What's Behind BSI's «Hail Mary» Appeal?

BSI, 1MDB, Finma, appeal

BSI's offices in Lugano, Switzerland

BSI bank is fighting sanctions imposed by Swiss regulator Finma over links to Malaysian state fund 1MDB. But what can be gained from a high-profile and unpromising attack on BSI's regulator?

BSI was effectively put out of business last month in a joint crackdown by Swiss and Asian authorities into providing accounts to allegedly corrupt Malaysian state fund 1MDB: Singapore's regulator withdrew BSI's license to do business while Finma ordered the bank to disgorge roughly 95 million Swiss francs in profits and began proceedings against two one-time BSI bankers. 

Correction: While the Monetary Authority of Singapore (MAS) withdrew the licence of the institute, the Swiss Financial Market Supervisory Authority (Finma) confiscated the profit of the Ticino-based BSI in the amount of 95 million Swiss francs. Furthermore, the Office of the General Federal Attorney opened a criminal investigation against BSI. However, no investigations have been opened against the top management of BSI.

Almost exactly one month later, BSI hit back in an unusually harshly-worded counter, saying the regulator had used «flawed» proceedings with «unlawful» measures in reaching a «disproportionate and incorrect» decision. 

Pending Sale

Banks have fought Finma decisions before, but with little success: of 49 appeals lodged in court last year, just two were successful.

The bank has admitted to «certain internal shortcomings» in the past, and it is also in the process of being sold to EFG International, a deal originally agreed before BSI was sanctioned but which will still go ahead. The bank also has a criminal investigation in Switzerland to deal with.

So what could BSI possibly hope to gain by in a «hail Mary» attack on Finma when the bank will disappear from the Swiss market soon anyway, as well as probably its brand?

Exonerate BSI Bankers

At first glance, several scenarios come to mind: the two former BSI bankers are involved in Finma enforcement proceedings over 1MDB and are likely to eventually be sanctioned. In Switzerland's insular banking world, where bankers need to maintain business conduct that is «beyond reproach in business relationships», this would be akin to a professional death sentence. 

Would BSI fight Finma in order to exonerate its bankers? This is highly unlikely, since BSI isn't actually party to the proceedings: those are strictly between the regulator and the bankers as individuals. 

Fighting Singapore's MAS?

Why not fight MAS, Singapore's regulator, which imposed the more forceful penalty of shutting BSI down? MAS is government-controlled, so appeals are even less promising in Switzerland, where courts are independent of the government. In the BSI case, Singapore is expected to exercise a show of force in order to send a signal that it won't tolerate bankers tarnishing its finance center.

Nevertheless, MAS decisions can still be appealed through its chairman, Tharman Shanmugaratnam, who is also Singapore's Deputy Prime Minister. But BSI has no such plans, sources familiar with the matter say. The bank feels it was explicitly informed by MAS investigators about the specific nature of its shortcomings in Singapore, where MAS imposes fines according to a catalogue, listing the financial penalty for each breach, these people say.

EFG Deal Affected

Another scenario is that BSI may be pursuing a court appeal because its current owner, BTG Pactual, might get a higher price from the acquirer, EFG International, if the sanctions are softened. BTG Pactual, previous owner Generali and EFG International are caught up in a complicated network of indemnities and other arrangements to secure against risks from the deal – and it is likely that Generali, which bears some of the risks linked to 1MDB – has pushed for an appeal in the hope of lowering BSI's 95 million franc penalty.

EFG International, which hopes to conclude the acquisition of BSI by the end of this year, wasn't keen on the bank's appeal, according to a source familiar with the matter, but presumably didn't have as much of say in the move until it actually owns the bank.

Wounded Pride

The reality behind BSI's appeal is far more mundane: the bank hopes to salvage its reputation, according to two sources familiar with the case, because it fears fallout to its business. It is likely that BSI – publicly shamed for its 1MDB dealings – has already seen clients and assets leave the bank over how the 1MDB case has played out in public. If BSI wants to stanch those outflows, it makes sense to take a stand.

Lugano, where the bank is based, is another key element in the bank's appeal, according to two sources familiar with the matter. As one of the oldest banks in Switzerland, BSI's demise has an enormous political dimension that it might not otherwise in other regions, and BSI bankers have been in frequent contact with local officials.

BSI Blindsided

BSI is not only effectively systemically relevant for Ticino's economy; its status as a flagship for the region cannot be overstated. BSI's 1,900 staff and clients alike are horrified at how the bank has been pilloried, and feel that regulators have done little to dissuade the view that it is a «criminal bank,» several people familiar with the matter told finews.ch.

BSI felt blindsided by the regulator's decision on May 23rd and decided to appeal after a month-long evaluation with outside lawyers, according to a source familiar with the matter.

Ignominious End After 143 Years

Officials at BSI felt Finma hadn't recognized efforts undertaken since a new chairman – veteran UBS banker and ex-Finma board member Joseph Rickenbacher – had come on board last September, according to one person. Those include a new organizational framework aimed at better addressing and handling business risks, including bringing in a risk expert from UBS.

So the last chapter in the 143-year-old prestigious private bank's history – including most recently passing from an Italian insurer to a Brazilian investment bank, only to be sold yet again when its billionaire new owner was arrested as part of a graft probe – will be decided in a Swiss courtroom.

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