"The serious breaches of supervisory law linked to the client relationships the bank maintained over the period under investigation enabled it to charge high fees.
Finma has ordered the disgorgement of illegally generated profits in the amount of 95 million swiss franc (about RM394 million).
"The money disgorged will go to the Swiss Confederation," it said in a statement.
As part of the Swiss investigation into 1MDB, it found funds being transferred across a client group which controlled over 100 accounts at BSI Bank.
The transfer was facilitated by BSI Bank without proper due diligence even in instances where there were clear indications of money laundering.
Finma also announced a similar move undertaken by the Monetary Authority of Singapore which ordered the closure of BSI Bank in the city state.
For BSI Bank in Switzerland, Finma said it had approved the complete takeover of the bank by EFG International.
However, Finma said this was on condition that BSI Bank must be fully integrated into EFG International and BSI Bank, as it is now, will cease to exist within 12 months.
"None of the BSI top management responsible for the misconduct will be allowed to take up leadership positions at EFG.
"This takeover is a positive development providing clients and employees with a perspective for the future," it said.
BSI Group chief executive director Stefano Coduri yesterday resigned from his position with immediate effect.
Finma acknowledged that it was receiving positive cooperation from the newly-installed directors at BSI Bank.
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