Switzerland's federal financial regulator, unable to impose punitive fines, has censured Credit Suisse for failing to meet its anti-money-laundering obligations in relation to various corruption scandals and for mishandling a business relationship with a politically-exposed person or PEP.

The effect on the banking group's stock price has been negligible. This is because stock markets rarely worry about regulatory rebukes on the subject of money laundering, although fraud cases are a different matter.

FIFA, Petrobras and PDVSA

One source of regulatory blame for Credit Suisse stems from an investigation that FINMA opened in 2015 that related to corruption involving FIFA, Petrobras and PDVSA - the international football association, the semi-public Brazilian oil company and the Venezuelan state-owned oil and natural gas company. The regulator was looking for HNWs whose money (located at different Swiss banks) might be connected to these scandals, along with corporations and small investors who might also be tied in. It started off by contacting the Swiss criminal authorities to see if they had opened any investigations already and asked them for information. Then FINMA asked the country's banks whether they had any clients 'in the context' of these cases.

FINMA found that most Swiss banks had dealt with the problem correctly. Other banks had made various errors in their background checks or responses to 'red flags' but did not exhibit any systematic problems when reacting to the scandals. Then, however, FINMA identified a few banks against which it felt obliged to open formal investigations. These banks included Credit Suisse and BSI in the case of Petrobras - and later, in Credit Suisse's case, regarding FIFA and PDVSA as well. In proceedings that came to a close in May 2016, FINMA sanctioned BSI's misconduct in the Petrobras case. It announced at the time that it had investigated more than twenty other Swiss banks and had proceeded against six of them. It has only just  completed its 'enforcement procedure' against Credit Suisse, however.

FINMA found that that Credit Suisse had failed to meet its AML obligations in respect of all three scandals. It did so by failing to identify clients, failing to determine the beneficial ownership of various entities, failing to spot 'high risk' business relationships, failing to "perform the necessary clarifications upon increased risk plus associated plausibility checks," as FINMA puts it, and failing to find and submit the right documents.

Credit Suisse, it emerged, had repeated these faux pas again and again after 2006, mainly before 2014 but right up to and including 2016 as well. FINMA conducted its reviews of the bank’s conduct in the FIFA, Petrobras and PDVSA affairs independently of each other but they showed similar results.

FINMA is not legally entitled to impose punitive fines on the banks it regulates, as this is the sole job of Swiss courts, so it censures them instead. It is, however, able to force them to 'disgorge' any ill-gotten gains that might have come from fees they charged on illicit business. That said, it is difficult for it to prove that this-or-that fee was charged on business that definitely emanated from this-or-that piece of misconduct, as much illicit business is merged with legitimate business. Consequently, FINMA decided not to pursue the tortuous goal of 'disgorgement' in this case and restricted itself to a 'naming and shaming' exercise.

Lescaudron - lone wolf or symptom?

The second prong of the reprimand centres around Credit Suisse's inability to keep a tight rein (or any kind of rein at all) on the activities of a star wealth manager called Patrice Lescaudron. A FINMA spokesman declined to say whether Lescaudron - who has been sentenced to five years' imprisonment for fraud - was the man in question but the entire Swiss press insists that he is and the spokesman said that everyone who has asked FINMA about its censure of Credit Suisse has mentioned his name. FINMA's press release says that he mismanaged the bank's relationship with a 'politically exposed person' or PEP, which also fits the Lescaudron profile.

Lescaudron, a Frenchman, had six HNW victims who included Bidzina Ivanishvili, the 62-year-old Georgian billionaire and former prime minister who has a fortune of US$5.9 billion/SFr5.67 billion, Vitaly Malkin, who long ago helped Ivanishvili set up Rossiyskiy Kredit Bank, Russian oil-and-gas executives Sergei Egorov and Zurab Lysov, and a Russian businesswoman called Olga Kurbatova. He forged his clients' orders and initiated trades without their permission, partly with the aim of fleecing them and partly with the aim of disguising the existence of an ever-widening 'black hole' of losses which eventually amounted to SFr143 million (US$147 million). During his trial Lescaudron argued that all his efforts were directed at the latter task, but the judge uncovered SFr 30 million (US$31.18 million) that he had leeched from his victims for his own personal gain.

Like most Ponzi schemers, Lescaudron was not a good investor of his clients' assets. He invested a princely sum in an Australian real-estate concern whose value declined by half and SFr 120 million (US$124.7 million) in three Swiss hedge funds whose holdings in a Californian chemical company lost most of their value.

Even at the time of Lescaudron's trial, Malkin told the court that Credit Suisse still had not apologised to him. Ivanishvili could not attend because of bad health.

The question before FINMA has been whether Lescaudron was a 'lone wolf' who successfully deceived the bank that employed him throughout his rip-roaring career as a fraudster, which lasted roughly eight years, or whether the bank was systematically complicit. Its verdict was unequivocal: "The relationship manager in question – who was very successful in terms of assets under management – breached the bank's compliance regulations repeatedly and on record over a number of years. However, instead of disciplining the client manager promptly and proportionately, the bank rewarded him with high payments and positive employee assessments. The supervision of the relationship manager was inadequate due to his special status."

Too slow off the mark

What has Credit Suisse been doing to placate the regulator over these problems? The answer seems to be "too little too late, so FINMA must intervene more heavily." Bloomberg reports that since 2015 the banking giant has "split its legal and compliance units," whatever that means, and has set up a regulatory affairs and compliance unit that reports to the CEO, also hiring an extra 800 compliance people and planning to set up a compliance committee.

This appears to be less than FINMA was led to expect, however, for its press release states: "FINMA acknowledges the improvements, some substantial. However, it has also decreed additional measures to complement the bank’s actions and restore full compliance with the law. These measures are designed to further improve the bank’s governance, organisation and risk management in the wealth management business."

The spokesman declined to confirm or deny whether this meant that FINMA felt obliged to step in and speed up the bank's sluggish internal reforms. He did say, however, that it was being done through the agency of a 'third party,' i.e. the Swiss version of a British 'skilled person' whom the regulator can appoint in accordance with s166 Financial Services and Markets Act 2000.

By the end of next year, all Swiss banks must be able to form a "single client view," a phrase which means that everyone at each bank must be able to see every relationship that this-or-that client has with every other part of the bank in all jurisdictions automatically. Most banks have done this already but Credit Suisse has been dragging its heels. It embarked on the policy in 2015 but even today it only has a system that allows the compliance department to see all the information. The spokesman said that the imperative for a "single client view" springs from FINMA's rules and not from FIDLEG, the new Financial Services Act whose 'conduct' rules are expected to come into force on 1 January 2020. He said that the idea behind it is that everyone at a bank can apprise himself of the risks inherent in every relationship with every client.