The Swiss Financial Market Supervisory Authority (Finma) has found Julius Baer fell “significantly short” in combating money laundering in its Latin America operation between 2009 and 2018.
The failures relate to alleged cases of corruption linked to a state-owned oil firm, Petróleos de Venezuela (PDVSA), and world football organisation Fifa, which resulted in enforcement proceedings by Finma.
The Swiss wealth manager has now been instructed to “undertake effective measures” to comply with its legal obligations to combat money laundering and “rapidly finalise” the measures it has already started putting in place.
“Julius Baer must change the way it recruits and manages client advisers, as well as adjusting remuneration and disciplinary policies,” the Swiss regulator said.
“Until it is once again fully compliant with the law, the bank is prohibited from conducting transactions, such as major acquisitions that lead to a significant increase in operating risks, including but not limited to money laundering risk, or in its organisational complexity.”
Recently, the firm was rumoured to be interested in buying Kleinwort Hambros, however Societe Generale has taken it off the market.
Inspections
Finma conducted inspections at several Swiss banks to find whether anti-money laundering (AML) rules had been upheld in connection with the alleged cases of corruption linked to PDVSA and Fifa.
Part of this process included the appointment of an agent to investigate Julius Baer.
Finma said it “broadened its investigation following the arrest of one of the bank’s client advisers in the US and in response to events unfolding in Venezuela”.
The watchdog added: “The proceedings, now concluded, found that Julius Baer was in breach of obligations to combat money laundering and its duty to put in place an appropriate risk management policy, representing a serious infringement of financial market law.
“Almost all of the 70 business relationships selected on a risk basis and the vast majority of the more than 150 sample transactions, selected on the same basis, showed irregularities.
“Finma also uncovered systematic failures in risk management at Julius Baer, which repeatedly failed to react to clear indications of possible money laundering risks or did not do so decisively enough.”
Details of offences
The private bank “did not do enough to determine the identities of clients, nor did it establish the purpose or background of its business relationships”, the watchdog added.
Information contained in KYC (know your customer) documentation was “either incomplete or ambiguous for the vast majority of the audited business relationships”.
The regulator also found that transactions were not “properly monitored or were insufficiently queried, in a period in which Julius Baer was presumably seeing clear warning signs of money laundering activity”.
“Finma proceedings furthermore showed that organisational failings and misplaced incentives encouraged breaches of the legal obligations to combat money laundering,” the regulator said.
“The bank’s remuneration system focused almost exclusively on financial targets and paid scant regard to compliance and risk management goals.
“Julius Baer had a poor compliance and risk culture in which legal obligations to combat money laundering were not given the required degree of importance.”
Improvements needed
Julius Baer has implemented a programme over the last two years to strengthen its global risk management and address weaknesses from the Finma report.
In the future, its focus will “shift from new money growth to sustainable profit growth”, the wealth manager said.
The Latin America operation has been under new leadership since December 2017, and appointments have been made to “all key positions”.
The strategy in the region has been “completely overhauled”, which includes the introduction of a “market-specific focus” that has resulted in the closure of the local business in Panama and Venezuela.
“Considerable sums have been and continue to be invested in enhancing transaction monitoring and combating money laundering,” it said.
“The group will also adapt its incentive and compensation systems to correspond with its risk standards.”
Additional measures
Finma has ordered the following additional measures to be taken:
- The bank must put in place a process for identifying those advisers whose client portfolio carries a high money-laundering risk, for assessing the identified risks and for suitably containing them;
- The bank must make changes to its remuneration and disciplinary policy so that incentives are no longer offered to generate the highest possible returns at the cost of unreasonable risk-taking or compliance failures; and,
- The bank must establish a board committee specialising in conduct and compliance issues, or set up a similarly effective mechanism.
The regulator will appoint an independent auditor to monitor, step-by-step, the implementation of internal measures, both those already introduced and the additional safeguards.
Finma “will now examine whether to commence proceedings against any individuals”.
Confident of a positive lasting impact
Romeo Lacher, chairman of the board of directors at Julius Baer, said: “We accept Finma’s findings and regret the shortcomings identified in our business with Latin American clients.
“This is not compatible with the risk culture that we are striving to achieve.
“Julius Baer has invested substantially over the past few years in strengthening our compliance and risk management processes to make them fit for the challenges of the future and, as part of our new strategy, we will continue to invest forcefully in these areas.
“We are fully confident that the measures we have taken have already had a positive lasting impact.
“Together with the executive board, the board of directors will rapidly and resolutely enforce implementation of the measures initiated and decreed by Finma.”
