FINMA, the Swiss Financial Market Supervisory Authority, has ordered Falcon Bank to disgorge profits of SFr2½ million ($2½ million) illegally generated from the 1MDB scandal and has forbidden the bank to form new business relationships with foreign politically exposed persons for three years.

The regulator says that Falcon has broken Switzerland's money laundering rules by failing to carry out adequate background checks when faced with transactions and business relationships associated with 1MDB, the scandal-struck Malaysian sovereign wealth fund, which were booked in Switzerland, Singapore and Hong Kong. It is also warning the bank that further transgressions will result in the withdrawal of its licence. FINMA has also begun enforcement proceedings against two of the bank's former executives.

FINMA launched enforcement proceedings against Falcon Private Bank Ltd at the beginning of this year because of evidence that it had breached Swiss money laundering regulations in respect of business relationships and transactions in the context of the alleged corruption scandal. It appointed an investigator, who now seems to have reported.

In the period under investigation between 2012 and the summer of 2015, FINMA identified serious shortcomings in Falcon's anti-money laundering activities and in its management of 'risk.'

Falcon's relationships

Assets amounting to approximately US$3.8 billion were transferred to accounts at Falcon and associated with the 1MDB Group during that period. These funds were generally moved on quickly. The business relationships and transactions booked in Switzerland and at Falcon’s branches in Singapore and Hong Kong  were unusual and, according to FINMA, involved a high level of 'risk' for the bank  through boththeir nature and the amounts transacted. Although the attention of senior managers was drawn to these matters, they failed repeatedly to  investigate the business relationships, specifically those with politically exposed persons (PEPs), and high-risk transactions properly. They also did not analyse or monitor the risks involved properly.

The bank had a number of business relationships with domiciliary companies within the 1MDB group and executed transactions amounting to approximately US$2½ billion in the accounts of two of these offshore companies. The bank failed to check the backgrounds and risk profiles of these complex transactions in sufficient depth. It did not sufficiently query or assess the plausibility of the proffered documents and information about the supposed financing of energy projects, nor did it question the commercial background of the US$1.3 billion which was immediately transferred from one account to another (these were 'pass-through' transactions).

Falcon also had a client relationship with a young Malaysian businessman with links to individuals in Malaysian government circles. The bank did not verify the means by which this person had been able to acquire assets of US$135 million in an extremely short period of time or why a total of US$1.2 billion was transferred to his accounts at a later date – a transaction that contradicted the information he had provided when opening the account. Falcon was also inadequate in its investigation of the commercial background to pass-through transactions amounting to US$681 million and the repayment six months later of US$620 million through these accounts despite conflicting evidence. In this context, an internal Falcon email states: "We started this six months ago and now we have to go through with it – somehow".

Internal warnings ignored

A number of bank employees expressed serious concerns to their managers about the relationship with the Malaysian businessman because of numerous suspicious factors and key questions remaining unanswered. One internal email relating to the transfer of US$1.2 billion states: "We can’t find any reason/motivation/statement why this transaction has to pass through FPB [Falcon] and not from [Bank X] directly to the respective parties […]." Nevertheless, these internal warnings were not followed up satisfactorily.

Although the bank's decision-makers were aware of these internal concerns, they decided to carry out the transactions. Their main aim was always to try to process the transactions on time. One senior manager warned the Singapore branch carrying out the transactions: “Head Office is watching you”.

Two terrible directors

Two representatives of the bank's owners who were on the board of directors initiated business relationships with the 1MDB Group and with individuals from their immediate circle. The managers responsible for these relationships therefore attached great significance to them and were concerned to ensure that they went smoothly. According to their own statements, they assumed that the two board members represented the will of the bank's owners as far as these relationships were concerned. Both board members pursued their own illegitimate purposes. Neither of them is any longer on the bank’s board of directors. FINMA has no evidence that other members of Falcon's board were implicated in these matters or that this behaviour was widespread at the bank.