Swiss banks chasing Asia cash stung by dirty money crackdown

GENEVA (BLOOMBERG) - Swiss private banks, which rushed to tap emerging markets to offset slow growth and tax-evasion crackdowns in the United States and Europe, will need to work harder to confirm how clients made the fortunes they deposit and move through the banks.

Arrests and enforcement actions against BSI and Falcon Private Bank for their involvement in the US$3.5 billion (S$4.8 billion) fraud and corruption scandal enveloping Malaysian state investment company 1Malaysia Development Bhd are roiling the taciturn bankers of Zurich and Geneva.

"There is no longer a banking model which can be built through the acquisition of non-compliant clients," Mr Yves Mirabaud, president of the Geneva Financial Center industry association and Senior Managing Partner of Mirabaud SCA, said on Tuesday (Oct 11). "We will never be the CIA, we will never be the police department, but we have absolutely no interest to go after non-compliant clients." He declined to comment on specific banks.

Prosecutors in Singapore, Switzerland and the US and other jurisdictions are looking into alleged corruption and money laundering involving more than US$3.5 billion diverted from 1MDB. The Swiss financial regulator known as Finma said enforcement proceedings are underway against UBS Group, one of six banks targeted, while the country's top prosecutor is also considering whether to open a criminal case against Falcon.

The 1MDB investigations shows cooperation between regulators has increased in recent years, especially around anti-money laundering rules, according to Patrick Emmenegger, a professor at the University of St. Gallen in Switzerland.

"How many other opaque banks are involved in the type of business they can no longer defend? Given the level of cooperation and international exchange of information between regulators they will get caught in the net sooner or later," he said.

The Monetary Authority of Singapore fined Falcon S$4.3 million, UBS S$1.3 million and DBS Group Holdings S$1 million for anti-money laundering lapses related to 1MDB this week. Regulators there ordered Falcon Private Bank to cease local operations on Tuesday having stripped BSI of its licence earlier this year.

Clients of BSI, spooked by the probes and a sale of the bank, withdrew 6.3 billion Swiss francs (S$8.8 billion) in the second quarter, BTG Pactual Group, which is selling the company to to EFG International, said in August. EFG only agreed to acquire the bank after securing indemnities and arranging an escrow account with BTG Pactual in relation to BSI's Malaysia matters.

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. 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.

UBS, with US$274 billion under management, is the largest wealth manager in Asia according to an Asian Private Banker ranking based on 2015 data. Switzerland's Credit Suisse Group and Julius Baer Group placed third and fifth respectively. Julius Baer CEO Boris Collardi said last month that Asia may overtake Europe as its biggest revenue-generating region. More than half of 200 new client advisers signed by Julius Baer this year will be based in Asia, he said.

Back home, Swiss private bankers, who for centuries relied on secrecy as their prime selling point, are discovering that their days of mystery are at an end and clients in the private banking capital of Geneva who don't want to declare their assets are moving them out. "I'm pretty sure it's mainly already done," Mr Mirabaud said.

Large banks in Geneva - those with more than 200 employees - are suffering outflows of money from European and Latin American clients, according to a survey published by Geneva Financial Center on Tuesday. Most respondents said net money flows from US, Asian and Middle East clients were unchanged.