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The role of Swiss banks in the 1MDB scandal

BSI has taken the brunt of the regulatory fire for its involvement with 1MDB Keystone

The ongoing global investigation into the 1MDB corruption case raises the question whether Swiss banks have cleaned up their acts.

The enquiry estimates that some $4 billion (CHF4 billion) has been syphoned out of the Malaysian sovereign wealth fund into the pockets of corrupt officials.

The suspects, which include Malaysian Prime Minister Najib Razak and other family members, are thought to have used the money to buy art works, property and even finance the movie The Wolf of Wall Street – which depicts financial corruption on Wall Street.

Details are starting to emerge about a string of offshore shell companies linked to bank accounts throughout the world. Several banks from different countries have been named in various documents from prosecutors.

Which Swiss banks have been implicated?

The first Swiss bank to be named in connection to 1MDB was the Lugano-based private bank BSI, which also has offices in Singapore. In May, the Swiss and Singaporean financial regulators withdrew the bank’s license in the two countries, accusing it of flagrant violations of anti-money laundering obligations.

The Swiss Attorney general has opened criminal proceedings against BSI while a former employee of the bank has been arrested in Singapore. BSI has appealed the punishment imposed by the Swiss Financial Market Supervisory Authority (Finma), which included an order to surrender CHF95 million of illicitly gained profits, to the federal administrative court.

Two more Swiss banks have recently been named – UBS and Falcon private bank. UBS was accused last week by the campaigning blog Sarawak Report of helping to funnel more than $2 billion of illicit funds from 1MDB. This accusation remains unverified.

But the Monetary Authority of Singapore (MAS) has slapped both UBS and Falcon on the wrists for “control failings”, “deficiencies”, “weaknesses” and “substantial breaches” in their dealings with 1MDB. The investigation into Falcon is ongoing. Both banks said they are cooperating with the authorities, while UBS said it had filed a suspicious transaction report.

But more Swiss banks are likely to be named. In May, Finma said six banks are being investigated in connection with either 1MDB or the Brazilian Petrobras scandal. On Wednesday, the United States Department of Justice said an unnamed Swiss bank had helped criminals syphon $1.37 billion from 1MDBExternal link.

How serious is their involvement?

BSI is in serious trouble. Finma said it was one of the worst casesExternal link of its kind it has investigated. The identified shortcomings included: failure to deal correctly with politically exposed persons, failure to identify the origins of hundreds of millions of dollars in assets and failure to establish the necessary documentation for transactions – all while charging excessive fees that could not be explained.

The bank’s clean business can continue as it is being taken over by EFG, but the BSI brand and reputation is effectively dead. Criminal charges against employees, including executives, could well be laid. understands that UBS will plead it is has been the victim of an elaborate fraud. The extent of falcon’s dealings with 1MDB is yet to be established. At best, they could be found to have failed to notice a fraud being perpetrated inside their own doors.

How can professional financial institutions fail to notice such a large fraud?

That’s the $4 billion question. As the Sarawak report states in its article on UBS: “Given the sums involved, it would seem to constitute a shocking failure of compliance and due diligence by one of the world’s major banks”.

Anti-money laundering regulations and legislation has been tightening in the last few years, resulting in banks around the world beefing up their compliance teams. The last set of new rules in Switzerland was passed by parliament 18 months ago. And yet it appears not to have worked in this case.

Earlier this year, reported that some Swiss banks are having trouble implementing the new rules.

“Information is tricky. Not all of it is accurate. There’s lots of false information. Who is going to screen that information?” commented David Ford, a former compliance director at Safra Republic and ex-head of anti-money laundering at HSBC Private Banking.

“Certain values should be promoted such as the obligation to challenge each other. An accountant can pick up a financial transfer that is suspicious. He should be able to challenge the boss and say that there’s a problem. If the culture within a firm is such that the boss says ‘shut-up,’ there’s a risk,” said Xavier Isaac, head of trust and fiduciary at Salamanca Group in Geneva.

In April, Finma director Mark Branson warned that the “risk posed by money laundering is on the increase in Switzerland”. He chided banks for waiting for scandals to appear in the media before reporting suspicions to the authorities.

“It is no good saying that Switzerland has the best anti-money laundering rules if the regulator finds so many banks failing to implement them,” Olivier Longchamp, off the Swiss anti-corruption NGO Public Eye told 

Are banks doing enough to detect fraud? have your say.

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SWI - a branch of Swiss Broadcasting Corporation SRG SSR

SWI - a branch of Swiss Broadcasting Corporation SRG SSR