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Extensive effort to ensure new measures are complied with
By Yasmine Yahya
01 July 2013
It has been an unrelenting slog for banks over the past six months but with a key deadline fast approaching, they had little choice.
The effort has involved updating IT systems, training staff and scouring through client accounts, all geared towards getting ready for a landmark new law that takes effect today.
It has been hard work - the biggest such operation they have had to undergo in years - but the banks say they are ready.
The big change centres on one of the hottest issues in finance today: tax dodging.
The new law designates that tax crimes will be known as money laundering predicate offences, adding to other predicate offences including corruption, bribery and fraud.
A money laundering predicate offence is the underlying criminal activity that results in “dirty” money that might then be laundered.
The new law makes it harder for tax cheats to hide their ill-gotten funds in Singapore, as banks will now have processes in place to spot and root them out. Bank staffs have now been trained to spot suspicious transactions and activities that look like tax evasion.
This is just one of several recent moves Singapore has made to get tougher on tax cheats.
In May, it signed up for the Organisation for Economic Cooperation and Development’s multilateral treaty on sharing tax details. This pact makes it easier to share information with other jurisdictions about citizens under investigation for tax evasion and with funds here.
With the pact and the new law, a tax cheat who tries to hide his funds in Singapore is now more likely to be turned away.
If he manages to slip through a bank’s filtering systems and open an account, he might still be caught later anyway, either through the bank’s own checks or when the country that he owes taxes to asks the Inland Revenue Authority of Singapore for information on his account.
Such moves are necessary to maintain Singapore’s reputation as a wealth management centre. As the Monetary Authority of Singapore (MAS) put it: “Singapore will continue to strengthen our framework for international cooperation as a strong signal to criminals that Singapore does not welcome illicit funds and readily cooperates with our counterparts in combating crime and recovering criminal proceeds.
“This is an important deterrence to help to ensure that our financial system is not used as a harbour or conduit for illicit assets and to maintain high standards of financial integrity.”
In the run-up to the implementation of the new law, the MAS had tasked financial institutions here to review the accounts of existing clients who they deemed to have a “high tax risk” by yesterday.
If they fail to meet this deadline, they could be in breach of the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act and relevant MAS Notices.
Banks will have to complete a review of all remaining client accounts by June 30 next year. If they come across any potential tax crimes in these reviews, they will have to file regulatory reports with the MAS and decide whether they want to continue the relationship with the client.
And starting today, banks will have to assess the tax risk of all new clients who want to open an account and ensure that the funds they are placing with the bank are not proceeds from tax evasion.
Given that Singapore has long had strict anti-money laundering laws, financial institutions here already had robust internal systems in place to spot suspicious transactions made by their clients that could indicate if they were laundering funds.
Having to also spot possible tax evaders now has not required a complete overhaul of those systems, but the changes they have had to make have been substantial nonetheless, experts said.
In fact, helping bank employees understand just what exactly tax evasion is has been among the most challenging parts of the whole process.
“We have trained them to help them better understand how to spot a transaction that looks dubious enough that it could be tax evasion, and how to ask tactful and diplomatic questions of clients once they’ve spotted such transactions, so they can form a firmer view about whether these are really tax offences.”
Ernst & Young financial services tax partner Stephen Bruce agreed, saying that determining whether a client may have committed a tax crime could require much investigation.
“Existing anti-money laundering rules already require banks to identify the ultimate beneficiary of funds. With this new rule, they have to establish the why,” he said.
“Why has a client set up a certain structure in a certain way, or why are they investing via a third jurisdiction? Why are they using an entity in the Cayman Islands, for example, to invest their funds?”
It has also been somewhat tricky for banks to determine which of their clients have a high tax risk, as the definition of this has been left to the banks’ discretion, Mr Bruce added.
The Private Banking Industry Group released a set of guidelines in March to help member firms identify potential tax cheats ahead of the new law.
However, these guidelines apply to only private banks, Mr Bruce noted, whereas the new law extends to all other areas of banking as well.
KPMG’s Mr Lau said the lack of an industry-wide benchmark makes it tough for banks to determine just how much they should do before they can be satisfied that a client is not committing a tax crime.
Mr Lau gave this example: A client is the 100 per cent shareholder of Company A in Indonesia, which holds all the shares of Company B in Mauritius, which in turn holds the shares of Company C in Singapore.
Say Company C approaches the bank to open an account with $10 million.
The bank can ask who owns Company C, and then who owns Company B, and so on until it finds the eventual beneficiary of the funds. This three-tier holding structure is quite simple to investigate.
But in some cases, the structure of a client’s holdings can be a lot more complex, so banks have to decide just how deep they want to dig, Mr Lau said.
“Should they stop at three tiers? Five? 10? It’s up to the banks’ own discretion. You don’t want to turn off the client unnecessarily or use up a lot of time and resources to investigate someone who may be perfectly clean, but on the other hand you have to be vigilant,” he said.
Banks said they have committed significant resources to the process of preparing for the new law.
“This has been an extensive bank-wide exercise that has involved, among other things, process enhancements, comprehensive staff training, revisions and improvements made to our policies and procedures and the careful review of all customer data,” said OCBC Bank’s head of group legal and regulatory compliance, Ms Loretta Yuen.
UBS Singapore set up a project task force to ensure that it would comply with all the new measures and that all relevant stakeholders were effectively briefed and trained before today.
The Standard Chartered compliance team began training staff across its consumer, private bank and wholesale businesses on how to spot tax evasion last December.
Barclays’ head of compliance at its wealth and investment management division, Mr Hoo Hui Joo, said: “Over the last 18 months, we have progressively implemented a framework including training, client screening, client selection and risk-based assessment of our clients’ tax profiles.”
Barclays has also issued tax declaration forms to certain clients, and has been conducting tax-specific training for bankers, ensuring that they are equipped to identify red flags, he added.
“We’ve had to call up some clients who have been with us many years, and ask them questions about their fund flows and of course they want to know, ‘Why are you asking me now?’” said a senior banker at an international bank. “Sometimes they get defensive and say, ‘Nobody else is asking me these questions, so why are you doing it?’”
Such challenges are par for the course for the banks, which said they are confident that they are compliant with the new law and agree with its principles.
“The new measures will further reinforce industry-wide enforcement of anti-money laundering programmes so that detection and due diligence processes for suspicious financial activities become even more robust,” said Citi Singapore’s head of country compliance, Ms Goh Siew Lian.