Switzerland and Singapore close net on banks ties to 1MDB corruption scandal

GENEVA — Switzerland and Singapore are bearing down on the banks linked to a corruption scandal at 1Malaysia Development Bhd (1MDB), with the Swiss financial regulator saying enforcement proceedings are under way against UBS Group, one of six banks targeted, and the Asian city-state ordering one institution to cease operations and fining others.

Switzerland’s top prosecutor is also considering whether to open a criminal case against the lender that was told to shut down in Singapore, Falcon Private Bank.

The Monetary Authority of Singapore fined Falcon S$4.3m ($3.12m), UBS S$1.3m and DBS Group Holdings S$1m for anti-money laundering lapses related to 1MDB.

Malaysian state investment company 1MDB is at the centre of several international investigations into alleged corruption and money laundering by public officials. Prosecutors in Singapore, Switzerland and the US and other jurisdictions are looking into a sweeping multiyear scheme in which more than $3.5bn was allegedly diverted from the investment vehicle.

"Regulators are increasingly willing to investigate and punish banks that don’t properly vet their clients or where their money comes from," said Patrick Emmenegger, a professor at the University of St Gallen in Switzerland who specialises in financial secrecy and the international exchange of bank account information. "Singapore and Switzerland have made real inroads against the banks."

Samuel Brandner, a spokesman for UBS in Zurich, declined to comment on the Finma proceedings. In response to the Singaporean sanctions, UBS and DBS said in separate statements they will strengthen controls and take actions against employees responsible for the lapses.

"Falcon was abused and was a little naive on occasion," the bank CEO Walter Berch said in Zurich on Tuesday. "We will take care to wind down the Singapore branch in an orderly fashion."

Finma is targeting the Zurich-based UBS, rather than individuals at the bank, said Vinzenz Mathys, a spokesman for the Bern-based regulator. He added that he could not say when the proceedings might be concluded. The Monetary Authority of Singapore said it had found control lapses at UBS by specific bank officers.

Swiss Attorney-General Michael Lauber warned in a speech last week of "serious suspicion" of the role of Swiss banks in the 1MDB affair. He urged the Malaysians to do more to help with his investigation.

Tuesday’s most significant action was against Falcon Bank, one of dozens of Swiss institutions that specialise in discreet banking for wealthy international clients and have come under increasing pressure amid an international crackdown on banking privacy.

Falcon, founded in 1965, was bought in 2009 by Aabar Investments, a unit of Abu-Dhabi’s sovereign fund International Petroleum Investment Corporation. IPIC had guaranteed some 1MDB debt and the two are now locked in arbitration over a 2015 agreement.

Falcon’s role was highlighted in court filings by US prosecutors in July, who are seeking to seize assets worth more than $1bn they say went through US banks from 1MDB. They detailed an alleged scheme of international money laundering and misappropriation stretching from 2009 to 2015. That includes more than $907m in bond-sale proceeds transferred in 2012 to Falcon, of which nearly $577m was wired roughly a day later to an account at BSI Bank in Lugano. That account was maintained by Aabar-BVI, which was not a legitimate subsidiary of Aabar Investments or IPIC, according to the filings.

Singapore said in May that it would close BSI’s unit in the country, and finma seized Sf95m in profit from the bank.

Pass-Through Transactions

Falcon failed to adequately investigate the background of so-called pass-through transactions totaling $681m and the repayment six months later of $620m, according to a statement by finma. That is the amount that appeared in Malaysian Prime Minister Najib Razak’s accounts in 2013 and most was later returned, the country’s attorney general said earlier this year. The Swiss regulator did not mention Najib.

1MDB has consistently denied wrongdoing and Malaysia’s government has said it will cooperate with lawful investigations of local companies or its citizens in relation to the fund.

Lauber’s office said on Tuesday that it is considering opening criminal proceedings against Falcon after Finma fined the lender Sf2.8m ($2.8m) for failing to adequately vet bank transactions. Finma warned the Lugano-based bank it would lose its Swiss banking license if it repeated such offenses.

Enforcement Proceedings

Swiss prosecutors will study the terms of Finma’s enforcement proceedings against Falcon before deciding whether to open a case, a spokesman for the attorney-general’s office said on Tuesday.

"Wealthy clients typically get very nervous when they read about their bank being the target of an anti-money laundering investigation," said Jonas Floriani, a banks analyst at Keefe, Bruyette & Woods in London. "When a regulator goes as far as to shut down part of the business there’s every chance some clients will run for the hills."

Falcon had less than $900m in client assets in Singapore, out of Sf18.2bn globally, Berchtold said. Aabar, the bank’s parent company, is not going to sell the Swiss lender, he said.

‘Serious Failings’

The Monetary Authority of Singapore’s withdrawal of the firm’s merchant-bank status brings to an end a boutique private-banking operation that began in the city in August 2008. The regulator had fined Falcon S$300,000 for anti-money laundering lapses after an inspection in 2013, and uncovered "an even larger number" of breaches as well as "serious failings" by senior management at the bank’s head office and by the Singapore branch manager, the Monetary Authority of Singapore said.

The Monetary Authority of Singapore said the firm’s local branch manager has been arrested and Switzerland’s Finma has started enforcement proceedings against two of Falcon’s former executives. Finma linked the private bank to $3.8bn of 1MDB fund flows and said it "has seriously breached money laundering regulations" in failing to carry out adequate background checks into 1MDB-linked transactions.

Falcon had a relationship with a "young Malaysian businessman" with ties to that country’s government, the Swiss regulator said. The man, who it did not identify, had been able to acquire $135m of assets in a short period of time and transferred a total of $1.2bn to his accounts at a later date. The bank did not verify how he was able to do so, even though the transaction was "clearly" inconsistent with the information he gave when opening the account.

©2016 Bloomberg LP