Swiss-based private bank BSI is taking the country’s financial regulator to court to appeal “unlawful and disproportionate sanctions” imposed last month in relation to the bank’s business with the Malaysian sovereign wealth fund 1MDB.
The Swiss Financial Market Supervisory Authority (FINMA) has ordered BSI to disgorge CHF95 million ($99 million) in profits for “serious breaches” of anti-money laundering rules. FINMA also effectively closed down the BSI, whose business is being taken over by EFG Bank, and is taking action against two executives.
The FINMA investigation found BSI guilty of failing to properly scrutinise business dealings with politically exposed persons or to question why the bank was carrying out certain financial services for 1MDB while charging exorbitant fees.
On Thursday BSI hit back with an appeal to the Federal Administrative Court, arguing that FINMA had overstepped its authority in a manner that has “severely harmed the reputation of the bank and its employees.”
“BSI believes that FINMA's procedure leading to the decision was flawed in many respects and FINMA's decision as such is disproportionate and incorrect,” the bank said in a statement. It added that it had cooperated with the FINMA investigation and closed down its business with 1MDB in early 2015.
“While BSI acknowledges certain internal shortcomings in the past, BSI believes that FINMA's decision, its timing as well as the manner in which FINMA decided to communicate it were wholly inappropriate,” the statement read.
FINMA declined to comment on the legal appeal against its May 24 ruling. The Swiss Attorney General has opened criminal proceedings against the bank.
The Singaporean financial regulator withdrew BSI's banking license for "gross dereliction of duty", but has allowed clients and assets to be passed over to EFG. swissinfo.ch understands that BSI will not appeal the Singapore sanctions where executives also face a criminal probe.
1MDB was set up and is run by Malaysia’s government since 2009. The fund has been accused of funneling state money into Malaysian Prime Minister Najib Razak’s personal accounts.
Only around a third of the world’s sovereign wealth funds have signed up to a self-regulatory code of conduct known as the Santiago Principles, according to political risk management consultants GeoEconomica.
The 31 Santiago Principles signatories command around $4 trillion in assets and have varying records of proving that they are living up to their self-governance pledges, said Sven Behrendt, managing director of the Geneva-based consultancy.
While Malaysia’s Khazanah Nasional Berhad sovereign wealth fund is a Santiago Principles signatory, 1MDB has never joined the list. “If a wealth fund hasn’t even tried to show it will abide by international standards and doesn’t publically provide any information of substance relating to its operations then there is obviously a higher risk of corruption,” Behrendt told swissinfo.ch.
“Then there is an enhanced requirement for financial intermediaries to undertake heightened levels of due diligence. It is quite astonishing what has happened at BSI.” Behrendt called on financial regulators across the world to pay more attention to sovereign wealth funds and demand that their countries’ financial institutions conduct more due diligence before doing business with them.
“The connection of money and politics is always subject to vulnerabilities,” he said.