The Monetary Authority of Singapore (MAS) declared its intention to aggressively enforce anti-money laundering rules with its revocation of the licence of Falcon Private Bank and fining of DBS and UBS yesterday. Other private banks should brace themselves for increased scrutiny and a zero-tolerance attitude, say industry experts.
Singapore's central bank and financial regulator said it had punished Swiss boutique Falcon for having allegedly processed large sums of funds linked to Malaysia’s scandal-hit 1MDB state investment fund. The Swiss Financial Market Supervisory Authority (Finma), which worked with MAS on the investigations, accused Falcon of receiving and moving on almost $4 billion in 1MDB-linked assets and of not adequately investigating another $681 million in pass-through assets that moved from its accounts.
The latter amount is identical to the size to the mysterious payment sent to the bank account of Malaysian prime minister Najib Razak in 2013, The Financial Times reported.
In addition to losing its licence, Falcon Private Bank was fined S$4.3 million, while its Singapore head was arrested. Additionally, Singapore-headquartered DBS and Zurich-based UBS were fined S$1 million ($725,294) and S$1.3 million, respectively.
MAS meted out the punishments after concluding its investigation into the 1MDB-related fund flows that took place through these banks from March 2013 to May 2015. Razak has been accused of receiving funds from 1MDB into his personal bank account, but claimed the money was received from wealthy Saudi Arabian donors for his 2013 election bid. 1MDB has consistently denied any wrongdoing.
Experts were under little apprehension as to the purpose of MAS's unusually severe punishments, which followed it fining BSI and ordering the closure of its Singapore branch licence in May. Philippa Allen, chief executive officer at Compliance Asia, said MAS was sending a double message: it is willing to impose big fines, and it will not give any preferential treatment to local banks.
"MAS is showing no favouritism here, even if you're a Singapore bank you're still going to be punished," she told AsianInvestor.
Keith Pogson, managing partner in financial services Asia Pacific at Ernst & Young, told AsianInvestor that "MAS's action was a clear message to the market that it is taking a robust approach to money laundering".
"1MDB is political in nature and needs to put a ring fence on that as an issue, but it is pretty clear that bad application [of AML rules] will not be tolerated [by MAS]. It is in line with what financial services jurisdiction around the world [are doing]. The US is taking a tough line on this," he added.
The scandal surrounding 1MDB has been particularly high profile, and the involvement of fund flows through Singapore led to questions about the rigorousness of the city state's scrutiny of cross-border activities. The MAS's aggressive attitude towards Falcon, DBS and UBS and, previously, BSI, suggests it wanted to demonstrate the seriousness of its commitment to rooting out money laundering.
According to Allen, the fines imposed on the three banks are particularly large by Singapore standards.
"DBS and UBS are not going to close down because of this but it will force them to start thinking about the enforcement of anti-money laundering rules. UBS, in particular, has issues in the US related to anti-money laundering and tax-related disclosures," she noted.
The Swiss bank admitted to helping wealthy American citizens dodge US taxes in 2009 and paid $780 million in a settlement, and more recently has faced similar money laundering and tax fraud accusations in France and Belgium.
The MAS's penalties follow months of investigation into 1MDB-related fund flows that it conducted in concert with overseas counterparts, most particularly Finma.
The Singapore agency found that Falcon Private Bank's head office in Switzerland failed to guard against conflicts of interest when managing the account of a customer who was associated with the bank's former board chairman Mohamed Ahmed Badawy Al-Husseiny. The MAS accused the former chairman in a separate statement of having “misled and influenced” the Singapore branch of Falcon into processing this customer's unusually large transactions despite multiple red flags.
MAS also said the improper conduct in the Singapore branch contributed to substantial breaches of AML regulations. It added that Falcon Singapore branch manager Jens Sturzenegger had been arrested by the commercial affairs department of Singapore on October 5.
Finma, meanwhile, ordered Falcon to surrender CHF2.5 million ($2.53 million) in profits it said were illegally generated, and banned it from doing business with foreign politically exposed persons for three years. Switzerland's attorney general's office is also considering criminal proceedings.
MAS was also critical of DBS and UBS, stating that its inspections revealed several breaches of AML requirements and control lapses. The banks had deficiencies when onboarding new accounts, weaknesses in corroborating the source of funds, inadequate scrutiny of customers' transactions and activities, and failures to file timely suspicious transaction reports.
Both banks were ordered to appoint independent parties to assess and confirm to the MAS that they were effectively implementing changes to rectify these weaknesses. MAS is also investigating Standard Chartered Bank and will make the results of its findings known soon.
In separate statements, both DBS and UBS said they should have taken more rigorous actions related to questionable activities and will donate profits from the said negative activities to a charitable cause.
Falcon Private Bank said around 35 colleagues working in Singapore will be impacted by the closure. The Singapore branch has CHF900 million in assets.
The hard-line approach of the MAS over 1MDB-implicated financial institutions stands in contrast to historical norms in Asia.
Traditionally, financial regulators have tended to be less vigorous about enforcing AML rules than counterparts in western countries like the US. However, the US has aggressively led efforts to both identify and punish financial transgressions and tax avoidance worldwide, which has in turn led financial watchdogs in Asia to become more serious about enforcing AML rules.
For instance, financial regulators in Singapore, Hong Kong and other financial centres have begun increasingly focusing upon on private banks' legacy clients and where their assets came from, in addition to looking at the on-boarding risks of new clients.
The increased scrutiny has led many banks to start de-risking, often closing bank accounts if the customers cannot satisfactorily demonstrate where the money came from. This has had its own impact, pushing money out of the official banking sector.
"The unintended consequence [of the increased scrutiny over bank accounts] is it pushes more money to other parts of the financial sector; some money goes to shadow banking or to hawala arrangements," said Allen.
Hawala are informal Islamic banking arrangements that allow for the transfer of funds both domestically and internationally without using formal financial institutions, according to the Anti-Corruption Resource Centre.
The MAS's increasing rigour with regard to AML enforcement could lead more funds to enter such areas, as clients with an aversion to transparency or questionable sources of funds seek other means to move their money.