Swiss Open Criminal Proceedings Against BSI Over Malaysia Fund Allegations

New York Times
MAY 24, 2016

GENEVA — The authorities in Switzerland said on Tuesday that they had begun criminal proceedings against one of the country’s oldest banks, BSI, after allegations that it had laundered huge sums for “politically exposed” individuals linked to a scandal-plagued Malaysian state investment fund.

The Swiss attorney general’s office said in a statement that it suspected “deficiencies in the internal organization of the BSI S.A. bank” and believed “that due to these deficiencies, the bank was unable to prevent the commission of offenses currently under investigation in the criminal proceedings relating to” the investment fund, 1Malaysia Development Berhad.

The prosecution arose from an investigation that Switzerland started last year into suspected misappropriation of billions of dollars from the Malaysian fund, also known as 1MDB, and that it has pursued in cooperation with the authorities in Luxembourg, Singapore and the United States.

The investigation has strained relations with Malaysia and embarrassed its prime minister, Najib Razak, who is fighting a scandal that has roiled Malaysian politics involving allegations that $681 million was paid into his bank accounts.

The Monetary Authority of Singapore announced separately on Tuesday that it was withdrawing the license of BSI’s 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.”

The authority said it had considerable evidence of “gross dereliction” of duty by BSI management and had sent prosecutors the names of six senior managers to investigate whether they had committed criminal offenses.

The Swiss attorney general’s office said that it had started proceedings against BSI, the oldest bank in the Swiss canton of Ticino, as a result of its own investigations into transactions linked to 1MDB and on the basis of an investigation by the Swiss Financial Market Supervisory Authority.

In a separate statement on Tuesday, the financial market authority said that “through business relationships and transactions linked to the corruption scandals surrounding the Malaysian sovereign wealth fund 1MDB,” BSI had “committed serious breaches of money laundering regulations.”

The authority said that it had ordered BSI to hand over to the Swiss government profits amounting to 95 million Swiss francs, or about $96 million, and had started legal proceedings against two of the bank’s former top managers.

On Tuesday, it also approved the takeover of BSI by a Zurich-based private bank, EFG International, under an agreement reached in February between EFG and BSI’s Brazilian owner, BTG Pactual. The authority said it had approved the deal on the conditions that BSI be completely integrated into EFG and dissolved within 12 months and that none of BSI’s top management associated with its misconduct take leadership positions in EFG.

EFG said in a statement that it believed Tuesday’s developments would “draw a line” ending regulatory uncertainty in Switzerland and Singapore for clients, employees, investors and other stakeholders.

The financial market authority said it had investigated 20 other Swiss banks and had started legal proceedings against six of them over transactions linked to either 1MDB or the Brazilian state oil company Petrobras, which has also been a subject of investigation by the Swiss authorities. BSI’s misconduct in its dealings with 1MDB “was particularly serious,” it said.

The Swiss attorney general’s office said in January that it suspected $4 billion earmarked for development projects in Malaysia had been misappropriated from 1MDB, citing cases involving companies in Malaysia and Saudi Arabia, and a United Arab Emirates sovereign wealth fund, “each involving a systematic course of action carried out by means of complex financial structures.”

In its business with 1MDB, the Swiss financial market authority said, BSI handled transactions for several foreign sovereign wealth funds amounting to hundreds of millions of dollars without adequately clarifying the money’s origins and helped to set up intermediate structures for handling the funds intended to increase the confidentiality of the transactions.

The sovereign wealth funds had constituted BSI’s most profitable group of clients, the financial market authority said, and generated fees that were above market rates. BSI’s senior management “did not question why the sovereign wealth funds should use a private bank to provide institutional services and pay excessive out-of-market fees for doing so,” the authority said.

It said the Swiss bank had also failed to apply adequate risk management procedures to business relationships “with politically exposed persons, the origin of whose assets was not sufficiently clarified and whose dubious transactions involving hundreds of millions of U.S. dollars were not satisfactorily scrutinized.”

BSI had “happily accepted” the explanation that one deposit of $20 million was a “gift,” the market authority said, and in another instance it allowed $98 million to be paid into an account with no attempt to identify the commercial basis for the transaction.

“In many cases, there were clear indications of pass-through transactions,” the authority said, citing a case in which a payment of $20 million was shifted through several accounts on the same day before being transferred to another bank. Such transactions were often a clear indication of money laundering, but the bank failed to carry out any checks, the authority said.

The authority’s statement added that, despite its warnings to BSI about the risks in its dealings with clients linked to 1MDB, the bank’s board of directors and executive board had determined to continue these client relationships.

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