Compliance lessons from Julius Baer’s ‘serious AML failings’

The shortcomings were uncovered by the Swiss Financial Market Supervisory Authority, known as FINMA, following inspections the regulator had conducted at several Swiss banks over alleged cases of corruption linked to Venezuelan state-owned oil company Petróleos de Venezuela (PDVSA) and world soccer federation FIFA. Part of this process included appointing an agent to investigate Julius Baer in 2017, an investigation FINMA said it broadened in 2018 following the arrest of one of the bank’s client advisers in the United States and in response to events unfolding in Venezuela.

FINMA’s now-concluded proceedings found Julius Baer breached its obligations to combat money laundering and failed to put in place appropriate risk management controls, “representing a serious infringement of financial market law,” the regulator said.

During its investigation, FINMA uncovered the following specific compliance shortcomings:

Defective KYC processes. Julius Baer did not do enough to determine the identities of clients, nor did it establish the purpose or background of its business relationships. Information contained in Know-Your-Customer (KYC) documentation was either incomplete or ambiguous for most of the audited business relationships. For example, information was frequently missing as to how individual clients had come by their wealth, why they wanted to open an account with Julius Baer, and what business they were planning to transact.

Due diligence failures. According to FINMA, nearly all 70 business relationships selected on a risk basis, and the majority of the more than 150 sample transactions selected on the same basis, showed irregularities. Moreover, these offenses spanned from 2009 to early 2018.

“All in all, 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.”

FINMA

Transactions were insufficiently queried, even amid warning signs of money laundering activity. For example, a CHF 70 million (U.S. $71.6 million) transaction was carried out for a large Venezuelan client in 2014 without the required investigations, even though the bank had learned in the same year the client was facing accusations of corruption, FINMA said.

Misplaced incentives encouraged breaches of legal obligations to combat money laundering. “The bank’s remuneration system focused almost exclusively on financial targets and paid scant regard to compliance and risk management goals,” FINMA said. For example, a client adviser looking after Venezuelan clients in 2016 and 2017 received bonuses and other remuneration in the millions, even though Julius Baer had reported a number of this adviser’s clients—based on investigations or suspected wrongdoing in connection with the PDVSA case—to the Money Laundering Reporting Office Switzerland.

Systemic cultural issues. “All in all, 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,” FINMA said. “For example, the manager in charge did not check the explanations given by the client adviser regarding the background to transactions in many of the cases connected with Venezuela. That task was left to the person’s assistants. In some examples, money laundering risks were flagged and addressed by the appropriate departments but not properly acted on.”

Even when Julius Baer decided in 2016 to conduct an internal review of the PDVSA case, it was delayed for almost 17 months. Moreover, the bank gave “incomplete responses” when questioned over the extent of its business relationships connected with PDVSA at the start of FINMA’s investigation, “which in itself represents a breach of its duty to provide information to the supervisory authority,” FINMA said. Only in 2018 did Julius Baer finally put in place operating and HR measures concerning its Venezuelan business relationships, the regulator said.

AML compliance enhancements

For its part, Julius Baer said in a statement it has “cooperated extensively with FINMA, assisting in the investigation and conducting its own comprehensive investigation in parallel, both in-house and with the assistance of independent experts.” Furthermore, the bank said it has improved and “strengthened significantly” its control system and compliance processes, both in terms of personnel and in the context of in-house rules and management principles.

Some of these changes have included appointing new leadership in the Latin American region and completely overhauling its strategy in Latin America, “including the introduction of a market-specific focus that has resulted, among other things, in the closure of the local business in Panama and Venezuela,” Julius Baer stated.

Additionally, the bank said it has further developed and improved its documentation standards for client data and active client relationships, changes it completed last year. The bank has also increased by 40 percent its compliance staff headcount and has made improvements in its “processes, technology and data analysis,” Julius Baer said. “In addition, considerable sums have been and continue to be invested in enhancing transaction monitoring and combating money laundering. The group will also adapt its incentive and compensation systems to correspond with its risk standards.”

While acknowledging these enhancements, FINMA ordered Julius Baer to implement the following additional measures to further enhance its AML compliance controls:

• Put in place a process for identifying those client advisers whose client portfolio carries a high money-laundering risk, for assessing the identified risks, and for suitably containing them;
• 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
• Establish a board committee specializing in conduct and compliance issues or set up a similarly effective mechanism.

Furthermore, Julius Baer is prohibited from conducting large and complex acquisitions until its fully in compliance with the law. Lastly, FINMA said it will appoint an independent auditor to monitor the implementation of internal measures, both those already introduced, as well as the additional safeguards now required of it.

Julius Baer Chairman Romeo Lacher said the company accepts FINMA’s findings. “This is not compatible with the risk culture that we are striving to achieve,” he said. “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.”

As is customary upon completion of proceedings against a bank, FINMA will now examine whether to commence proceedings against any individuals.