Swiss Banks at Risk of Harboring Corruption Proceeds, Says Regulator

BERN, Switzerland—The head of Switzerland's financial regulator flagged a growing risk to the country's banks of harboring the proceeds of corruption, as they increasingly forage for wealth to manage in emerging markets.

Mark Branson, chief executive of the Swiss Financial Market Supervisory Authority, or Finma, noted in public remarks Thursday that Swiss wealth managers are "increasingly accepting money from faraway, previously less-familiar markets." That, he said, shifts the danger for Swiss banks "away from risks connected with tax law towards money laundering risks."

"It is often more difficult to determine the origin of money from developing countries," Mr. Branson said.

The Finma CEO cited as examples recent cases of suspected money laundering involving Malaysian state investment fund 1Malaysia Development Bhd., or 1MDB, and Brazilian state-run oil firm Petrobras.

Finma has probed more than 20 Swiss banks, and opened enforcement proceedings against seven, related to the two cases, Mr. Branson said. "There are concrete indications that the measures those banks had in place to combat money laundering were inadequate," he said.

In the case of Petrobras, one-quarter of the bank's investigated weren't applying anti-money-laundering regulations appropriately, Mr. Branson said.

Switzerland's Office of the Attorney General has also opened investigations related to 1MDB and Petrobras. The Swiss attorney general has estimated that $4 billion may have been misappropriated from 1MDB.

The recent leak of the so-called Panama Papers, documents from a Panamanian law firm that describe the rampant use of offshore structures to conceal wealth for tax evasion and other wrongdoing, "is just the latest proof of how money flows like water through multiple jurisdictions, sometimes for legitimate purposes, sometimes not," the Finma CEO said.

Finma has said previously it would seek to "clarify" whether Swiss banks had deployed the offshore structures for clients in an illegitimate way.

As authorities in Europe and the U.S. began roughly a decade ago to crack down aggressively on Swiss banks for aiding tax evasion among their citizens by providing accounts concealed by Switzerland's bank secrecy laws, many banks shifted focus to emerging markets in Asia and other regions.

Switzerland's two biggest banks, UBS Group AG and Credit Suisse Group AG, have been at the forefront of this strategic change.

Credit Suisse's recent restructuring under CEO Tidjane Thiam involves a stronger focus on wealth management in Asia. A separate unit created by the bank last October is developing wealth management in emerging markets in regions such as Latin America, Eastern Europe, and Africa.

"We need a culture in which bank employees feel personally committed to combating money laundering," Mr. Branson said.

More Swiss banks need to be proactive about reporting suspicious activity, he said, with 18% of such reports based on the bank's internal suspicions, while 28% are "in response to a newspaper article."

Write to John Letzing at [e-mail]

(END) Dow Jones Newswires

April 07, 2016 06:45 ET (10:45 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.