Banker’s Arrest Puts Boom Years Under Scrutiny at Swiss Bank

(Bloomberg) -- Locked up in a jail cell at the height of a humid Florida summer, former Julius Baer banker Matthias Krull didn’t take long to crack and plead guilty to money-laundering charges.

Described by U.S. prosecutors as a “door opener” who managed “banking activities for Venezuelan officials and kleptocrats,” the German was arrested in Miami on the evening of July 24. He stood before a federal court judge less than a month later and was released on Sept. 11 after posting $5 million bail.

Krull won’t know his fate until he is sentenced next month for his role in an illegal scheme linked to Venezuela’s state-owned oil company. But at Julius Baer it’s becoming clear that the breakneck pursuit of new money over the past decade is raising hard questions inside the Swiss bank about how customers were vetted, just as the European financial industry is once again in the spotlight over illicit funds.

Before the Krull saga, Julius Baer was embroiled in the corruption probe at FIFA, which, like the bank, is based in Zurich. One of its former bankers pleaded guilty in a New York federal court in June 2017 to his role in channeling money from Argentina to officials at the soccer world’s governing body. In March this year, Julius Baer said it suspended an employee in Russia while the bank looked into allegations made by Swiss federal prosecutors as part of a probe into deals by a weapons company.

As part of what it calls “Project Atlas,” Julius Baer is now reviewing its client portfolios to see whether assets held in the bank are clean and sufficiently tracked, three people familiar with the process said. Managers must document every person equally, whether a dentist in suburban Zurich or an ultra-rich entrepreneur in the Americas, one person said.

The message is zero risk, and when it used to be sufficient to say a client inherited the money, that doesn’t cut it anymore.

Banker’s Arrest Puts Boom Years Under Scrutiny at Swiss Bank

A particular focus is Julius Baer’s Latin American business. About 10 or so top bankers who left the company in recent months worked there, and the departures included the head of wealth management for Central America and the Andean region. Some were disgruntled with how the bank is overhauling the way it operates, the people said.

The expansion came under former Chief Executive Officer Boris Collardi with the biggest deal being the purchase of the international operations of Bank of America Merrill Lynch. He spearheaded growth at Switzerland’s third-largest wealth manager, doing a dozen acquisitions of smaller firms and joint ventures during his almost 10-year tenure. Julius Baer hired hundreds of new client managers and more than doubled the money it oversaw.

Between 2009 and 2017, assets under management swelled to 388 billion Swiss francs ($403 billion). That propelled Julius Baer into the top 12 private banks globally, according to a ranking by Scorpio Partnership. The number of relationship managers at the bank rose from 800 in 2012, to 1,400. The bank’s share price almost doubled between 2012 and 2017.

It’s down 18 percent this year, in line with other Swiss banks, though dropped as much as 5.6 percent on Friday. That was the biggest decline in eight months and made Julius Baer the worst performer on the Swiss stock market. 

Banker’s Arrest Puts Boom Years Under Scrutiny at Swiss Bank

“Even if Baer doesn’t get entangled in any legal liability, rising expenses for improving conduct and compliance systems could go hand in hand with a slower and more selective intake of net new money,” Stefan Stalmann, a partner at Autonomous Research, an independent group of analysts looking at financial companies worldwide, said in a research note. “We continue to believe that investors under-appreciate Baer’s exposure to legal risks.”

Collardi, who left for Swiss rival Pictet last year, declined to comment for this article. He kicked off “Project Atlas” in the second quarter of 2016 by earmarking funds to pay for it, according to people familiar with the situation.

It was then rolled out in 2017 and Bernhard Hodler, who was in charge of risk under Collardi and succeeded him as CEO, briefed client-relationship managers again on the project this year, the people said, declining to be identified when speaking about Julius Baer’s affairs.

“Clearly we are spending a lot of time doing Project Atlas,” said Yves Robert-Charrue, who runs Julius Baer’s European operations. It’s just an opportunity to review portfolios with existing clients and gauge new prospects, he said. “If we don’t understand structures or see where the wealth is coming from, we don’t open an account.”

A spokeswoman at Julius Baer’s headquarters in Zurich said the bank doesn’t comment on the details of what goes on internally, or indeed on any of the legal cases. 

