Singapore Regulator Removes BSI Bank's Merchant Banking Licence For "Gross Misconduct", AML Breaches

Tom Burroughes Group Editor 24 May 2016

Singapore Regulator Removes BSI Bank's Merchant Banking Licence For

The Monetary Authority of Singapore has stripped a firm of a merchant banking licence for the first time since 1984.

Singapore’s financial regulator is stripping BSI Bank of its merchant banking status because of anti-money laundering lapses, poor management oversight and “gross misconduct” by some of its staff.

“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,” Ravi Menon, managing director, Monetary Authority of Singapore, said in a statement today.

This is the first time MAS has withdrawn its approval for a merchant bank since 1984, when Jardine Fleming (Singapore) was shut down for serious lapses in its advisory work.

BSI, Swiss-based parent of BSI Bank, in a separate statement, said that Stefano Coduri, BSI's group chief executive, has decided to immediately step down and that Roberto Isolani has been appointed group CEO. BSI is in the process of being acquired by EFG International, another Swiss bank.

While the MAS statement made no reference to the Malaysian state-run fund, 1MDB, which has been at the centre of a major political and financial scandal concerning bribery and corruption claims, BSI, in its own statement today, referred to "the investigations into 1MDB, arising from activities occurring between 2011 and April 2015". BSI said it has "co-operated fully with both FINMA and MAS".

"BSI remains well capitalised with excellent liquidity and solvency ratios. In addition, the bank highlights that it has been continuously improving its risks and compliance culture by implementing a number of actions and remedial measures. The bank has undertaken significant steps to strengthen management, including the introduction of a new chief risk officer and the appointment of a new group legal counsel both at group executive board level to enhance the overall risk and compliance framework," it said.

"BSI acknowledges that these events are important steps with regard to the regulators to resolve legacy issues and removing uncertainty for clients and staff in relation to 1MDB."

The action highlights how Singapore, one of the world’s leading financial centres and bases for wealth management, is mindful of its reputation at a time when there is heightened global focus on money laundering and illicit money flows. The MAS statement did not state the magnitude of the financial flows involved in the BSI Bank case.

Besides removing its merchant banking approvals, 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.

The action is arguably the most severe that Singapore has taken against a bank over such matters in recent years.

BSI Bank has been operating as a merchant bank in Singapore since November 2005.

The regulator said clients and customers of BSI Bank could be assured that the bank is solvent and is fully backed by its parent bank.

“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,” the regulator said.

Because of recent Swiss regulatory approval of EFG International’s acquisition of BSI Bank’s parent, MAS said it will allow the transfer of the Singapore subsidiary’s assets and liabilities to the Singapore branch of EFG Bank or to the parent entity, BSI.

Explaining the background, the regulator said it carried out an inspection of BSI Bank in 2011 and “found policy and process lapses at the front office and weak enforcement by control functions”, but those lapses were rectified.

In 2014, MAS inspected the bank again and said it 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, MAS said.

The MAS said 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, it said.

“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,” the regulator said.

It said several 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.

EFG International has further taken note of FINMA’s and MAS' press releases in connection with the BSI related 1MDB matter," EFG International said in a statement today.

"The share purchase agreement with BTG Pactual has an indemnity in relation to these and certain other matters up to the overall purchase price. It was agreed in the share purchase agreement that the indemnity will be backed by a material Swiss escrow account which, at closing, will contain 51.0 milion EFG shares issued to BTG as consideration, with shares locked up for two years. The fine and the penalty will result in a reduction in the purchase price. The indemnities and escrow account remain unchanged," it said.

EFG believes that these developments will draw a line, from a Swiss and Singaporean regulatory standpoint, with the past in connection with this matter and constitute another important step to remove related regulatory uncertainty for clients, employees, investors, and other stakeholders.

1MDB statement
1Malaysia Development Berhard, to give 1MDB’s full name, said today that it “notes the media statements issued today by lawful authorities in Switzerland and Singapore”.

“1MDB states that it has not been contacted by any foreign lawful authority on matters relating to the company. 1MDB remains committed to fully cooperating with any foreign lawful authority, subject to advice from the relevant domestic lawful authorities, and in accordance with international protocols governing such matters. 1MDB confirms that its ownership of various fund investments has not been impacted by the announcements today.”

The organisation has consistently denied claims of wrongdoing, such as that it has allowed funds to be siphoned off by political figures and other individuals.

Swiss action
The Office of the Attorney General of Switzerland said it has has opened criminal proceedings against the BSI bank, saying it has decided to act based on information revealed by the criminal proceedings in the 1MDB case as well as by issued raised via FINMA, the Swiss regulator.

“The OAG suspects deficiencies in the internal organisation of the BSI SA bank,” it said. “It is believed that due to these deficiencies, the bank was unable to prevent the commission of offences currently under investigation in the criminal proceedings relating to 1MDB,” it said.

“Swiss law (Art. 102 para. 2 of the Swiss Criminal Code, SCC) allows the prosecution of a company that is suspected of not taking all the reasonable organisational measures that are required to prevent third parties from committing offences, and in particular money laundering or corruption offences,” it said.

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes