Singapore: Enhancing Its Regulatory Controls Against Money Laundering and Terrorism Financing

By Yeoh Lian Chuan, and Kwok Shuhui, Allen & Overy LLP, Singapore (01/01/2016)

Singapore's rapid growth as a financial center over the past 50 years has been widely noted. While advanced physical and market infrastructure, the availability of human talent, and an open trading economy more than happy to welcome foreign investment and offshore talent have all contributed to Singapore's success, a clear commitment to a robust regulatory framework has played a key role in helping Singapore build up and cement its reputation as a clean, trusted and credible financial center.

In the area of anti-money laundering and counter-terrorism financing (AML/CFT), Singapore has become a jurisdiction with high ratings on various international AML-CFT rankings and indices. For example, the International Monetary Fund, in its recent (2013) assessment of Singapore's compliance with the Basel Core Principles for Effective Banking Supervision, acknowledged that the Monetary Authority of Singapore (MAS) has put in place a strict AML/CFT regime, and in its last full FATF mutual evaluation in 2008, Singapore scored a very credible 43 out of 49 ‘compliant’ and ‘largely compliant’ ratings.

However, as one of the 25 systemically important financial centres in the world (according to the IMF) and given the broad scope and constantly evolving threats of money-laundering / terrorism financing (ML/FT), it is obvious that Singapore cannot rest on her laurels and must constantly up-date and revise her AML/CFT laws and measures.

This note seeks to highlight a number of recent developments of significance.

In January 2014, Singapore's first AML/CFT National Risk Assessment (NRA) report was published. The Report comprehensively assessed the ML / TF risks to Singapore across various industries (including non-financial sectors) and, amongst other things:

·                     rated Singapore financial sector as having in place generally strong controls in the arena of AML / CFT, whilst noting  that there was scope for improvement in a few areas, such as trade finance and correspondent banking.  

·                     noted that a considerable fraction of Singapore's ML/TF risks arose from offences committed overseas;

·                     identified a number of emerging areas for future study, such as virtual currencies and the precious stones and dealers market; and

·                     noted that the corporate service providers (CSP) sector had been identified as one of the sectors with a higher-risk – and to this end, the Accounting and Corporate Regulatory Authority Act was amended in 2014 to regulate CSPs and to subject them to customer due diligence (CDD) requirements - a regime which has just come into force on 15 May 2015.

In 2014, the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act was amended to introduce the concept of "foreign serious tax offences", effectively aboishing the concept of "dual criminality" for tax offences in the context of money-laundering.

The Monetary Authority of Singapore (Amendment) Bill (MAS Amendment Act) was passed on 11 May 2015 (although it has yet to take effect). The new Act:

·                     (in line with international best practice) embeds in primary legislation the obligation on financial institutions (FIs) in Singapore to conduct CDD measures and to maintain proper records so as to facilitate AML / CFT supervision and any investigations into possible criminal activity;

·                     sets out MAS' powers to conduct AML-CTF inspection on FIs (and aligns them across various classes of FIs in Singapore) and to approve such inspections by home AML-CTF supervisors;

·                     empowers the MAS to share information with foreign AML-CFT supervisory authorities (subject to strong safeguards); and

·                     extends the AMF-CTF regime to financial holding companies and non-banks credit card or charge card issuers

In April 2015, the MAS also introduced (following a period of consultation) substantial amendments to its various AML-CFT notices and guidelines to FIs which set out the detailed requirements in respect of CDD and know-your-client (KYC) requirements. Some of the key changes include the following:

·         the introduction of a new obligation on FIs to undertake an enterprise-wide-risk assessment to identify and assess the overall ML/TF risk that that the FI faces as an institution. To assess such risks, an FI is required to take into consideration, inter alia, its customers and the countries or jurisdictions they are from or in as well as the products, services, transactions and delivery channels of that FI. Having identified those risks, an FIs must take commensurate steps to mitigate those risks effectively and develop and implement policies, procedures and controls to manage and mitigate the risks identified. Particular emphasis will also be placed on the monitoring of such policies, procedures and controls, and FIs will be required to update and review the risk assessments and mitigation methods on a regular basis (at least one every two years or when material trigger events occur).

