The fallout from Credit Suisse Group AG’s spying scandal widened as Switzerland’s regulator escalated its investigation into an episode that ultimately led to the ouster of the bank’s chief executive officer.
Banking regulator Finma said it would start an enforcement action against Credit Suisse to look into potential violations and scrutinize how the spying was documented and controlled. While Finma doesn’t have the power to fine a bank, it can take actions such as banning executives from the industry.
“It is not surprising that Finma has expanded its investigation of Credit Suisse, but its sanctioning powers are very limited,” said Kern Alexander, the chair of law and finance at the University of Zurich. “This will probably result in another order to ‘correct’ their internal controls and order the board to have more involvement in such activities.”
Credit Suisse is struggling to move beyond one of the most damaging episodes in its recent history after it spied on star banker Iqbal Khan, who was leaving for rival UBS Group AG. Last year’s scandal tainted the bank’s reputation, led to the ouster of CEO Tidjane Thiam after a power struggle, and rattled the usually quiet world of Swiss banking.
Chairman Urs Rohner turned to Thomas Gottstein, a two-decade Credit Suisse veteran, to restore investor confidence. Gottstein has pledged to reach out to shareholders and regulators to mend relations, and sought to build bridges with employees.
At the same time, the new CEO had to contend with a series of setbacks since the onset of the coronavirus pandemic. They include losses from soured loans in Asia, allegations of conflicts of interest at the bank’s fund unit, a fraud case in the bank’s wealth business and questions about its role in helping disgraced German payments firm Wirecard AG raise funds.
Gottstein, speaking Wednesday at an event organized by Finanz & Wirtschaft, said Finma’s probe will touch on “how we communicate” in the bank via iPhone or Whatsapp messaging, and could set a standard for the whole industry.
“The observation of employees is not part of the culture of Credit Suisse,” Credit Suisse said in a statement, adding it will continue to fully cooperate.
Shares of Credit Suisse rose 0.1% at 3:06 p.m. in Zurich trading. They’re down 25% this year.
An internal probe ordered by the bank at the time of the scandal had concluded that Thiam didn’t know about the spying, and that Chief Operating Officer Pierre-Olivier Bouee was responsible. It later emerged that ex-human resources chief Peter Goerke had been monitored, and a former U.S. executive also said she had been followed. Bouee was fired late last year.
“The most extreme action Finma could take would be to ask people to leave the bank, but Credit Suisse already preempted that to some degree with the CEO and COO leaving,” said Andreas Venditti, an analyst at Bank Vontobel in Zurich. He said he wasn’t surprised by Finma’s announcement and that like Alexander, he expected Finma only to order some compliance changes.
“One thing still open in my view is the use of encrypted chats and if the regulators are able to decrypt those conversations,” said Venditti. “What information would come out of there?”
Finma launched its own investigation in December, appointing an independent auditor who has now completed the initial probe. The regulator said enforcement proceedings can take several months and it will inform the public once they are concluded.
Finma doesn’t have the power to fine a bank, but it can demand repayment of profits deemed illicit or otherwise suspicious. Similarly, while it cannot fine individual bankers, it can ban them from the industry for up to five years.
Credit Suisse was criticized by Finma two years ago over its failure to properly oversee a former star wealth manager convicted of fraud, as well as its dealings with soccer’s governing body FIFA and two South American oil companies. At the time, the bank was ordered to improve internal controls and be subject to third party monitoring to oversee their implementation.
It’s not clear yet if Finma’s enforcement proceedings will lead to any new investigation into the broader scandal. Zurich prosecutors did open a probe into the original complaint that Khan filed after discovering that he was followed. Authorities also investigated the suicide of a Credit Suisse contractor caught up in the scandal.
A spokesman for the Zurich prosecutor’s office said Finma proceedings do not have a “direct influence” on its own ongoing investigations.
A message left with the federal prosecutor’s office in the Swiss capital Bern was not immediately returned. Federal prosecutors have investigated Swiss banks caught up in the FIFA affair as well as scandals involving oil producers PDVSA and Petrobras.