Private banks, already on high alert following the Panama Paper leaks, are tipped to review their client bases even more closely on news that BSI Bank will close in Singapore. These events have reinforced the realisation that wealth managers must be far more aware of the source of customer funds, note industry observers.

“Private banks are frantically going through their client lists in the region and looking for hidden risks,” said a Singapore-based risk consultant. “They are also being incredibly careful about who they onboard now as clients, given that potential revenues often do not outweigh rising compliance risks these days.”

However, private banks are struggling to conduct the necessary due diligence because they have never made great efforts to do it before, he noted.

They used to view Hong Kong and Singapore as having a light regulatory touch, but not any longer, said consultants and bankers contacted by AsianInvestor. The Hong Kong Monetary Authority, for example, has been pushing banks to verify their source of funds. The city’s anti-money laundering (AML) law provides clear guidelines on conducting due diligence on customers with political exposure.

Indeed, what happened to BSI could happen to any firm, argues Velisarios Kattoulas, chief executive of Singapore-based risk assessment firm Poseidon Research. Any private bank in the region of any scale that's been in the region for more than 10 years has the potential to breach AML requirements, he said.

“Many bankers have clients where they are not certain of their source of funds,” Kattoulas added. “They are trying hard to find out, but it is not an easy thing to do. Unless you get the necessary reps and warranties, bankers run the risk of being caught up in a money-laundering probe which is potentially career-ending.”

The BSI closure came on the heels of the Panama Papers scandal, which saw a massive leak of data files revealing prominent businessmen and politicians who kept money – both legally and illegally obtained – offshore.

The leaks may prompt a re-assessment of AML and anti-terror financing, including customer due-diligence measures, said Steve Vickers, CEO of Steve Vickers and Associates, a specialist political & corporate risk consultancy.

"Financial institutions are liable to institute investigations and update procedures ... A raft of new regulatory measures is likely to follow," he said. 

BSI's woes
BSI was ordered to withdraw its status as a merchant bank by the Monetary Authority of Singapore (MAS) yesterday because of serious breaches of anti-money laundering (AML) rules, poor management oversight of operations and gross misconduct by some of its staff. It was also fined S$13.3 million, and six of its current and former employees have been referred to the public prosecutor to evaluate whether they have committed criminal offences.

These sanctions have added to BSI’s woes, even as the Swiss regulator Finma yesterday approved the firm's takeover by rival Swiss private bank EFG. Switzerland’s Office of the Attorney General had already started criminal proceedings against BSI in connection with the money-laundering case against state fund 1Malaysia Development Berhad (1MDB), to which it is believed to have client links.

Soon after MAS announced the BSI closure, the bank said Stefano Coduri had stepped down as group CEO and been replaced by Roberto Isolani, currently a member of the board. BSI also said it had been improving its risk and compliance culture, including by introducing a new chief risk officer and a new group legal counsel.

The bank added that it had taken note of comments by MAS and Finma in relation to “past compliance gaps related to the 1MDB case” and had co-operated fully with both Finma and MAS “with regard to the investigations into 1MDB, arising from activities occurring between 2011 and April 2015”.

The MAS’s sanctions for BSI come after the private bank changed hands twice in the past year, first being sold to Brazilian group BTG Pactual in a deal completed in September. BTG was then forced to sell it on – to EFG – amid allegations related to a corruption scandal in Brazil.