Banker’s Arrest Puts Boom Years Under Scrutiny at Swiss Bank

It’s been a torrid time at many European banks. Deutsche Bank AG, ING Groep NV and Credit Suisse Group have all been reprimanded this month by the authorities for lax controls over money-laundering. Danske Bank A/S of Denmark said that a large part of about 200 billion euros ($233 billion) that flowed through its Estonian unit between 2007 and 2015 may have been laundered.

At Julius Baer, some bankers complain that too much time is now spent doing due diligence paperwork and not enough on the business of luring clients, people said. A team of roughly 100 compliance officers hired specifically to help execute “Project Atlas” is screening client portfolios.

Relationship managers must provide frequent status updates on the screening and at the end of the process, those managers need to testify that their books are clean, according to the people. Political links are scrutinized and the wealth of the client needs to be traceable, they said.

Also in the mix for Hodler is the bank’s so-called deferred prosecution agreement, or DPA, with the U.S. Department of Justice. That deal was struck in February 2016 with U.S. prosecutors for Julius Baer’s role in concealing undeclared accounts held by U.S. taxpayers at the Swiss bank.

It offers plenty of scope for the American authorities to exert further pressure for unrelated issues. As part of the DPA, Julius Baer must cooperate with any U.S. government agency and must flag all criminal conduct by its employees for “any violations of U.S. federal law.”

Latin Headache

The biggest headache, though, is Latin America. The business is run by former Goldman Sachs banker Beatriz Sanchez. She is now exiting Venezuela and is also reviewing its Panama unit, according to at least two people familiar with the bank’s regional strategy. Sanchez declined to comment, while Julius Baer has said only that it’s realigning its business on the continent without being more specific.

Krull, who was 44 at the time of his arrest, quit Julius Baer in June. He was arrested the following month and accused of laundering stolen money from Petroleos de Venezuela SA, known as PDVSA. Krull, one person said, generated about 11 million Swiss francs in fees a year, making him one of the top rainmakers in the entire bank.

He pleaded guilty for his role in a scheme to launder $1.2 billion worth of funds from PDVSA by Venezuelan officials, according to a public transcript of his plea hearing. He admitted to prosecutors that he joined the conspiracy in or around 2016 when he was approached to handle the proceeds of a foreign-exchange embezzlement scheme, according to U.S. prosecutors. Julius Baer started an internal investigation into the case and said it’s not been charged with any wrongdoing.

Oscar Rodriguez, Krull’s lawyer in Miami, did not return messages seeking comment on behalf of his client.

About $600 million was stolen through that forex scheme, which began in late 2014, a number that would double by May 2015, the Department of Justice said. Krull told prosecutors his main job at the bank was to recruit private wealth clients, including a Venezuelan indicted on money-laundering charges in August.

Another Probe

Separately, Geneva prosecutors are investigating the case of two executives at Helsinge, a small oil-trading company in the Swiss city, suspected of bribing Venezuelan officials and money laundering.

The two men, Francisco Morillo and Leonardo Baquero, and Helsinge have been accused in a U.S. lawsuit of defrauding PDVSA by bribing employees to hand over information they then resold to some of the world’s biggest oil-trading houses. Morillo and Baquero banked with Julius Baer, according to two people familiar with the probe.

Morillo declined to comment when reached by phone. Attempts to reach Baquero, whose whereabouts were not known, were not successful. Brian Briz, a lawyer for Helsinge, declined to comment.

With new automatic exchange of information rules due to come into place this year for Switzerland, the country is no longer an obvious destination for those looking to hide money from their local tax authorities. Still, as a country that built a secrecy statute into federal law in 1934, it has attracted illicit money flows for decades, and old habits die hard.

A light touch to regulation helps. Credit Suisse was castigated by Switzerland’s financial regulator last week for its compliance failures in four different scandals including PDVSA, but faced no further sanction.

Julius Baer, founded in 1890, still plans to continue its growth path through acquisitions and hiring in the Americas and Europe and may even reopen in Miami to cater to wealthy Latin Americans, according to people familiar with the plans.

In the meantime, investors are looking keenly at compliance, said Andreas Venditti, a Swiss banking analyst at rival Bank Vontobel. “And they are wondering, ‘what’s going on?’”

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