Singapore, Swiss Regulators Slam Falcon Over 1MDB Breaches

  • Falcon linked to $3.8 billion of 1MDB fund flows, Finma says
  • Private bank’s Singaporean branch manager arrested on Oct. 5

Monetary Authority of Singapore Shuts Falcon Bank

Regulators ordered Falcon Private Bank to cease operations in Singapore and slammed the bank for “serious” breaches of anti-money laundering regulations in relation to its role in moving funds associated with the troubled 1Malaysia Development Bhd.

The Monetary Authority of Singapore said the firm’s local branch manager has been arrested and Switzerland’s Financial Market Supervisory Authority has started enforcement proceedings against two of Falcon’s former executives and threatened to withdraw its license if there were any further breaches of money-laundering regulations. Finma linked the private bank to $3.8 billion of 1MDB fund flows, according to a statement released Tuesday.

Falcon “has seriously breached money laundering regulations,” Finma said. The private bank failed “to carry out adequate background checks into transactions and business relationships associated with Malaysian sovereign wealth fund 1MDB which were booked in Switzerland, Singapore and Hong Kong.”

Special Report: Malaysia's 1MDB Controversy

Falcon failed to adequately investigate the background of so-called pass-through transactions totaling $681 million and the repayment six months later of $620 million according to the Finma statement. That’s the amount that appeared in Malaysian Prime Minister Najib Razak’s accounts in 2013 and most was later returned, the country’s attorney general said earlier this year. The Swiss regulator didn’t mention Najib.

Unsettling Move

"Wealthy clients typically get very nervous when they read about their bank being the target of an anti-money laundering investigation, said Jonas Floriani, a banks analyst at Keefe, Bruyette & Woods in London. “When a regulator goes as far as to shut down part of the business there’s every chance some clients will run for the hills.”

The two regulators fined Falcon a combined $5.6 million, with UBS Group AG and DBS Group Holdings Ltd. also drawing penalties from the MAS for anti-money laundering lapses. In a statement, Falcon said it and its Abu Dhabi-based owner, Aabar Investments PJSC, welcomed the completion of the investigations, which “finally resolves the 1MDB topic for the bank with the regulators.” Since 2013, the firm had further enhanced its compliance and taken additional measures “to prevent future issues,” it said.

Abused, Naive

“We will take care to wind down the Singapore branch in an orderly fashion,” Chief Executive Officer Walter Berchtold told journalists in Zurich Tuesday. “Falcon was abused and was a little naive on occasion.”

Falcon had under $900 million in client assets in Singapore, out of 18.2 billion Swiss francs ($18.5 billion) globally, Berchtold said. Aabar, the bank’s parent company, is not going to sell the Swiss lender, he said. “Aabar stands behind the bank 100 percent and views it as a strategic asset.”

Falcon had a relationship with a “young Malaysian businessman” with ties to that country’s government, the Swiss regulator said. The man, who it didn’t identify, had been able to acquire $135 million of assets in a short period of time and transferred a total of $1.2 billion to his accounts at a later date. The bank did not verify how he was able to do so, even though the transaction was “clearly” inconsistent with the information he gave when opening the account.

Besides Singapore and Switzerland, U.S. authorities are also digging into how billions of dollars may have been improperly diverted from 1MDB, which was set up in 2009 to fund development projects across Malaysia. Singapore said in May it would revoke Lugano, Switzerland-based BSI SA’s local license, and in July rebuked four banks -- including Falcon -- for lapses in anti-money laundering controls related to transactions linked to the Malaysian fund.

1MDB has consistently denied wrongdoing and Malaysia’s government has said it will cooperate with lawful investigations of local companies or its citizens in relation to the fund. Singapore has criminally charged four people, including three former BSI bankers for their roles in transactions and money flows linked to 1MDB.

For a QuickTake Q&A on 1MDB, click here.

The Swiss regulator said it had identified “serious shortcomings” in Falcon’s anti-money laundering activities and in risk management between 2012 and the summer of 2015. Assets amounting to about $3.8 billion associated with 1MDB were transferred to accounts at Falcon during that period and “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,” Finma said. “Although management’s attention was drawn to these matters, it repeatedly failed to properly investigate the business relationships.”

The MAS’s withdrawal of the firm’s merchant-bank status brings to an end a boutique private-banking operation that began in the city in August 2008. The regulator had fined Falcon S$300,000 for anti-money laundering lapses after an inspection in 2013, and uncovered “an even larger number” of breaches as well as “serious failings” by senior management at the bank’s head office and by the Singapore branch manager, the MAS said.

Serious Failings

The branch manager, Jens Sturzenegger, was arrested by Singapore’s Commercial Affairs Department on Oct. 5, the MAS said. The regulator fined Falcon S$4.3 million ($3.1 million) for 14 breaches of Singapore’s anti-money laundering rules including failing to adequately assess irregularities in customer accounts and to file suspicious transaction reports.

“Falcon Bank has demonstrated a persistent and severe lack of understanding of MAS’ AML requirements and expectations,” the regulator said. “Taking into account the totality of Falcon Bank’s conduct, MAS’ assessment is that the merchant bank will be unable to comply with these requirements and expectations going forward.”

Falcon’s Singapore office on the 26th floor of a building overlooking the city’s downtown area was quiet on Tuesday morning, with employees moving about, talking on their mobile phones. Two of them, who declined to provide their names, said they had been notified about the MAS decision and refused to comment further. Building security said later they had been instructed to deny media access to the office.

Taking Action

Founded in 1965 as Ueberseebank, the Zurich-based bank was renamed Falcon in 2009 after Aabar, an investment company controlled by the Abu Dhabi government, took over the firm from American International Group Inc. Falcon has offices in London, Abu Dhabi and Dubai.

The Singaporean regulator, which had vowed stronger action on anti-money laundering lapses earlier this year, also fined UBS S$1.3 million and DBS S$1 million in relation to 1MDB. The MAS had found control lapses by specific bank officers, the regulator said, adding that it had completed its inspections of the two banks’ 1MDB fund flows.

UBS and DBS said in separate statements they will strengthen controls and take actions against employees responsible for the lapses.

The boards and senior management at banks “must set the tone from the top – that profits do not come before right conduct,” MAS Managing Director Ravi Menon said in the statement. “MAS will work closely with the industry to ensure that standards are kept high and will take strong deterrent actions against institutions that fall short.”

— With assistance by Vogeli Voegeli, Niluksi Koswanage, David Roman, Pooja Thakur Mahrotri, Klaus Wille, Giles Broom, David Yong, and Shamim Adam

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