Rise and Fall of a Private Swiss Bank: MAS directs Swiss Merchant Bank

By Bachir El Nakib

 

MAS Decision dated Singapore, 24 May 2016…

1. The Monetary Authority of Singapore (MAS) announced today that it has served BSI Bank Limited (BSI Bank) notice of intention to withdraw its status as a merchant bank in Singapore 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.

2. In addition, MAS has referred to the Public Prosecutor the names of six members of BSI Bank’s senior management and staff to evaluate whether they have committed criminal offences.

3. BSI Bank has been operating as a merchant bank in Singapore since November 2005 where it offers private banking services. It is a wholly-owned subsidiary of BSI SA, a bank founded in 1873 and headquartered in Switzerland.

4. Assurance for customers of BSI Bank 4 Clients and customers of BSI Bank are assured that the Bank is solvent and has assets in excess of its liabilities and commitments. It also has the full support of its parent bank, BSI SA, in Switzerland. MAS is working closely with the Swiss Financial Market Supervisory Authority (FINMA), the home regulator of BSI SA, to oversee an orderly closure of BSI Bank in Singapore.

5. MAS notes that FINMA has approved the acquisition of the entire BSI Group by EFG International, a bank authorised by FINMA and headquartered in Switzerland. In the interest of the customers of BSI Bank, MAS will allow the transfer of the Singapore subsidiary’s assets and liabilities to the Singapore branch of EFG Bank AG or to the parent entity, BSI SA. Withdrawal of merchant bank status.

6. In 2011, MAS inspected BSI Bank and found policy and process lapses at the front office and weak enforcement by control functions.

The lapses were rectified. In 2014, MAS inspected the bank again and uncovered serious shortcomings in its due diligence checks on assets underlying the investment funds structured for the bank’s customers. Given repeated findings of weaknesses in its control regime, MAS instructed BSI Bank’s management to increase scrutiny of the bank’s risk management processes and internal controls.

A more intrusive third inspection by MAS in 2015 revealed multiple breaches of anti-money laundering regulations and a pervasive pattern of non-compliance. 

7. MAS’ decision to withdraw BSI Bank’s status as a merchant bank takes into account the repetitive lapses as well as the 2015 inspection findings which revealed:  widespread control failures which led to numerous serious breaches of various antimoney laundering regulations  poor and ineffective oversight by the senior management of BSI Bank  unacceptable risk culture, with blatant disregard for compliance and control requirements as well as MAS’ regulations  numerous acts of gross misconduct by certain staff

8. Specific regulatory lapses include the processing of multiple unusual transactions which were essentially pass-through trades often without economic substance. Approvals of such transactions were based purely on faith of client representations despite deficient documentation and concerns raised by the bank’s compliance officers.

9. This is the first time that MAS is withdrawing its approval for a merchant bank since 1984, when Jardine Fleming (Singapore) Pte Ltd was shut down for serious lapses in its advisory work.

Referral of BSIS senior management and staff to the Public Prosecutor.

10. MAS found considerable evidence of gross dereliction of duty and failure to discharge oversight responsibilities on the part of BSI Bank’s senior management. Their ineffective governance led to a poor risk culture, which prioritised questionable customer demands ahead of compliance with anti-money laundering regulations and the bank’s own internal controls.

11. Several of the bank staff also committed wilful acts of misconduct, such as:  making material misrepresentations to auditors  abetting improper valuations of assets; and  taking instructions from persons other than customers’ authorised representatives on matters relating to customers’ accounts.

12. The severe lapses and failings in BSI Bank, which led to MAS’ decision to withdraw the bank’s status as a merchant bank, were the result of the actions or omissions of these individuals.

13. MAS has referred to the Public Prosecutor the names of the following six members of BSI Bank’s senior management and staff to evaluate whether they have committed criminal offences: 

  1. Mr Hans Peter Brunner, former CEO 
  2. Mr Raj Sriram, former Deputy CEO 
  3. Mr Kevin Michael Swampillai*, Head of Wealth Management Services 
  4. Mr Yak Yew Chee, former Senior Private Banker  Mr Yeo Jiawei**, former Wealth Planner; and 
  5. Ms Seah Yew Foong Yvonne, former Senior Private Banker

* Mr Swampillai is currently suspended by the bank.

