Sovereign Investment Funds and AML Violations
2 June 2016
Authorities in Switzerland announced on May 24, 2016, that they initiated criminal proceedings against private bank BSI due to allegations of money laundering. The Swiss attorney general’s office stated that it suspected “deficiencies in the internal organization of the BSI S.A. bank” and that these organizational deficiencies resulted in the bank’s inability to prevent certain criminal offenses under investigation relating to 1Malaysia Development Berhad (1MDB), a Malaysia state investment fund. BSI was ordered by Swiss authorities to hand over 95 million Swiss francs (approximately U.S. $96 million) in profits.
The Swiss attorney general’s office maintains that the proceedings against BSI are a result of its own investigations into transactions with 1MDB and an investigation by the Swiss Financial Market Supervisory Authority, which found BSI “committed serious breaches of money laundering regulations.”
The Monetary Authority of Singapore (“MAS”) also ordered BSI Bank to shut down its Singapore operations, the first time in 32 years that it has withdrawn a license from a merchant bank, and also ordered $13.3 million in financial penalties. The MAS also referred six senior BSI managers to prosecutors for further criminal investigation.
This case is notable in several respects. First, the case highlights cooperation between jurisdictions – Switzerland worked with authorities in Luxembourg, Singapore, and the United States when conducting its own investigation. It also shows how investigations in one jurisdiction may prompt or influence investigations in other jurisdictions.
Another point to note is that both the Singapore and Swiss authorities noted BSI’s failures in internal oversight and management. Swiss authorities indicated that BSI handled transactions for several foreign sovereign wealth funds without adequately clarifying the monies’ origins. Furthermore, BSI “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.” Another example given by the authorities on BSI’s operational failures was that BSI “happily accepted” that a $20 million deposit was a “gift.” In other words, BSI did not conduct basic due diligence where red flags indicated that the transactions may be problematic. Through this case, authorities from more than one jurisdiction are emphasizing that it is not acceptable for organizations to turn a blind eye to risks, and that banks are obligated to ensure that functioning monitoring systems with real management oversight are in place. Cursory questions and answers are not sufficient; where red flags are present, one is required to dig deeper.
Finally, this case illustrates how political repercussions can be magnified in investigations relating to sovereign wealth funds. In particular, 1MDB is closely linked with Malaysia’s Prime Minister, Najib Razak, who continues to face corruption allegations, particularly as reports have traced nearly $700 million from 1MDB to Najib’s personal accounts (which Malaysia authorities found to be a “donation” from Saudi Arabia’s royal family). The money laundering charges against BSI relating to 1MDB by Singapore and Swiss authorities are likely to add fuel to the fire.
It remains to be seen whether the BSI investigation may be the signal of a wider sweep. The Swiss financial market authority noted that it has investigated 20 other Swiss banks, and initiated proceedings against six of them. The transactions in question are related to 1MDB or Petrobras, the Brazilian state oil company. It is also reported that the U.S. Department of Justice has asked several banks for details on transactions with 1MDB. Even as BSI is taken over by EFG International AG, which plans on dissolving BSI, the full aftereffects of BSI’s case remains to be seen.