| Asia | Articles
At the beginning of March, the Monetary Authority of Singapore (MAS) imposed penalties of S$5.2 million on Standard Chartered Bank Singapore (SCB) for 21 breaches and S$1.2 million on Standard Chartered Trust Singapore (SCTS) for 12 breaches. These penalties were imposed for breaches of MAS’ anti-money laundering and countering the financing of terrorism (AML/CFT) requirements, occurring when trust accounts of SCB’s customers were transferred from Standard Chartered Trust (Guernsey) to SCTS. SCB and SCTS were found to have unsatisfactory risk management and controls. They did not adequately assess and mitigate risk factors, and also failed to file suspicious transaction reports (STRs) in a timely manner.
The incident first came under the regulator’s purview when S$1.91 billion of private bank client assets were transferred from Guernsey to Singapore, ahead of new tax transparency rules being adopted, the Common Reporting Standard (CRS). The CRS allows for automatic exchange of tax and financial information on a global level. Its purpose is to combat tax evasion. Guernsey, a Channel Island known as a low-tax offshore financial centre, adopted the CRS at the start of 2016. Singapore will implement the CRS from 2018.
As financial institutions, some of the red flags associated with the transfer that should have been flagged were:
- Timing of transfer
The customers were moving assets right before the implementation of the CRS, to Singapore, a jurisdiction which has not yet implemented CRS. This could indicate avoidance of CRS reporting obligations.
- Customer background
The customers were mainly Indonesian clients, some of whom with military links. These type of customers, should be identified as Politically Exposed Persons (PEPs) and should have been subject to enhanced monitoring.
- Account activity
Accounts that were previously static had a flurry of requests in late 2015. This sudden increase in account activity was raised to the financial crime compliance team but subsequently approved.
- Source of funds
There were significant disparities between earnings of some customers and account balances. Some customers had funds in their accounts in the tens of millions but earned only in the tens of thousands. The source of wealth should have been thoroughly determined through Customer Due Diligence (CDD) commensurate to the risk profile of the customer.
The failure to thoroughly investigate these red flags and conduct commensurate customer due diligence led to significant fines imposed on SCB and SCTS because they are all direct breaches of MAS’ AML/CFT regime. This is especially so since the designation of tax crimes as a money laundering predicate offence. Financial institutions need to ensure that customer funds do not involve tax evasion monies. With the implementation of the CRS, it will be easier for governments to collect evidence of tax evasion due to the free exchange of information. This is likely to reduce incidence of tax evasion. However, financial institutions must still be vigilant to the possibility of customer funds being proceeds of tax crime, particularly for customers coming from countries with more onerous tax regimes.
MAS highlighted some positive actions of SCB and SCTS that considerably reduced the penalties imposed on them. Firstly, SCB was pro-active in notifying the regulator when they discovered some suspicious behaviour in the trust accounts. Internally, individuals had raised their concerns to senior management about the activities in the trust accounts. Secondly, both SCB and SCTS’ management showed strong commitment to address deficiencies and strengthen their internal AML/CFT controls. These are some lessons we can learn from this incident.
Hence, financial institutions should aim to promote a strong risk culture especially from the top management. Doing so would enable proper implementation of AML/CFT controls and reduce the incidence of AML/CFT failures. Internal whistleblowing, where employees feel comfortable raising issues to senior management, is also something that should be seen as more of an acceptable norm. This allows significant issues to be highlighted to key personnel who can effect change, in the event it had been overlooked.
Since the specialised Anti-Money Laundering Department had been established in MAS in 2016, we have seen an increasing trend of imposing heavy penalties and unprecedented enforcement actions. In 2017, SCB were fined the same amount for 28 breaches with regards to the 1MDB scandal. This increasing trend of imposing heavy penalties for breaches of AML/CFT regime highlights the regulators’ enforcement focus, and we can expect them to continue their unstinting vigilance on AML/CFT controls.
We can help
Financial institutions have detailed requirements for reporting suspicions of money laundering and countering the financing of terrorism (AML/CFT), preventing bribery and corruption, managing fraud risks and preventing market misconduct. Whether you need help with a specific area or ongoing support with financial crime compliance, Bovill can help.
We support our clients by preparing your firm for regulatory visits, conducting a financial crime health check, ensuring your governance is fit for purpose, training your people to understand risks and assessing financial crime risk across your firm.
