MAS, industry partners tackle legal persons, trade finance issues to mitigate AML risk

Legal persons and trade finance are now the two top concerns of the Monetary Authority of Singapore (MAS) as it aims to mitigate further the risks of money laundering and terrorist financing, an MAS official said.

The Anti-Money Laundering and Countering the Financing of Terrorism Industry Partnership (ACIP), formed in April this year, which brought together the MAS, the Commercial Affairs Department of the Singapore Police Force (CAD), other government entities, the Association of Banks in Singapore (ABS) and financial institutions recently set up two work groups on legal persons and trade finance.

Abuse of legal persons, offshore companies and investment funds

Following bank inspections, MAS found that the abuse of legal persons, offshore companies and investment funds was a main feature of many typologies, Chua Kim Leng, assistant managing director at MAS, told a financial crime seminar held last week.

Some individuals have made use of trust and company service providers to set up large numbers of corporate structures in multiple jurisdictions, many of which are shell companies with no clear commercial purposes and hidden ultimate beneficial owners. Very often such companies and investment funds opened multiple bank accounts in different jurisdictions to facilitate their fund flows. Using methods such as “layering” and “pass-through”, they seek to disguise the sources of fund and where the fund goes to, while hiding the true beneficiary owners and the purpose of transactions.

The main challenge to financial institutions is the lack of a complete picture either because customers failed to make all their information available to them or their intentions known, said Ruchi Sharma, consultant at Bovill in Singapore.

“What is being presented to financial institutions may be perfectly legitimate and provide no reason for suspicion at the outset. With such limitations they run the risk of inadvertently becoming conduits to money laundering. It is a real challenge to work with the limited information revealed by customers and make the best use of it,” she said.

Know your customers well

To protect the financial system from such abuses, firms must know their customers well and be alert to patterns, Chua said. That means being able to detect inconsistency in behaviour and transactions against the information provided by customers about their wealth, risk profile and business, which may suggest illicit activities are involved. This would require banks to have onboarding and customer review practices and transaction monitoring processes which address red flags effectively, he said.

Even accounts of longstanding clients who run operating companies could be used for illicit purposes, MAS found.

Financial institutions need to make use of trends and patterns to strengthen their understanding of their customers over time, given the limited information they work with, Sharma said.

“When something falls out of the usual trend, you are better informed,” she said.

ACIP workgroups

To address these challenges, the ACIP workgroup will highlight ways in which criminals set up and abused legal persons. It will also propose a set of measures, including red flag indicators, to prevent the abuse of legal persons that both financial institutions and non-financial institutions (including accountants, legal practices and corporate service providers), can take onboard as customers, Chua said.

The legal persons workgroup set up by ACIP will be collecting information from the industry on the types of legal entities that are being used by their customers and the jurisdictions in which such legal entities are being set up or incorporated, among others, said Eunice Tan, local principal at Baker & McKenzie Wong & Leow in Singapore.

“The whole idea of the exercise [of collecting information] is to identify patterns and to see whether entities are being used to mask beneficial owners or sources of funds. Naturally arising out of that comes a trend or pattern. Regulators will see whether there are any existing gaps and whether measures need to be implemented,” she said.

The ACIP workgroup will collect information based on a set of parameters, according to Tan. It will be a one-time exercise expected to be completed this year.

ACIP’s work of collecting information should provide real tools for banks to adopt, Sharma said.

Trade-based money laundering

The MAS’s concerns about trade-based money laundering (TBML) have led the ACIP to form another workgroup. There are similar concerns internationally about the criminal abuse of trade and trade financing channels, Chua said. This includes mis-declaring invoices, using unnecessarily complicated shipping routes or involving multiple trading companies to legitimise illicit monies and movement of goods. Some schemes even involved the use of front companies to import and export contraband goods and dual-use materials into sanctioned countries.

“The workgroup will seek to improve our collective understanding of TBML typologies, outlining industry best practices on preventing and detecting TBML, and considering new analytical tools that could make detection processes more effective and efficient,” he said.

Notwithstanding the overall awareness of AML risks, staff at financial institutions may be insufficiently trained to detect abnormal or questionable transactions from a sea of similar-looking transactions that banks process on daily basis, Sharma said. This remains one of the biggest challenges to firms.

“While training/advisories can provide real examples of dual use goods, it would still take an experienced staff to detect over-invoicing manually, for example,” she said.

Sharing of information

Chua also highlighted the importance of sharing information beyond ACIP, adding information sharing needs to be extended to a bank’s group-wide operations. The Banking Act and the Personal Data Protection Act should not deter financial institutions from sharing information, but this is provided that the recipients maintain confidentiality of information, he said.

“… banks can share relevant information with their head offices, and any overseas branch or subsidiary designated by the head office, for risk management purposes. This includes the management of ML/TF risks. I encourage such sharing, as a holistic view of a client relationship is essential for a bank to implement a consistent group-wide AML/CFT policy to combat illicit activities,” Chua said.

Jul 4 2017 Patricia Lee, Regulatory Intelligence

Patricia Lee is chief correspondent, banking and securities regulation, Asia

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