The Wolf of Wall Street, starring Leonardo DiCaprio, was a 2013 movie documenting the true story of the rise of an ordinary man to a wealthy stock-broker living the high life and his subsequent downfall, involving crime, corruption and the federal government.
In 2016, the United States brought its largest kleptocracy case to date, where the Department of Justice is seeking to recover US$1 billion in stolen assets laundered through the US, including the rights to the film, The Wolf of Wall Street. It is reported that more than US$100 million of funding for the movie was funnelled to Red Granite Pictures, a company co-founded by the Malaysian Prime Minister’s stepson, from funds raised through bond issues intended to help in developing the country via the state development fund, 1 Malaysia Development Berhad (1MDB).
It is alleged that more than US$3.5 billion has been misappropriated by 1MDB officials, their relatives and other associates, in a corruption case of eye popping proportions.
Now a new film is in production and it will be one to watch out for – The Master and His Wolf. Producer Mike Lerner was reported as saying ‘we have a gripping story with a cast of fantastical characters; movie stars, prime ministers and a system of money laundering, with direct links between Malaysia via Saudi and Abu Dhabi companies, which goes right to the heart of Hollywood’s elite’.
BSI Bank, Falcon and RBS Coutts
Asia and the rest of the world has been rocked by the 1MDB corruption scandal which has seen investigations triggered around the globe including the United States, Singapore, Switzerland, the United Kingdom, Hong Kong and Malaysia.
The scale has also shook the financial services industry. In Singapore, two private banks, Falcon Bank and BSI Bank, have lost their banking licences for serious and ongoing anti money laundering failings involving this scandal. The Singapore regulator, the Monetary Authority of Singapore (MAS), referred members of the senior management to law enforcement and subsequently four bankers received jail terms and four have been barred for working in financial services in Singapore; two for life and two for terms of 10 and 15 years respectively.
Singapore takes its reputation as a trusted and clean financial centre very seriously and the enforcement action shows that Singapore is not afraid to land significant punches in the protection of its reputation. Additionally the MAS has fined five banks more than S$18 million, the largest fines imposed by the regulator to date for such breaches.
The corruption and money laundering scandal can be traced back to its banking roots in Singapore in 2003. Banking relationships established at that time later became 1MDB related banking relationships after the state development fund was established in 2009. RBS Coutts provided banking services to 1MDB. In 2010, BSI Bank completed Singapore’s largest ever transfer of staff from one private bank to another by hiring seventy of Coutts private bankers, including the new BSI CEO. BSI was then on track to fulfil the vision to treble the bank’s regional funds under management to $9 billion by 2015. The more than S$8 billion in funds raised by 1MDB would have been an attractive target. With BSI Bank the custodian bank of $2.3 billion of investments from the Malaysia fund, this made 1MDB the largest customer of BSI bank.
Suspicious Transaction Reports
So what are the emerging trends from the 1MDB scandal?
Highly profitable yet politically exposed clients from high risk countries are still seen as attractive by many private bankers. Protests from compliance and some bankers were noted in both of these two bank cases, but the calls for restraint were largely ignored by the business. Highly suspicious transactions were repeatedly not reported to the authorities as is required by law and the failure to file suspicious transaction reports (STRs) form the basis of the jail terms imposed on individuals.
The last few years have seen increases in penalties and prosecutions for failure to file STRs. The massive Bernie Madoff Ponzi scheme in 2009 highlighted this trend when in 2014 JP Morgan Chase was fined $2.6 billion for its failure to file STRs related to the case.
Another example from Asia includes over a dozen public and private sector banks being slapped with fines in India following a sting operation for their “failure” to report attempts of suspicious transactions and money laundering in their branches.
An emerging trend is the focus on the provision of compliance advice to the business versus providing compliance instructions to the business (and compliance following through to ensure instructions are acted upon). This advice vs instruct distinction has come under intense scrutiny as a result of 1MDB and other recent cases. Banks have been fined in respect of situations where compliance advice has been ignored or overruled in favour of profits.
The advice vs instruction distinction is not a new phenomenon although its more publicised shortcomings would suggest that financial services firms will need to train compliance staff how to navigate and understand the highest levels of responsibility required.
By understanding and acting appropriately on the issues presented, both the compliance and money laundering risks emanating from corruption can be more effectively mitigated. As we have seen in the cases of both Falcon bank and BSI Bank, failed compliance risk management can result in the ultimate sanction: the removal of the firm’s licence.