·         building on the MAS' risk-based approach (RBA) in its supervision of financial institutions, the MAS introduced new requirements on FIs to identify and assess the ML/TF risks in relation to the development of new products and new business practices, including new delivery mechanisms, and the use of new or developing technologies for both new and pre-existing products. These proposals are not dissimilar to the product approval process currently in place under the MAS' Guidelines on Risk Management Practices – Internal Control, which require FIs to have in place a ‘new product policy’ that would generally require an analysis of legal and regulatory requirements and whether the activities are permissible, as well as an analysis of the risks that may arise from these activities and details of any risk management procedures and systems established, including procedures for identifying, measuring, monitoring and controlling risks. As FIs who had already put in place sound risk management practices should be able to adapt their current policies and procedures to include ML/TF risks as one of the specific risks to consider when launching a new product line, the practical impact for most FIs should be manageable.

·         the theme of adopting a holistic risk-based approach is also apparent in the MAS' treatment of CDD/KYC requirements for politically exposed persons (PEPs). In this regard, the MAS introduced amendments to track the definitions of PEPs as set out in the 2012 FATF Recommendations, with separate categories of PEPs depending on the functions that the PEPs carried out. In respect of:

  • domestic PEPs (ie, persons entrusted domestically with prominent public functions),
  • international organization PEPs (ie, persons entrusted with prominent public functions in an international organization) or
  • PEPs who have stepped down from their prominent public functions, taking into consideration the level of influence such persons may continue to exercise after stepping down,

FIs may adopt the RBA in determining whether or not to perform enhanced CDD measures or the extent of such measures.

Apart from the above, the new Notices and Guidelines also:

·         require FIs to take into account the NRA in evaluating their ML/TF risks;

·         require FIs to conduct on-boarding and periodic screening of customers, natural persons appointed to act on behalf of customers and the customers’ connected parties and beneficial owners;

·         provide additional details on CDD process – for example, the Guidelines state that in identifying a natural person who ultimately owns a legal person or legal arrangement a person owning more than 25 per cent of a legal person or legal arrangement (taking into account cross-shareholders).

With increased global mobility and connectivity, MAS has also recognized that international cooperation is crucial to combating ML/TF crimes, and therefore a need to enhance cooperation between MAS and its counterparts. As noted above, the MAS (Amendment) Bill introduced powers to allow the MAS to share information with foreign AML-CFT supervisory authorities.

To address the concerns raised by over requests that may be raised that are merely ‘fishing expeditions’ intended to investigate into specific clients of the FI, which may not in themselves be AML/CFT related, the MAS has indicated that information will be shared only for the purpose of AML/CFT supervision and must be relevant for the foreign supervisor to assess the FI's compliance with relevant AML/CFT laws in the foreign jurisdiction. In addition, foreign AML/CFT supervisors are required to undertake to use the information only for the purpose that is specified in the request, and to protect the confidentiality of the information obtained. There is, of course, the possibility that the MAS may consent to the sharing of the information to a third party by the foreign AML/CFT supervisor. FIs should nevertheless take heart that the MAS is unlikely, based on its past practices, to lightly share information with foreign supervisors simply because it has the ability to do so.   

The overall message put forward by the MAS in the numerous changes it is introducing (or has introduced) to the AML/CFT regime is clear – Singapore will not tolerate the use of its financial system to conduct criminal activities and will do what it takes to fully keep pace with international norms and best practices. Helpfully, the MAS has also recognized that prescriptive rules are not the most efficient method of ensuring that FIs comply with the AML/CFT requirements applicable to them, and will allow FIs some flexibility over how they wish to comply with the standards it has set in respect of AML/CFT requirements. At the same time, it is also clear that the MAS views FIs as key stakeholders in the fight against the omnipresent threat of ML/TF, and expects them to play a full part in upholding and maintaining the reputation that Singapore has painstakingly built up over the years.