** Mr Yeo is currently in remand and has been charged by the Public Prosecutor for various offences.

Imposition of financial penalties 14 MAS has also served BSI Bank notice to impose financial penalties amounting to $13.3 million for 41 breaches of MAS Notice 1014 - Prevention of Money Laundering and Countering the Financing of Terrorism. The breaches include failure to perform enhanced customer due diligence on high risk accounts, and to monitor for suspicious customer transactions on an ongoing basis. MAS’ expectations of financial institutions

15. MAS requires financial institutions in Singapore to comply strictly with its regulations on anti-money laundering and countering the financing of terrorism. Like all major international financial and business centres, Singapore faces an inherent risk of being used as a conduit for illicit financial flows.

Financial institutions operating in Singapore are therefore expected to have rigorous systems and processes to thwart this risk, including high standards of vigilance in on-boarding clients and monitoring transactions.

16. Mr Ravi Menon, Managing Director, MAS, said, “BSI Bank is 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.”

17. MAS is conducting supervisory reviews of several other financial institutions and bank accounts through which suspicious and unusual transactions have taken place. MAS will not hesitate to take actions against these institutions if they are found to have breached regulations or fallen short of expectations.

18. Mr Menon said, “MAS is absolutely committed to safeguarding the integrity and reputation of Singapore’s financial centre. On this, there can be no compromise.” 

The Monetary Authority of Singapore's decision to shut down the local operation of Swiss merchant bank BSI Bank has sent a message to financial institutions that anti-money laundering responsibilities must be taken seriously, sources said. 



This was the most severe sanction MAS had imposed for some time, they said, and showed the regulator was determined to preserve the city-state's position as a leading financial centre by making it clear it would not tolerate any misconduct. 

Failure of senior management in exercising oversight

The fact that MAS has referred six of BSI Bank's employees, including senior managers, to public prosecution is striking, they said. 

The MAS said in its press release that it had found considerable evidence that the bank's senior managers had failed to exercise appropriate oversight, and of gross dereliction of duty. 

"Their ineffective governance led to a poor risk culture, which prioritised questionable customer demands ahead of compliance with anti-money laundering regulations and the bank's own internal controls," MAS said.

A head of compliance at an offshore private bank in Singapore, who declined to be named, said the withdrawal of BSI Bank's licence had come as a surprise but not a shock. Some form of punishment was to be expected given what had transpired at the bank, and that the regulator would have been keen to make the market aware of its findings, he said. 

"The stronger message is that MAS named six of [BSI Bank's] employees for prosecution. That shows the [regulator's] push on accountability on the part of the senior management. That's an extremely strong message," he said.

Flouting the new AML rules

A lawyer in Singapore who declined to be named because of her involvement in the case, pointed to a raft of amendments MAS had made to its AML regulations in 2013 and 2014, and in particular to Notice 626, which she said demonstrated the regulator's commitment to strengthening its AML regime. She said BSI Bank appeared to have deliberately flouted those rules, hence the MAS' decision to take serious action. 

The lawyer said however strong Singapore's anti-money laundering regulations were, there would inevitably be some lapses. 

"Singapore has always been criticised for its banking secrecy and for not having strict enough laws. The fact of the matter is [that Singapore's] regulations are [sufficiently] robust to deal with lapses and the regulators are concerned enough to deal with them. No system is perfect," she said.

Clear consequences for breaching Singapore's laws and regulations

The financial services industry is an important sector which drives growth in Singapore. The MAS has always sought to promote the city-state as Asia's leading financial centre whose business-friendly rules are backed by a strong regulatory framework. 

The head of compliance said it was "absolutely necessary" for MAS to take action against BSI Bank if Singapore wanted to be taken seriously as a leading financial centre. The city-state needed to send a clear message that it took compliance with its laws and regulations seriously and that there were clear consequences for any breaches. 

