Credit Suisse Group AG was scolded by Switzerland’s financial regulator for its failure to properly oversee a former star wealth manager convicted of fraud, escaping any real penalties for its compliance shortcomings.
Finma identified deficiencies in the bank’s anti-money laundering controls as well as shortcomings in its oversight of the manager, identified as Patrice Lescaudron by people with knowledge of the matter. The agency didn’t identify Lescaudron by name in the Sept. 16, morning statement.
Lescaudron was convicted in February and sentenced to five years in prison for perpetrating an eight-year scheme in which he made unauthorized trades and faked purchase orders in a bid to reverse deepening clients’ losses that resulted in damages of 143 million Swiss francs ($148 million). Lescaudron’s activity, which began in 2007, went undetected by Credit Suisse and his clients until a massive wrong-way bet on a Californian drugmaker in 2015 exposed his behavior.
“Instead of disciplining the client manager promptly and proportionately, the bank rewarded him with high payments and positive employee assessments,” Finma said, adding that oversight was “inadequate” because of his special status.
The regulator said it ordered Credit Suisse to improve internal controls and a third party will be hired to monitor their implementation. The bank pointed out that Finma didn’t order any illegal profits to be repaid. Nor did the Swiss regulator hand down a fine as it’s not empowered to do so.
It shows Finma lacks the enforcement tools that its British counterpart can wield to police U.K. banks for compliance failures in London, according to Kern Alexander, the chair of law and finance at the University of Zurich. Last year Deutsche Bank AG was fined 163 million pounds ($214 million) by the U.K.’s Financial Conduct Authority for anti-money laundering failings related to Russian accounts.
“The lack of any fine, in this case, shows that the Swiss regulator is toothless in terms of its inability to mete out meaningful penalties or other sanctions,” said Alexander, who is also a research fellow at the University of Cambridge.
Finma also wrapped up a second case against the bank, this time looking at its relationships with soccer’s governing body and two South American oil companies.
Credit Suisse has exited a number of “high-risk markets” in recent years including private banking with onshore Venezuela clients and Panama. In recent years, it also stopped dealing with the riskiest so-called politically exposed persons, who are seen as a potential hazard because of links to funds from governments and national agencies.
Credit Suisse has consistently said that Lescaudron was a lone wolf who hid his activity from his bosses and colleagues. Georgian billionaire Bidzina Ivanishvili, his biggest client, and victim, said the bank must have, or at least should have, known of his wrongdoing. Lawyers for Ivanishvili, a former prime minister of Georgia, have said their client’s losses reached into the several hundreds of millions.
“We are pleased to learn that the independent regulator has today confirmed our longstanding complaints concerning the bank’s conduct in this matter,” a spokesman for Ivanishvili said in a statement. “We now expect the bank to meets its responsibility for repayment of losses in full.”
Credit Suisse said on Sept. 17 that Finma acknowledged “the improvements that have been made to our compliance and control framework over the last few years and of the additional measures already planned by the bank.”
Shares of Credit Suisse rose 0.3 percent at 4:40 p.m. in Zurich. The stock is down 15 percent this year, in line with a broader decline for the MSCI Europe Bank Index over the same time frame.
The other case that Finma concluded Sept. 17 combined probes into the bank’s relationships with officials at FIFA, soccer’s governing body, and its dealings with Petroleos Brasileiro SA and Petroleos de Venezuela SA that have been at the center of political firestorms in Brazil and Venezuela.
FIFA was rocked by a corruption probe that erupted in 2015 when dozens of soccer executives were arrested in Swiss police raids and the U.S. Justice Department filed charges relating to bribery allegations involving hundreds of millions of dollars. The regulator said that review covered the period from 2006 to 2016.
Credit Suisse must put right “the relevant control systems and processes, and so prove that higher-risk business relationships and transactions are adequately detected, categorized, monitored and documented,” Finma said in the statement.
The bank began an overhaul of its compliance structure when the FIFA and Lescaudron affairs became public. Since 2015, Credit Suisse has split its legal and compliance units and created a regulatory affairs and compliance unit that reports to the CEO. Its chief, former investment banker Lara Warner, became a member of the bank’s executive board. The firm also hired an additional 800 people to bolster compliance, and the bank’s board of directors plans to establish a compliance committee.
Lescaudron maintained he never profited from his illicit trades and his deception was motivated by a desire to recover his clients’ money. The judge overseeing the case disagreed and found that the Frenchman gained 30 million francs through his deception.
In June, lawyers for Credit Suisse asked Geneva’s Criminal Appeals Court to acquit Lescaudron of a single count of criminal mismanagement, but not his convictions for fraud and forgery. Lawyers for one of his clients said the bank was trying to overturn the mismanagement charge because unlike fraud and forgery, a conviction carries broad implication for what the bank may have to pay out in civil lawsuits.
In July, a Geneva appeals court ruled that the prosecutor who led the pretrial investigation into Lescaudron must look at whether the Frenchman should have been charged for mismanaging two of his clients’ investments. Prosecutor Yves Bertossa dismissed the allegation from his indictment of Lescaudron a year ago.
By Jan-Henrik Förster & Hugo Miller