal rules were made for important clients and justified as special client service. Management was informed, but took no action to monitor these exceptions.”

No wonder Ravi Menon, managing director of MAS, described BSI Bank as:

 “…the worst case of control lapses and gross misconduct that we have seen in the Singapore financial sector. It is a stark reminder to all financial institutions to take their anti-money laundering responsibilities seriously. Controls need to be robust, surveillance vigilant, and the management culture must emphasise professional integrity and risk consciousness.”

Conclusion

FINMA and MAS co-operated particularly intensely in this case, highlighting how increasingly, regulatory authorities in advanced jurisdictions are working closely together to fight financial crime.

The case is also a timely reminder for senior management and boards of directors at organisations such as financial institutions to take their anti-money laundering obligations seriously. As Ingenique Solutions puts it:

The Board of directors and Senior Management are responsible for promoting high ethical and integrity standards, and for establishing a culture within the organisation that emphasises and demonstrates to all levels of personnel the importance of internal controls. All levels of personnel at a banking organisation need to understand their role in the internal controls process and be fully engaged in the process.

An essential element of an effective system of internal control is a strong control culture. It is the responsibility of the board of directors and senior management to emphasise the importance of internal control through their actions and words. This includes the ethical values management displays in their business dealings, both inside and outside the organisation. The words, attitudes and actions of the board of directors and senior management affect the integrity, ethics and other aspects of the bank’s control culture.

Proceedings continue apace against the individuals involved in the BSI Bank case. Watch this space!

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