The Swiss financial services regulator has found Coutts & Co Ltd to be in serious breach of Switzerland's money laundering regulations by failing to carry out adequate background checks when dealing with 1Malaysia Development Berhad, the scandal-struck fund.

The checks that the bank left undone ought to have thrown more light on business relationships and transactions associated with the Malaysian sovereign wealth fund, according to FINMA, the Financial Market Supervisory Authority. Some Malaysian officials used the fund as though it were a personal bank account, according to Loretta Lynch, the US attorney general under President Barack Obama. She and her office went to court in July to seize more than $1bn of assets allegedly acquired using misappropriated from the fund.

FINMA has ordered the bank to disgorge unlawfully generated profits of SFr6½ million (€6 million). The regulator is also thinking of punishing the bank employees who facilitated the misconduct.

FINMA has just finished something it calls "enforcement proceedings" that had been in progress against the bank since the beginning of last year. According to FINMA, they 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. The bank was not sufficiently clear about the circumstances surrounding a number of business relationships and unusually large, highly risky transactions. It also 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.

Coutts was involved at an early stage of the Malaysian saga. In 2003, some employees of the Singapore branch of Coutts struck up business relationships with individuals who were later associated with 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 over to Coutts Zurich. In total, 1MDB-related assets to the value of USD 2.4 billion were transferred through Coutts accounts in Switzerland.

FINMA is also furious about the dubious reasons that the bank had for various transactions. In the summer of 2009, Coutts opened a business relationship in Zurich with a young Malaysian businessman. When the account was opened, a shadowy person or persons (FINMA does not say who, but presumably it was the account holder) led the bank to expect a US$10 million transfer to it from the account holder’s family. Instead, in the autumn of 2009, approximately $700 million went into to the account from 1MDB, which had just been given its present-day name. The reasons that the shadowy person gave for this transaction were inconsistent and someone changed some information (FINMA does not say who or what) retrospectively. Moreover, the documents that the person presented in support of the transaction contained obvious mistakes, not least the fact that the identities of the contracting parties were, in FINMA's odd parlance, "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 US$600 million or so the role of the parties has been confused.” The legal services unit even spoke of the risk of a “total fabrication.” Nevertheless, according to FINMA, due diligence took a back seat to greed and the bank failed to enquire further.

Subsequently, between late 2009 and early 2013, numerous highly risky transactions with a total value of US$1.7 billion went through the account. For example, more than US$½ billion was transferred to a domiciliary company belonging to the young Malaysian businessman on the basis of opaque loan agreements. The bank justified these actions by saying that the same beneficial owner was involved, taking no action to gather information about the use of US$35 million for people's visits to casinos and the purchase of a range of luxury services (e.g. the chartering of yachts and private aeroplanes).

Although Coutts had serious grounds for suspicion about these transactions in 2009 and subsequently, it opened a further business relationship with the Malaysian businessman in the summer of 2012. Contrary to the information he provided when the account was opened, US$380 million was transferred to this account from an offshore company in March 2013. A further $300 million followed. The account holder then used pass-through transactions to transfer most of these funds to another domiciliary company that belonged to him. Despite the obviously suspicious nature of these transactions, the bank failed to look into them seriously and was content to make superficial enquiries.

It also ignored internal warnings. A number of bank employees were quick off the mark in expressing serious doubts about the business relationship with the Malaysian businessman to their managers and to the compliance unit. Having read some negative press reports about him, the bank employee responsible for providing advisory services to him 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 at the bank and a dialogue between Coutts Singapore and its Swiss head office during which the clearly erroneous information provided by the client was bandied about, Coutts failed to follow up on these clear causes for concern. Instead, it decided to carry on with the lucrative business relationships and process the transactions. 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.” In 2013 and 2014, various compliance people at the bank raised and questioned the business relationship once again. On each occasion, however, they decided to continue with it.

FINMA has conducted investigations into a number of Swiss banks in relation to the 1MDB case and has commenced proceedings against five other banks in addition to Coutts. It concluded its proceedings against BSI Bank and Falcon Private Bank AG in May and October 2016 respectively.