Michael Peel, Bangkok regional correspondent
Financial Times
May 24, 2016

Regulators in Europe and Asia have cracked down on BSI, the Swiss private bank, over alleged money-laundering failings related to the scandal over Malaysia’s 1MDB state investment fund. Claims that billions of dollars have been misappropriated from Malaysian state companies have spawned probes on several continents. BSI is now under criminal investigation in its home country and has been ordered to shut down in Singapore. It has been fined S$13.3m in Singapore and forced to disgorge profits of SFr95m in Switzerland. Here are a few questions raised by Tuesday’s events.

1. What was BSI’s relationship with 1MDB?

BSI appears to have had a deep transcontinental involvement in 1MDB-related business. In particular the Malaysian fund became a big part of BSI’s drive to win new business in Asia, after it opened its doors in Singapore in 2005 as a merchant bank offering private banking services. BSI counted as its clients not only the 1MDB parent fund itself but subsidiaries and related parties, court documents in the city state suggest. One was Brazen Sky, a 1MDB subsidiary through which $2.3bn was processed — not necessarily all through BSI — to buy investments in the Cayman Islands. 1MDB insists all this money is accounted for, but the fund’s critics say it has yet to show evidence of this.

Documents released by the Singapore attorney-general’s office in a civil court case involving a former BSI official state that another of the bank’s clients was Jho Low, a Malaysian financier whose role — if any — in 1MDB’s international dealings has come into question. Mr Low has consistently denied any wrongdoing.

BSI received the proceeds of a $3bn bond arranged for 1MDB by Goldman Sachs in 2013, a relatively unusual move as state funds usually deal with larger commercial banks. Goldman has denied any wrongdoing.

2. What happened in Switzerland?

In Switzerland, BSI committed “serious breaches” of anti-money-laundering rules, according to Finma, the country’s financial supervisor. BSI failed between 2011 and 2015 to identify risks around “dubious” transactions totalling hundreds of millions of dollars involving “politically exposed persons”, Finma said. The bank was happy to accept the client’s explanation in one case that $20m of new funds were a “gift”, while in another instance an account was credited with more than $98m without any effort to clarify the money’s commercial background.

Authorities have now approved BSI’s previously proposed takeover by Zurich-based EFG International, after which BSI will be dissolved. Stefano Coduri, BSI’s group chief executive, has resigned with immediate effect to be replaced by Roberto Isolani, a board member of the bank.

3. Why is BSI being shut down in Singapore?

The closure order is the climax of a string of troubles for BSI in Singapore. In 2011, a Monetary Authority of Singapore inspection of BSI found “policy and process lapses at the front office and weak enforcement by control functions”. The regulator says those problems were rectified. In 2014, another inspection revealed “serious shortcomings” in the bank’s due diligence on assets underlying investment funds structured for clients. Then a “more intrusive” third inspection last year uncovered “multiple breaches of anti-money-laundering regulations and a pervasive pattern of non-compliance”. The regulator says the bank suffered from widespread control failures, poor senior management oversight, a “blatant disregard” for monetary authority rules on compliance, and “numerous acts” of gross misconduct by certain staff.

BSI’s alleged record of problems raises a question of whether the authorities should have taken stronger action sooner. The Singapore regulator says the bank has made “substantive strides” on anti-money-laundering and counter-terrorist financing over the past five years and now has a “comprehensive regime” in place.

4) Which BSI employees are being investigated and what are the allegations?

The Monetary Authority of Singapore said it had referred six past and present BSI executives to the public prosecutor to determine whether they had committed criminal offences. The most senior official named was Hanspeter Brunner, the bank’s former Asia head. Mr Brunner arrived from Royal Bank of Scotland Coutts’ Singapore office in 2010, bringing scores of colleagues with him. That group also included Raj Sriram, his deputy at BSI and another one of the six whose files have been passed to the Singapore prosecutor. Neither man could be reached for comment.
Yeo Jiawei, a third member of the six, has already been charged in Singapore with laundering-related offences and has also been accused of witness tampering and attempting to pervert the course of justice. He could not be reached for comment.

5) Are other banks under investigation?

RBS disclosed last month that Swiss authorities were investigating client accounts at Coutts, which used to be part of RBS’s private bank. A number of other financial institutions are claimed to have been involved in the web of 1MDB transactions that have spanned the US, Europe and Asia since the fund was set up in 2009. Finma, the Swiss financial supervisor, said last month it was investigating more than 20 banks in connection with the 1MDB affair and the Petrobras corruption scandal in Brazil.

The BSI action seems unlikely to be the last regulatory sanction over the 1MDB case.

Additional reporting by Jeevan Vasagar in Singapore