It was announced yesterday (2 FEB 2017) that the Swiss Financial Market Supervisory Authority, known as Finma, has ordered Coutts & Co Ltd to pay back 6.5 million Swiss francs ($6.57 million) in unlawfully generated profits from the transactions [https://www.finma.ch/en/news/2017/02/20170202-mm-coutts/]

FINRA said that Coutts, owned by Royal Bank of Scotland Group Plc, allowed a total of $2.4 billion worth of assets related to the Malaysian development fund to flow through accounts in Switzerland even though it had good reason to be suspicious of the transactions.

FINMA will also consider opening enforcement proceedings against the bank employees responsible.

The fine has also prompted Swiss prosecutors to review the decision to see if the bank should face a criminal investigation.

THE FINRA statement says

In January 2017, FINMA concluded enforcement proceedings which had been running since the beginning of 2016 against Coutts & Co Ltd (“Coutts”).

Coutts & Co Ltd has seriously breached money laundering regulations by failing to carry out adequate background checks into business relationships and transactions associated with Malaysian sovereign wealth fund 1MDB.

What was found

The proceedings uncovered serious deficiencies in the bank’s anti-money laundering processes for business relationships and transactions associated with the alleged corruption scandal involving the Malaysian sovereign wealth fund 1MDB.

The bank failed to adequately clarify the circumstances surrounding a number of business relationships and unusually large, high-risk transactions.

In addition, it did not follow up on relevant internal information and, despite the existence of substantive evidence, failed to report any suspicions to the Swiss authorities until the spring of 2015.

Given the inadequacy of the bank’s anti-money laundering controls in this particular case, Coutts was in serious breach of its duty to ensure proper business conduct.

2003 – It starts with no questions

In 2003, some employees of the Singapore branch of Coutts entered into business relationships with individuals associated with what became known as the sovereign wealth fund 1MDB.

Coutts, through its branch in Singapore, was the first Swiss bank to accept assets from these individuals. When the Coutts employees moved to another bank in Singapore in 2009, some of the business relationships were transferred to Coutts Zurich. In total, 1MDB-related assets to the value of USD 2.4 billion were transferred through Coutts accounts in Switzerland.

Dubious reasons for transactions were not clarified

2009 – Triggers and red flags ignored

In the summer of 2009, Coutts opened a business relationship in Zurich with a young Malaysian businessman. When the account was opened, information was provided to the effect that USD 10 million would be transferred to it from the account holder’s family assets.

Instead, in the autumn of 2009, approximately USD 700 million was transferred to the account from the Malaysian sovereign wealth fund 1MDB. The reasons given for this transaction were inconsistent, and some information was changed retrospectively.

Moreover, the documents presented in support of the transaction contained obvious mistakes, not least the fact that the identities of the contracting parties were transposed.

A member of the bank’s Compliance unit noted in an internal email:

“It would be the first time in my career that I would see a case where [in] an agreement over the amount of USD 600 Mio. or so the role of the parties has been confused.”

The Legal Services unit even spoke of the risk of a “total fabrication”.

Nevertheless, the bank failed to clarify the background to the transaction with the necessary diligence.

2009-2013 – numerous high-risk transactions

Subsequently, between late 2009 and early 2013 numerous high-risk transactions with a total value of USD 1.7 billion were processed through the account. For example, more than USD 0.5 billion was transferred to a domiciliary company belonging to the businessman on the basis of in transparent loan agreements.

The bank justified these actions on the basis that the same beneficial owner was involved. Coutts took no action to clarify the use of USD 35 million for visits to casinos and the purchase of a range of luxury services (e.g. the chartering of yachts and private aeroplanes).

Suspicion due to the unusual transactions

Although Coutts had serious grounds for suspicion due to the unusual transactions from 2009 onwards, it opened a further business relationship with the Malaysian businessman in the summer of 2012.

Contrary to the information provided when the account was opened, USD 380 million was transferred to this account from an offshore company in March 2013. A further USD 300 million followed.

Pass-through transactions were then used to transfer most of the funds received to another domiciliary company belonging to the businessman. Despite the obviously suspicious nature of these transactions, the bank failed to look into them seriously and was content to make superficial enquiries.

Internal warnings were ignored

A number of bank employees expressed serious, timely concerns to their managers and the Compliance unit about the business relationship with the Malaysian businessman.

Following negative media reports, the individual responsible for providing advisory services to this businessman in Singapore noted:

“I feel very uncomfortable with this guy and the transactions that are going through the account. I think the management has to make a decision whether to keep this relationship.”

Although the media reports led to investigations within the bank and exchange between Coutts Singapore and its Swiss head office at which the clearly erroneous information provided by the client was discussed, those responsible failed to follow up on these clear causes for concern. Instead, it was decided to continue with the lucrative business relationships and process the transactions.

2012 – SOW/SOF IS OK

As early as March 2012 the following was noted in an internal bank meeting about the business relationship with the Malaysian businessman:

• “[X] Is a key client who we are comfortable with the Source of Funds, Source of Income and activity performed on these accounts”.

2013-2014

In 2013 and 2014, various compliance bodies within the bank again raised and questioned the business relationship. On each occasion, however, they decided to continue with it.

Does the behaviour meet the test for corporate criminal liability?

The Swiss attorney general’s office said Thursday that it had asked Finma for a copy of the enforcement decision to help evaluate whether Coutts’s behaviour met the test for corporate criminal liability.

Finma said it has also flagged the case to the U.K. Financial Conduct Authority. A spokesman for the FCA declined to comment.

NOT THE FIRST

This fine follows Falcon Private Bank and BSI, both based in Lugano, who were ordered to shut down their Singapore banking units as punishment for facilitating illicit payments, and BSI was fined 95 million Swiss francs last year for ignoring clear warning signals, according to Finma CEO Mark Branson.