"Singapore is interested in sustainable growth as a financial centre. It is also very important to the government and regulators to protect and safeguard Singapore's reputation. It will not allow anything to jeopardise its standing," he said. 

Financial penalty

MAS has also imposed a financial penalty of S$13.3 million on BSI Bank for 41 breaches of MAS Notice 1014 on "Prevention of Money Laundering and Countering the Financing of Terrorism". These breaches included the failure to perform enhanced customer due diligence on high-risk accounts, and to continuously monitor for suspicious customer transactions. 

Ravi Menon, managing director, MAS, said BSI Bank was the worst case of control lapses and gross misconduct ever witnessed 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," Menon said. 

A number of financial institutions and bank accounts in Singapore suspected of having carried out suspicious and unusual transactions are now being reviewed by MAS. The Singapore regulator said it would not hesitate to take action against these institutions if they were found to have breached or compromised its regulations.

Policy and process lapses; weak control functions

An inspection of BSI Bank carried out by MAS in 2011 found policy and process lapses at the front office and weak control functions. Although the lapses were rectified, in 2014 MAS found "serious shortcomings" in the bank's due diligence which showed it had failed to check the assets underlying the structured investment funds offered to clients. 

The repeated findings of control weaknesses led MAS to instruct BSI Bank's management to step up scrutiny of the bank's risk management processes and internal controls. MAS' inspection in 2015 showed further breaches of anti-money laundering regulations and "a pervasive pattern of non-compliance".

"Specific regulatory lapses include the processing of multiple unusual transactions which were essentially pass-through trades often without economic substance. Approvals of such transactions were based purely on faith of client representations despite deficient documentation and concerns raised by the bank’s compliance officers," MAS said in its press statement. 

MAS said it had taken into account BSI Bank's repeated lapses and a number of serious findings from the 2015 inspection before it decided to withdraw BSI Bank's merchant bank status. 

Those findings included widespread control failures which led to numerous serious breaches of anti-money laundering regulations; poor and ineffective oversight by the senior management of BSI Bank; unacceptable risk culture, blatant disregard for MAS' regulations, compliance and control requirements, and instances of gross misconduct by certain employees.

BSI Bank operated as a private bank in Singapore under a merchant banking license since November 2005. It is a wholly-owned subsidiary of BSI SA headquartered in Switzerland, which was founded in 1873.Swiss financial regulators have opened criminal proceedings against the country's BSI bank over links to corruption allegations against Malaysia's 1MDB fund.

BSI chief executive Stefano Coduri has resigned with immediate effect. 

Swiss prosecutors said 

the probe was "based on information revealed by the criminal proceedings related to 1MDB".

1MDB is faced with multiple international investigations around the world into allegations of corruption.

Switzerland's Office of the Attorney General (OAG) said it had information suggesting "the offences of money laundering and bribery of foreign public officials currently under investigation in the context of the 1MDB case could have been prevented" by BSI.

In a statement, BSI said it would co-operate with the investigation and described the case as "legacy issues and removing uncertainty for clients and staff in relation to 1MDB".

BSI is a private bank, offering services to high-net-worth individuals, and was founded in Lugano, Switzerland, in 1873. At the end of 2015 the bank was looking after total client assets of 84.3bn Swiss francs (£85bn; £58.5bn).

It employs roughly 2,000 people, with about two-thirds of them employed in Switzerland. About 300 of that total staff figure work in Asia.

Until two years ago it was owned by Italian insurer Generali Group, who in July 2014 sold it to the banking unit of BTG Pactual Group of Brazil.

Earlier this year BTG Pactual agreed to sell BSI to Swiss-based EFG International for 1.33bn Swiss francs ($1.34bn; £922m).

Once the deal is completed, BSI will be fully integrated into EFG.

In its last annual report BSI said that 2015 had been "a very challenging year in many respects".

It also said that it had "successfully supported" its clientele "in the voluntary disclosure process" and improved its "risk and compliance culture".

 

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