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1MDB FALLOUT

Falcon Bank loses S'pore licence; DBS, UBS fined over 1MDB-linked fund flows

MAS slaps monetary penalties on all three for breaching Republic's anti-money laundering rules
Wednesday, October 12, 2016 - 05:50
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THE Monetary Authority of Singapore (MAS) has stripped Falcon Private Bank of its licence for 1MDB-related fund flows, the second Swiss bank to be thrown out of Singapore for involvement with the tainted Malaysian state fund.

Singapore

THE Monetary Authority of Singapore (MAS) has stripped Falcon Private Bank of its licence for 1MDB-related fund flows, the second Swiss bank to be thrown out of Singapore for involvement with the tainted Malaysian state fund.

In a statement on Tuesday, MAS said that it would also fine Falcon, which is owned by the International Petroleum Investment Company, one of the world's leading sovereign wealth funds from Abu Dhabi, S$4.3 million for anti-money laundering (AML) breaches.

MAS will also impose penalties on DBS Bank and UBS AG, Singapore Branch for AML breaches.

The development follows the shuttering of the Singapore branch of Swiss bank BSI in May for its role in suspicious 1MDB transactions.

MAS said that it decided to shut Falcon for "serious failures in anti-money laundering (AML) controls and improper conduct by senior management at the head office in Switzerland as well as the Singapore Branch".

Action against the three banks came after MAS looked into 1MDB-related fund flows that took place through these banks between March 2013 and May 2015. MAS said that investigations benefited from close cooperation with various overseas regulatory counterparts, in particular, the Swiss Financial Market Supervisory Authority (Finma).

Falcon has been operating as a merchant bank in Singapore since August 2008, offering boutique private banking services.

MAS conducted inspections on Falcon in 2013 and 2015. The 2013 inspection found weaknesses in the bank's controls for client acceptance and transaction surveillance that led to breaches of AML requirements. Falcon paid a composition fine of S$300,000 for these breaches, and it was told to strengthen its AML controls.

The 2015 inspection uncovered an even larger number of regulatory breaches as well as serious failings on the part of head office senior management and the Singapore branch manager, Jens Sturzenegger, who was arrested by the Commercial Affairs Department on Oct 5.

Ironically, Mr Sturzenegger joined Falcon in Switzerland in March 2011 as head of compliance before being promoted to Singapore branch manager in August 2011. He was previously with Credit Suisse.

MAS said that the decision to shut Falcon also took into account the head office failure to guard against conflicts of interest when managing the account of a customer who was associated with the bank's former board chairman, Mohamed Ahmed Badawy Al-Husseiny.

"The former chairman misled and influenced the Singapore branch into processing the customer's unusually large transactions despite multiple red flags," said MAS.

Finma said on Tuesday that it has fined Falcon 2.5 million Swiss francs (S$3.5 million) and banned it from entering into business relationships with foreign politically exposed persons for a period of three years. Furthermore, the bank would have its licence withdrawn in the event of a further breach. Finma has also launched enforcement proceedings against two of the bank's former executives.

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 risk management. Assets amounting to some US$3.8 billion were transferred to accounts at Falcon and associated with the 1MDB Group during that period, it said.

"These funds were generally moved on quickly. The business relationships and transactions booked in Switzerland and at Falcon's Singapore and Hong Kong branches were unusual and involved a high level of risk for the bank both through their nature and the amounts transacted."

On the inspections of DBS and UBS in relation to their 1MDB-related fund flows, MAS said that the control lapses observed at the two banks "relate to specific bank officers who failed to carry out their duties effectively". "MAS inspections did not find pervasive control weaknesses within these banks."

The two banks have been told "to investigate the lapses, promptly address the control deficiencies, and take appropriate disciplinary measures against the staff involved".

A DBS spokeswoman said that MAS's findings indicate that the bank's control weaknesses were not pervasive but it "should have taken more rigorous action with respect to the questionable activity, even if it was intentionally designed to conceal another purpose".

"These actions are for lapses which occurred in 2013 and 2014. We have made many enhancements since then and are in a materially better position than before," she said.

The bank "will be taking appropriate actions to hold responsible staff accountable, which will include our senior executives".

"We are aligned with our regulators, that tone is set from the top. Therefore, it is consistent that our actions will include senior executives," she said when asked to elaborate on the action the bank would take.

"Beyond that, we do not comment on specific employee matters."

The Business Times understands that action could range from a warning to a bonus impact to dismissal.

DBS will be donating profits from the 1MDB-related account to a worthy cause.

A UBS spokeswoman said that the bank was strengthening its controls and "appropriate action will be taken on individuals responsible for the lapses".

"UBS is determined not to be used as a platform for financial crime. We will donate all profits from this account to the establishment of an industry-wide AML programme to be run by an independent educational body to help combat financial crime and reinforce Singapore's status as a financial centre which adheres to the highest standards."

MAS also said that it was finalising its assessment of Standard Chartered Bank Singapore Branch and will make an announcement in due course. It has referred the 1MDB-related transactions processed by Raffles Money Change to the Commercial Affairs Department for their follow-up investigation.

A Falcon spokesman said that the 50-year-old bank would try to help its Singapore employees affected by the closure. Asked if the Singapore business would be sold, he said: "We are looking at all possible solutions but it is too early to tell in which direction we will go."

The Singapore office based in Centennial Tower in Temasek Avenue employs 35 people and has assets under management (AUM) of about 900 million francs. Group AUM comes to 18.2 billion francs.

MAS's action will further increase compliance cost but is necessary, said Mak Yuen Teen, associate professor at NUS Business School.

"It will increase costs but this is absolutely necessary given the risks when dealing with customers in the private banking business," he said.

"For DBS and UBS, I think the penalties are relatively low compared to fines often imposed on financial institutions elsewhere for lapses.

"MAS is sending a clear message that it is prepared to go beyond censures to imposing fines, and I think financial institutions can expect MAS to be much tougher going forward.

"Perhaps MAS even needs to look beyond corporate accountability and consider holding boards and senior management accountable where they have not done enough to ensure robust controls within the organisation."

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