BY UNA GALANI

Singapore is finding that being the Switzerland of Asia has its downside. The city-state’s central bank has shut down the local operations of BSI as Swiss authorities opened a criminal probe into the private bank, relating to disgraced sovereign fund 1Malaysia Development Berhad. The battle against illicit money flows is global. But Singapore seems only now to be properly facing up to the risks of its push to court private wealth.

The city-state made an aggressive push to capitalise on Switzerland’s distress following the global financial crisis, when Swiss authorities reined in their secrecy laws and saw their home-grown banking giants UBS and Credit Suisse collectively fined over $3 billion by U.S. authorities for enabling tax evasion. Deloitte reckons that Singapore grew its net new assets in international wealth management by 11 percent compared to a 7 percent decline for Switzerland between 2009 and 2014.

Now that relative success is posing a big threat to Singapore’s reputation as a financial centre. BSI was a correspondent bank for 1MDB, from which Swiss authorities said earlier this year as much as $4 billion appeared to have been misappropriated in a scandal that has engulfed Malaysia’s Prime Minister Najib Razak.

Singapore’s closure order on BSI, a S$13.3 million ($9.61 million) fine, and move to refer current and former executives of the bank to the public prosecutor, appears decisive. But the central bank said it had found policy lapses and problems with internal controls at the Swiss-headquartered bank, which was recently sold to EFG International, as far back as 2011. Swiss regulator Finma, in comparison, clawed back $95 million of BSI’s earnings.

The fallout underscores the tension the city-state faces between the desire to grow as a financial centre and the need to maintain a reputation for robust enforcement. Maintaining this balance is especially difficult given some of the key pillars of Singapore’s financial centre have been struggling in recent years; fees for merger advice are flagging and the country is losing out to its Southeast Asian rivals as a destination for new stock-market listings.

Switzerland is already all too aware of the risks that come with private banking. For Singapore, the Malaysian fund scandal may force a rude awakening.

First published May 24, 2016

(Image: REUTERS/Edgar Su)