Singapore has set its trajectory to becoming one of the most renowned financial centres in the world. One of the key elements to achieve this status is the regulatory regime that governs and protects the industry. The Monetary of Authority (MAS) had implemented Anti Money Laundering/Countering the Financing of Terrorism measures as per the Financial Action Task Force (FATF) standards, providing for a new culture and mentality that is to change with the times. All monies injected through the financial industry are subject to stringent background tests and checks, and training to be provided to all staff and key officers for them to be aware of what is required in the event of a suspicious transaction.
The Parliament of Singapore passed the Terrorism (Suppression of Financing) Act in 2002, criminalizing the financing of terrorism and placing an obligation on bank employees to report any activity related to this crime to the police immediately. In 2007, the MAS, who regulate banking and other financial services, issued a Notice to banks, specifying the appropriate measures to be followed when conducting Due Diligence on prospective and existing clients. This was to be all-encompassing – covering the different risk aspects faced by the Financial Institutions on the ground, ranging from banks to insurance brokers. Recently, the Companies Act was amended in Singapore and this provided for additional transparency requirements to ensure that the “relevant” individuals are identified.
Who would be considered “relevant” here? This refers to the Ultimate Beneficial Owner, in most cases. The FATF defines a beneficial owner as “the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement”.
Verifying ownership of a publicly held entity or on a simple company structure can be relatively pain-free. Public companies are subject to regulatory disclosure requirements, therefore it isn’t necessary to seek to identify and verify the identity of any shareholder. For private entities with simple structures, Financial Institutions (FIs) can check the company registry or chamber of commerce, or can ask the client to supply a certified extract from the chamber of commerce data with the shareholder information. However, where there are complex legal structures in place things can start to get complicated. This is especially true in offshore jurisdictions because corporate vehicles here often have limited disclosure and recordkeeping requirements. This means that FIs have to rely on information provided directly by clients or on public records in that jurisdiction to discover the true owner which have limited to no information. It can be a challenge to identify the beneficial owners that are behind trusts and offshore corporate entities. To what extent is identification and verification of beneficial ownership needed? This question has come to the forefront for Compliance professionals around the world, perpetrated by guidance from the FATF and specific local legislation and rules from organisations such as the U.S. Financial Crimes Enforcement Network (FinCEN) and the MAS. Understanding the concept of beneficial ownership is important so as to support the criminalisation of tax evasion and for compliance with legislation such as the United States Foreign Account Tax Compliance Act (FATCA) and the new global Common Reporting Standard (CRS) regime.
Technology to our rescue
This doesn’t necessarily mean that offshore structuring and operations are used to carry out fraudulent financial transactions. There are a number of businesses who use offshore entities and sophisticated legal structures for valid reasons such as asset protection, estate planning, privacy and confidentiality. Hence, FIs need to be extremely careful when distinguishing between legitimate and suspicious activities. The level of risk associated with the entity is determined by the FI and dictates the stringency of due diligence measures required. To help FIs better understand who are the relevant beneficial owners, how to determine suspicious activities and decide the appropriate level of due diligence required, the recent use of technology has been more prevalent, and the industry has been looking into adopting more tech-friendly measures as well. Technology enables FIs to map complex organisational structures, document the owners and their findings, automatically link ownership data and create a scheme that illustrates the beneficial owners and the relationships among related entities, such as service providers. Artificial Intelligence used with data analytics help reduce false positives, and allows for more free time for human analysts to investigate actual situations that need their attention.
Ultimately, it is important to ensure that the appropriate levels of transparency and responsibility are addressed when handling any client. Regardless of how convoluted a structure is, the current trend and measures being implemented worldwide does not allow for any individual or company to hide behind their legal structures. The need to apply registers for controllers and beneficial owners are being made mandatory, and authorities are allowing this to be used and shared with the relevant parties in the time of need.