By Joshua Franklin, Saeed Azhar and Anshuman Daga
ZURICH/SINGAPORE (Reuters) - Regulators' closure of the Swiss BSI bank's Asian outpost for failing in its duty to prevent money-laundering has highlighted the risks of hunting wealthy clients farther afield as Swiss banks' traditional line in hiding money from foreign tax men is choked off.
The Swiss banking watchdog FINMA has already opened enforcement proceedings against no fewer than six other unnamed Swiss banks in relation to either the Malaysian fund that tripped up BSI or a separate scandal involving Brazil's state-controlled oil producer, Petrobras.
"We've made clear over recent years and months that we see money-laundering risk as having risen in our country," FINMA Chief Executive Mark Branson told reporters.
"We're concerned that not all organizations have matched their control processes to this increased risk."
The head of Singapore's central bank accused BSI of the "worst case of control lapses and gross misconduct" ever seen in the city-state's financial sector for its dealings with the scandal-hit Malaysian government fund 1 Malaysia Development Bhd (1MDB).
LOOKING FOR WEALTH
In recent years, Swiss banks have paid billions of dollars in fines as global prosecutors, led by the United States, chipped away at the secrecy that for decades enabled the world's wealthy to keep their cash in Switzerland, out of sight of the tax man.
Faced with the prospect of a sharp decline in their wealth management business at home, and an economic slowdown in Europe, BSI and other Swiss private banks expanded rapidly into Asia, where economies - and the number of ultra-rich individuals - were growing much faster.
In 2009, BSI made clear its intentions by hiring around 100 Asian-based bankers from its rival RBS (LON:RBS) Coutts.
What BSI and perhaps others failed to take account of was the higher prevalence of corruption in the region, and the greater difficulty of making compliance checks.
"You end up kicking out clients who suddenly are unacceptable because of tax issues, but you replace them with clients who are far worse," said Carlo Lombardini, a banking lawyer and professor of banking law at the University of Lausanne. "They have no tax issues but have corruption issues."
As well as courting wealthy individuals, BSI took on a group of state-owned wealth funds as clients, including 1MDB. They became, according to FINMA, its most profitable client group, paying fees well above the norm.
The wheels began to come off last year when Singaporean and Swiss regulators began questioning transactions linked to 1MDB.
FINMA said BSI had repeatedly missed red flags in various transfers involving 1MDB over several years, and failed to double-check potentially suspect transactions, including a deposit of $20 million described by the client as a "gift".
1MDB is now at the center of a multi-billion-dollar graft scandal, and its transactions have triggered investigations on three continents.
ILLEGAL EARNINGS
While Singapore shut down BSI's branch there, FINMA confiscated 95 million Swiss francs ($96 million) that it said BSI had earned illegally through suspect transactions.
BSI's chief executive, Stefano Coduri, resigned and the bank said it would, among other measures, appoint a new chief risk officer and group legal counsel.
"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," it said in a statement.
More than a dozen executives who were associated with the 1MDB account or related accounts have left BSI over the past year, sources familiar with the matter told Reuters - something on which BSI declined to comment.
1MDB for its part said on Tuesday that it had not been contacted by any foreign authority after the Singapore and Swiss actions.
For now, 143-year-old BSI's ongoing business, with total client assets of 84.3 billion Swiss francs at the end of 2015, will be salvaged through an already-agreed takeover by its Swiss peer EFG International.
Swiss regulators said the deal could still go ahead on condition that BSI, currently owned by Brazil's BTG Pactual (SA:BBTG11), was fully integrated into EFG and then dissolved.
But Bradley Birkenfeld, an American whistleblower in a breakthrough tax fraud case against UBS who later won a $104 million reward from the U.S. Internal Revenue Service, said it had taken too long to bring the issue into focus. "If you don't fix a problem, it will fester," he said. "And this is exactly what we have now."