BSI: The Business of Secrecy Backfired Bitterly

Suntec Towers in Singapore, where BSI has its offices (Shutterstock)

Suntec Towers in Singapore, where BSI has its offices (Shutterstock)

Swiss banking is basked in an unfavorable light after the forced closure of Ticino private bank BSI. Yet again, the business of secrecy appears to backfire bitterly. Here are the most important points on the topic.

1. Scandal After Scandal

The noble art of Swiss private banking was never free of scandal — one has only to think of dictator loot and Holocaust funds held in Swiss accounts. But Swiss banks have been unable to escape the crossfire since the financial crisis.

After data leaks, whistleblowers, guilty pleas and billion-dollar payments to foreign authorities over tax claims, Swiss banks face a new frontier: high growth in Asia and other promising emerging markets is closely linked with heightened risk of money-laundering. BSI is a textbook case of this — and enforcement proceedings by regulator Finma could soon provide further examples.

2. Don’t Ask, Don’t Tell

Taking client’s money without asking any questions has historically been a lucrative, not to mention entirely legal under Swiss law until fairly recently, business model. After abandoning banking secrecy, this was thought to be a vestige of the past.

The money-laundering scandal surrounding 1MDB shows that banks like BSI have adopted the model of silence — akin to the Sicilian Omertà — to their new markets. The difference is that tax avoidance isn’t the key play in these markets. Instead, the origin of client money swings into focus.

With complex, opaque structures between banks, clients and funds from politically exposed persons, what could possibly go wrong? The latest wave of money-launder scandals from world football body FIFA to 1MDB is lamentable evidence that, in fact, everything can.

3. Blemish for Regulators

Finma, the Swiss regulator, has been accused since the offshore tax dispute of only waking up to scandals when foreign regulators have taken the lead on an issue and exerted pressure on Switzerland to cooperate. At first glance, this isn’t the case with 1MDB or Petrobras, another brewing money-launder storm: it was Finma and Switzerland’s attorney general which drove both complex investigations and stopped them from fading away unaddressed.

Nevertheless, neither watchdog comes out of 1MDB looking very good. Finma disclosed on Tuesday that it had already conducted an in-depth probe of 1MDB over alleged money-laundering in 2013, but inexplicably appears not to have informed colleagues across the road at the attorney general’s office at all.

Instead, the attorney general got involved by responding to a criminal complaint by the Bruno Manser Fund, a non-profit organization which campaigns for conservation of tropical forests primarily in Malaysia. The prosecutor decided early last year not to investigate further, and it wasn’t until last August that it finally got in on the ongoing criminal proceedings. While Swiss authorities seem to have dithered, business between BSI and the Malaysian state fund was still flourishing.

The image this all portrays is of a uncoordinated, hesitant and toothless response of Switzerland to BSI. For a financial center seeking to sell stability and a working rulebook as well as eager to shake off its past as a haven for undeclared tax money, this is fatal.

4. Banks’ Gamble

Nobody can dispute that Finma operates with a limited scope of influence and resources. But a deeper look at BSI begs the question of whether the bank recklessly exploited this.

Finma first addressed BSI’s deficiencies in dealing with potentially laundered funds in autumn 2013. Very little appears to have happened at the bank after that, until Tuesday’s sanctions by Finma and Singapore watchdog MAS. Tellingly, Finma head Mark Branson said on Tuesday that BSI «didn’t understand much about the business they were doing, but it was too lucrative to give up.»

5. Banking Virtuosos

The bankers behind BSI’s ill-fated dealings with BSI, such as former Chief Executive and Chairman Alfredo Gysi, were once considered stars of Swiss banking.

Gysi, an influential Ticino native who sat in the Swiss central bank’s council until last month, called for more engagement from Swiss banks and politicians in order to bolster the credibility of Switzerland’s financial center, as finews.ch reported.

Ironically, it was also Gysi who praised the BSI banker who took care of 1MDB for the bank’s «fantastic business successes» in 2011.

The cult of stardom surrounding Hanspeter Brunner, who successfully led a mass resignation of bankers from Coutts for BSI in 2009, has also faded in light of the 1MDB revelations. Singapore’s prosecutor is now investigating Brunner, BSI’s former Asia head for potential criminal conduct.

6. Ugly Swiss Calling Card in Booming Market

BSI’s closure is extremely discomfiting for Singapore’s regulator and the Asian private banking hub has a lot to lose over the affair. Singapore is thriving in part because of funds gushing in from wealthy clients in neighbor states like Malaysia and Indonesia — many of them fighting endemic corruption.

This doesn't bode well for Swiss banking, whose influential players see Asia as their second home market. Singapore may impose higher barriers to entry for Swiss banks and intensify supervision of firms already operating in Asia. Bottom line: banking in Asia becomes more expensive, and less attractive.

7. Learning By Doing

Swiss banks aren’t wrong to gripe about overly onerous regulation and compliance costs continually rising. But Finma and MAS’ treatment of BSI highlights the reason for the regulatory glut: some banks are still masterful at exploiting loopholes while selectively hearing supervisory warnings.

The regulatory response to this won’t take long: stick to the rules, or find out the hard way.

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