How S'pore can raise the compliance bar

How S'pore can raise the compliance bar

The article was published in the The Business Times on 4 November 2016.

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SINGAPORE has one of the lowest rates of financial crimes in the world. It is a feat given the country's position as a global financial centre and international trading and transportation hub, where voluminous transactions take place daily.

On the flip side, the country's status as a pristine, global financial hub increases the risks of illicit funds flowing in from overseas. This was highlighted in the recent mutual evaluation report issued by the Financial Action Task Force (FATF) for Singapore. It noted that funds that pass through Singapore may fuel the perception that the transactions are legitimate, regardless of whether they are illicit or not. This could be due to the misconception that transactions that originate from Singapore will not involve illicit transactions.

Two other developments make it necessary for regulators worldwide to pay attention to this area. One is that globally, there is a greater awareness of the urgent need to combat Money Laundering and Terrorist Financing (ML/TF). This is evident from the widespread media coverage of the evolving 1MDB scandal and terrorist attacks around the world.

Another reason is the increasing complexity involved in mitigating ML/TF risk as a result of technological advancements and the emergence of cyber-crimes. It is a challenge for both government bodies and the private sector (including financial institutions) to keep pace with technology changes when it comes to implementing effective Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) measures globally.

Regulators around the world are responding to the challenges. They are paying closer attention to this issue by increasing inspections at regulated financial institutions and taking harsher stances against financial institutions. Greater guidance is also provided to financial institutions engaged in high-risk business areas such as trade finance and private banking through the issuance of guidance papers.

 

Upholding Singapore's reputation as a trusted financial hub

In addressing these challenges, Singapore can be encouraged that it has done reasonably well in the mutual evaluation concluded by FATF. The report stated that financial institutions in Singapore are generally or largely compliant with FATF recommendations[1], given that Singapore authorities have invested significantly to ensure a robust and effective AML/CFT regime. Authorities here were also praised for having and implementing high compliance standards in the industry.

Industry players have played their part in boosting their defences. Foreign financial institutions with well-developed AML/CFT regimes operating in Singapore have influenced industry practices over the years. Singapore's AML/CFT coordination at the operational level is also viewed to be highly effective and inclusive of all relevant, competent authorities.

Even as Singapore is commended for what it has achieved so far, as part of the ongoing quest for continued excellence, the report called for some areas of improvements.

For instance, there is a need to improve the understanding of ML/TF risks and implement more robust frameworks to mitigate such risks for certain segments of the Designated Non-Financial Business and Professionals (DNFBPs)[2] industry. It is expected that certain segments of DNFBPs could have a less developed understanding of AML/CFT requirements as the rules came into effect only in 2015. This is further exacerbated by the concern that DNFBPs may not be as well-resourced as the bigger financial institutions to deal with the AML/CFT checks. Cause for worry too is that the demand for relevant subject matter experts in the industry is likely to exceed the supply, impeding the DNFBPs' move to enhance their capabilities in this area.

Just as it took financial institutions a few years to get to their current level of maturity in AML/CFT, we expect DNFBPs to undergo a similar journey. Similar efforts to bring reform to the DNFBPs can be seen overseas. The New Zealand government had announced earlier this year that it is accelerating efforts to implement phase two of AML reforms to bring DNFBPs within the scope of New Zealand's AML/CFT regime.

The mutual evaluation report also highlighted that while supervision of financial institutions in Singapore appears robust, there were significant differences in the effective supervision of AML/CFT requirements across the relevant supervisory bodies. For instance, supervisory bodies of DNFBPs have only been tasked recently to supervise the industry for AML/CFT compliance.

Consistency in the interpretation and application of the requirements is an important step in ensuring compliance and adoption by the industry. There are clear benefits for regular and structured interactions among the supervisory bodies on the interpretation and implementation of AML/CFT requirements.

Given the push to develop Singapore's fintech industry, it is imperative that more attention is paid to industry sectors identified as potentially posing higher ML/TF risks in the national risk assessment (such as Internet-based stored-value facility holders). Progress is being made, with plans to establish a National Payments Council and proposed changes to the payment regulatory framework.

We will need to be cognisant that the new financial services and products brought about by fintech may expose Singapore to different ML/TF risks. Information sharing between industry participants and relevant authorities will thus be crucial to mitigate these ML/TF risks.

 

What more can Singapore do?

Not having adequate, accurate and timely information on the beneficial ownership and control of legal persons and legal arrangements is a weakness that money launderers and terrorists can exploit. It is heartening to hear that banks in Singapore are exploring the possibility of a country-wide model to enhance customer due diligence.

A know-your-customer (KYC) utility concept has been around for a number of years but adoption has not been ideal because the net savings or benefits to the banks are not compelling. Further, there are obstacles to overcome such as offshoring of data, privacy issues and whether a utility concept is an acceptable approach to supervisory bodies.

Singapore can learn from experiences of existing utilities to develop a unique country-wide utility that goes beyond mere information collection. It can be one that helps banks to effectively reduce substantial costs and understand the risks associated with each customer.

In addition, financial institutions have significant resources committed to the screening and monitoring of customers and their transactions. A very large proportion of these alerts generated from transaction monitoring, name screening and payment filtering systems often turns out to be false positives. Improvements can be achieved through analytics and technology to improve the effectiveness and cost efficiency of these control systems. Singapore, through the regulators, can drive these areas of improvement.

Ultimately, AML/CFT compliance is everyone's responsibility and we must all work together to reduce the risk of money laundering, terrorist financing and financial crimes.

It is thus important that both financial institutions and DNFBPs receive significant levels of understanding and support from top management to help build a risk awareness and compliance culture. To do that well, there needs to be a ready pool of human capital with the requisite deep domain expertise.

With a coordinated approach to develop more professionals in this space, Singapore would be better geared to maintain its status as one of the premier financial hubs of the world.

The writer is head of forensic at KPMG in Singapore. The views expressed are his own.

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