The recent U.S. fine in connection with the FIFA scandal will lead Julius Baer to three tortuous years as an additionally empowered Finma monitor shadows the bank’s every step.

The U.S. attorney’s office for the Eastern District of New York did not mince its words when it fined Bank Julius Baer at the end of May.

Even for an office where hyperbole is not uncommon, the language was blunt, even brusque, saying Julius Baer had facilitated bribes while compliance turned a «blind eye to glaring red flags of money laundering».

This means that the next three years are going to hurt even though the U.S. agreed, as part of the DPA, to use the independent compliance monitor installed by Finma and not appoint its own.

Blame the System

Julius Baer does claim it has addressed many of the Finma breaches under its Atlas program, which ended in 2019, although much of that work looks like they were just tackling basics.

When they say they improved documentation standards, what that usually means is that they now have records of plausible sources of wealth for clients in places or computers you can actually find.

And when the DPA states the «Project Phoenix» large-scale AML transaction monitoring system has been launched but that some of the program enhancements are «incomplete and untested», it means they are likely having problems fine-tuning alerts and stopping false positives, all of which prevents real cases from getting escalated.

Flagged Down

Although all that work is likely to continue, you can make the argument that the systems themselves were not at fault.

The DPA states multiple times that internal staff should have been aware of red flags and transaction alerts, going so far as to say that Julius Baer supervisors and compliance did not meaningfully review due diligence from relationship managers central to the scheme and that they «would have known there were multiple, significant red flags» when they affirmatively approved contracts, shell company services and third-party payments.

Updating systems is not going to change anything except to provide more alerts and escalations to ignore while everyone continues on their way to affirmatively approve what they haven’t even reviewed.

Cowed Compliance

This all does give the monitor leeway, however, to tackle an internal culture where advisors could apparently cow compliance into what sounds like complete subjugation.

One of the tools they could do that with is Finma’s requirement to establish a board committee for conduct and compliance issues – or a similar mechanism. That committee or method, likely already up and running, has its work cut out for it.

No Dissent

If it is a committee, it is highly likely to have a quorum, or some variation of it, where members of the compliance, legal and financial crime teams, or similar functions, have full votes - along with relationship managers and management. If they adopt that model, it is likely that all decisions over the next three years would require full approval from the committee without any dissenting votes.

A monitor team worth its salt is going to make sure that the submissions and minutes are closely scrutinized, full, complete and appear truthful, given the DPA wrote Julius Baer had made misleading representations and did not come forward with all evidence pertaining to senior management.

They are also going to need to see a track record of significant push-back and limited patience by management towards front-line staff. Importantly, they will want to see clients go beyond those they had exited by the end of 2020, with the involved relationship managers executing the decisions fully and promptly.

Dubious Rationalizations

Over the next three years, both the monitor, Finma and the U.S. are going to demand that relationship managers view clients and transactions beyond the simplistic lens of additional business and/or past personal connections. They are going to want to see critical scrutiny of escalated alerts, large transactions, and dubious client rationalizations.

This is going to be gut-wrenching. Many in Julius Baer are going to say three years down the line that paying the fine was the easiest part.