Singapore’s drastic move to shut Swiss bank BSI’s operations in the city-state over its dealings with scandal-hit Malaysian fund 1MDB is a wake-up call for wealth managers in Asia, which had been spared the large fines and sanctions seen in the West.
The private bank is the first casualty of money-laundering probes in at least six jurisdictions into state investor 1Malaysia Development Bhd, whose advisory board was chaired by Malaysian Prime Minister Najib Razak.
The Monetary Authority of Singapore (MAS) did not name 1MDB in a statement on Tuesday announcing it was shutting down of BSI’s business for “serious breaches of anti-money laundering requirements” and “gross misconduct” by some staff.
But details from a Swiss probe into 1MDB accuse BSI of routinely failing to carry out required background checks on large sums deposited.
In one case, according to the Swiss banking watchdog, BSI was happy to take $20 million after being told by a client the sum was “a gift”. In another, it accepted $98 million without any effort to clarify the origin of the funds.
While Western countries, in particular the United States, have censured banks including UBS (UBSG.S), Credit Suisse (CSGN.S), BNP Paribas (BNPP.PA) and Standard Chartered (STAN.L) for lapses on tax evasion or international sanctions, Asian regulators had been slow to bare their teeth.
The MAS move against BSI, however, signals a willingness to act to protect the reputation of key financial centers in the region, lawyers and bankers said.
“Asian regulators cannot sit on the sidelines and deal with the issues quietly because of the increasing global nature of these probes,” said James Comber, a partner with law firm Ashurst in Hong Kong. “No one regulator wants to be seen as failing to take action on its turf.”
Besides ordering the closure of the bank, Singapore authorities said they were evaluating whether five former BSI executives committed criminal offences.
Bankers and lawyers expect more regulatory action and believe smaller banks will come under massive cost pressure to ensure they implement adequate compliance.
“This will send a chilling effect to banks and financial institutions,” said Nizam Ismail, partner at RHTLaw Taylor Wessing LLP in Singapore. “Their license could be at risk. Worse, there is also the real threat of personal criminal liability.”
While the United States, and other jurisdictions, started to look closely at money flows in the aftermath of the Sept. 11 attacks in 2001, Asia has at times lagged behind.
In its last annual report, MAS said it issued nine warnings and reprimands to financial institutions in 2014 and imposed financial penalties on six ranging from S$1,000 to S$700,000 ($507,320), a far cry from the billions of dollars in fines the United States has imposed on global banks for misbehaving.
Hong Kong strengthened its anti-money laundering law in 2012. Before that date, the regulator did not have the power to impose fines, lawyers said. In Singapore, rules were toughened further in 2013 and then again last year.
But the 1MDB investigation has shown some banks such as BSI were completely disregarding the rules.
MAS inspected BSI three times since 2011 and said it found multiple breaches of anti-money laundering regulations that reflected a “a pervasive pattern of non-compliance”.
The Swiss probe showed BSI failed to adequately monitor relationships with a client group with around 100 accounts at the bank.
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MAS, Singapore’s central bank and financial regulator, said it was checking compliance standards at other institutions, without naming them.
A Malaysian parliamentary inquiry has shown that banks including the private banking units of JPMorgan (JPM.N) and RBS (RBS.L) had been handling money transfers linked to 1MDB. Both banks have declined to comment.
The U.S. Department of Justice has asked JP Morgan, Deutsche Bank (DBKGn.DE) and others for details of transactions with 1MDB, Reuters reported. The U.S. government is also reviewing Goldman Sachs’ (GS.N) relationship with the Malaysian fund. All the banks have declined to comment.
The Wall Street Journal reported last year that investigators had traced nearly $700 million from an account at Falcon Private Bank in Singapore to accounts in Malaysia they believed belonged to Prime Minister Najib. Falcon has said it is in contact with Singapore’s central bank and cooperating with authorities.
Private banks across the world have targeted growth in Asia, a region expected to soon boast more billionaires than the United States.
But the expansion is coming at a cost and, as the regulatory pressure mounts, smaller banks may have to decide whether they can afford to compete. European banks such as Barclays wealth unit are already exiting the region.
“The big players can afford cutting edge technology, hire the best people to have a real robust go at anti-money laundering and know-your-customer rules,” said Keith Pogson, Asia senior partner for financial services at EY.
“But for the small players the question will be: does it make economic sense to put in place the level of compliance and scrutiny requested or is it not worth it?”
(Additional reporting by Praveen Menon in Kuala Lumpur and Andrew MacAskill in LONDON; Editing by Alex Richardson)