BSI Bank

In a rare exercise of the most severe extent of its supervisory powers, the Monetary Authority of Singapore (MAS), in May this year, closed down BSI Bank in Singapore for serious breaches of AML requirements, poor management oversight of the bank’s operations, and gross misconduct by bank staff. The AML breaches largely related to the Swiss bank’s handling of persons connected to the Malaysian national sovereign debt fund, 1MDB.

The last time MAS closed down a bank was more than 30 years ago.

MAS also announced its referral of six former senior BSI Bank employees (including the former CEO, deputy CEO, business-line head, and three other Relationship Managers) to the Public Prosecutor for potential criminal investigations into money laundering offences.

This was again unprecedented since investigations by MAS are typically conducted in a confidential manner. The Singapore regulator has, however, intended to send a strong public signal on the criminal repercussions for compliance lapses, and zero tolerance of money laundering within Singapore. A criminal conviction for a money laundering offence is punishable with a possible jail term that could extend to 7 years per charge.

The above regulatory actions by MAS have had a chilling effect on the private banking industry in Singapore, particularly the risk of personal criminal liability for front office functions.

New AML and Enforcement Departments

Shortly after the BSI Bank case, the MAS announced, on 13 June 2016, its plans to set up, with effect from 1 August 2016, two dedicated departments to fight money laundering and strengthen enforcement respectively: an AML Department and an Enforcement Department.

The new AML Department will streamline the existing responsibilities for regulatory policies relating to money laundering and terrorist financing. A dedicated supervisory team will be set up to monitor these risks and carry out onsite supervision of how financial institutions manage these risks.

The new Enforcement Department centralises and strengthens MAS’ enforcement functions and will be responsible for, amongst other things, enforcement actions arising from regulatory breaches of MAS’ banking, insurance and capital markets regulations.

The timing of the announcement was significant – this was made barely days before the Financial Action Task Force (“FATF“) discussed the Mutual Evaluation report of Singapore at a plenary meeting in Seoul. The review of Singapore’s AML regime took place in November last year and was conducted by peer regulators appointed by the FATF. The FATF would have discussed Singapore’s Mutual Evaluation report at the plenary. The announcement of the AML Department and the Enforcement Department can be seen as a signal underscoring Singapore’s commitment to AML enforcement.

Bite or Bark?

The new Enforcement Department will, however, not have criminal investigative powers in respect of money laundering offences. MAS, as a consolidated financial services regulator, regulates a broad spectrum of financial services – banks, insurance, exchanges and markets, broker-dealers, fund managers, financial adviser, trust companies, money-changers and remittance businesses. The new initiative appears to be focused on consolidating policy formulation and onsite supervision roles from diverse departments into a single point of reference.

Criminal investigative powers for AML offences will continue to vest in the Commercial Affairs Department (”CAD“), which sits within the Singapore Police Force. CAD also functions as Singapore’s designated AML Financial Intelligence Unit. Criminal prosecutions are conducted by the Attorney-General’s Chambers.

The new Enforcement Department will be merged with an existing enforcement set-up within MAS that focuses on market abuse investigations and will continue to jointly investigate with the CAD capital markets misconduct offences. In its initial set-up, the market abuse enforcement unit initially did not have any criminal powers of investigations and had cooperated closely with CAD. However, the market abuse enforcement unit was then given criminal enforcement powers allowing it to have powers of entry of premises, seizure and arrest. This was done by designating the MAS officers as police officers, thereby conferring on them powers under Singapore’s Criminal Procedure Code.

Given this precedent, it is plausible that the MAS officers in the Enforcement Department dealing with money laundering and terrorist financing may be granted police investigation powers in the future.

Spotlight on Management for AML Compliance

The creation of a new dedicated platform for enforcement and the BSI Bank case, which shows a clear willingness on the part of the MAS to take extreme action, where warranted, throws a bright spotlight on the AML compliance program of financial institutions in Singapore.

The BSI Bank case highlighted many management lapses on the part of the bank in ignoring many red flags in handling 1MDB – links to politically-exposed persons, the questionable nature of transactions, the use of multiple structures without any apparent commercial justification, pass-through transactions with no economic substance, failure to question and report suspicious transactions, and management’s repeated overriding of advice from the bank’s compliance department. BSI Bank had approved many transactions based purely on faith in client representations despite deficient documentation and concerns raised by the bank’s compliance officers. These were repeatedly done by BSI Bank’s management.

The risk of personal criminal liability and the setting up of a dedicated AML watchdog places the responsibility squarely on the shoulders of senior management to implement a robust AML compliance program and foster a strong compliance culture within the organization.

Turning to the FATF Mutual Evaluation of Singapore, the last Mutual Evaluation report on Singapore was the precursor of many changes in Singapore’s AML regime. It is likely that the Mutual Evaluation report, which will shortly be issued by the FATF, could also trigger further ratcheting of AML requirements in Singapore.

The confluence of more AML regulations and more activist enforcement can only make the following statement more resonant – “If you think compliance is expensive, try non-compliance”.