ABS Anti-Money Laundering & Terrorism Financing Guidelines (2015) PDF

ABS Guidelines on Anti-Money Laundering and Countering the Financing of Terrorism (13 November 2015) Introduction The Association of Banks in Singapore (ABS) issued its first Guidelines, “Prevention of the Misuse of the Singapore Banking System for Drug Trafficking and Money Laundering Purposes”,...

ABS Guidelines on Anti-Money Laundering and Countering the Financing of Terrorism (13 November 2015) Introduction The Association of Banks in Singapore (ABS) issued its first Guidelines, “Prevention of the Misuse of the Singapore Banking System for Drug Trafficking and Money Laundering Purposes”, in 1990. It revised the Guidelines in 1994, 2001 and 2009 to reflect the changes in domestic laws and international standards. The Guidelines supplement the Monetary Authority of Singapore (MAS) Notice and accompanying Guidelines on the Prevention of Money Laundering and Countering the Financing of Terrorism. This update continues to consider the MAS’ Notice and Guidelines, as well as the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap 65A) (CDSA), the Financial Action Task Force (FATF) Recommendations and other relevant international best practices. It addresses the concerns and requirements of investment and commercial banking, private banking, retail banking and trade finance. The ABS recommends using these Guidelines to preserve, nationally and internationally, the good name of the banking community in Singapore. These Guidelines apply to all ABS member banks and institutions, as well as the foreign branches and subsidiaries of Singapore-incorporated banks. Where the laws of the foreign jurisdictions differ or conflict with these Guidelines, the foreign branches and subsidiaries shall comply with the more rigorous of the 2 and shall inform the bank’s head office accordingly. These Guidelines are industry best practice meant for all ABS member banks in relation to preventing money laundering (ML) and terrorism financing (TF). Member banks are advised to identify the risks associated with the businesses and services they provide, so that they can adopt suitable mitigating controls. Table of Contents Introduction ............................................................................................................................................ 2 1 Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Fundamentals... 6 1.1 Definition of Money Laundering ............................................................................................. 6 1.2 Definition of Financing of Terrorism ....................................................................................... 6 1.3 Overview of the Singapore AML/CFT Regime ......................................................................... 8 2 Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap 65A) (CDSA) ..................................................................................................................................................... 8 3 4 2.1 Predicate Offences .................................................................................................................. 8 2.2 The CDSA defines 4 distinct predicate offences. An offence is committed under the CDSA when a person: ....................................................................................................................... 8 2.3 Tipping-Off Offence................................................................................................................. 9 2.4 Complying with Court Orders ................................................................................................. 9 2.5 Record Keeping ..................................................................................................................... 10 2.6 Extra-Territoriality ................................................................................................................. 11 2.7 Cross-Border Movements of Physical Currency and Bearer Negotiable Instruments .......... 12 Countering the Financing of Terrorism Laws ................................................................................ 12 3.1 The Terrorism (Suppression of Financing) Act (Cap 325) (TSOFA) ........................................ 12 3.2 Reporting Obligations ........................................................................................................... 14 3.3 Penalties ................................................................................................................................ 15 3.4 Court Orders ......................................................................................................................... 15 3.5 Statutory Protection ............................................................................................................. 15 Risk Assessment and Risk-Based Approach .................................................................................. 16 4.1 5 New Products, Practices and Technologies .................................................................................. 18 5.1 6 Overview ............................................................................................................................... 16 Overview ............................................................................................................................... 18 Customer Due Diligence................................................................................................................ 18 6.1 Risk-Based Approach............................................................................................................. 18 6.2 Customer Defined ................................................................................................................. 18 6.3 Customer Risk Assessment ................................................................................................... 18 6.5 Customer Identification Program ......................................................................................... 20 6.6 Customer Due Diligence........................................................................................................ 20 6.7 Screening............................................................................................................................... 21 6.8 Simplified Due Diligence ....................................................................................................... 22 6.9 Enhanced Due Diligence ....................................................................................................... 23 6.11 Politically Exposed Person..................................................................................................... 25 6.12 Source of Wealth and Source of Funds of PEPs .................................................................... 26 6.13 Ongoing Monitoring .............................................................................................................. 27 7 Reliance on Third Parties .............................................................................................................. 28 7.1 Reliance on Third Parties Versus Outsourcing Arrangements .............................................. 28 7.2 Syndicated Facility Transaction ............................................................................................. 28 8 Correspondent Banking ................................................................................................................ 28 8.1 Overview ............................................................................................................................... 28 8.2 Correspondent Account ........................................................................................................ 28 8.3 Correspondent Banking Services .......................................................................................... 29 8.4 Due Diligence Considerations ............................................................................................... 30 8.5 Ongoing Due Diligence Considerations................................................................................. 31 9 Wire Transfer ................................................................................................................................ 31 9.1 Overview ............................................................................................................................... 31 9.2 Responsibility of the Ordering Institution............................................................................. 32 9.3 Responsibility of Beneficiary Institution ............................................................................... 32 9.4 Responsibility of the Intermediary Institution ...................................................................... 32 10 Suspicious Transaction Reporting ................................................................................................. 32 10.1 Overview ............................................................................................................................... 32 11 Proliferation Financing .................................................................................................................. 33 11.1 Overview ............................................................................................................................... 33 12 Sanctions ....................................................................................................................................... 34 12.1 Overview ............................................................................................................................... 34 12.2 Sanctions and Freezing of Assets Regulations ...................................................................... 34 12.3 Notice on Prohibition on Transactions with the Iranian Government and with Iranian Financial Institutions............................................................................................................. 34 13 Compliance, Audit, Employee Hiring and Training ....................................................................... 35 13.1 Compliance ........................................................................................................................... 35 13.2 Group Policy .......................................................................................................................... 35 13.3 Appointment of a Compliance Officer/Department ............................................................. 35 13.4 Internal Money Laundering Control Program ....................................................................... 35 13.5 Audit ...................................................................................................................................... 36 13.6 Employee Hiring .................................................................................................................... 36 13.7 Training ................................................................................................................................. 36 14 Banking Secrecy and Personal Data Protection Act ...................................................................... 37 14.1 Overview ............................................................................................................................... 37 ABS Anti–Money Laundering Principles for Investment and Commercial Banks (2015) ...................... 38 1 Customer Acceptance: General Principles ............................................................................ 38 1.1 General .................................................................................................................................. 38 1.2 Identification and Verification of Identity............................................................................. 38 1.3 Beneficial Owner ................................................................................................................... 40 1.4 Practices for Walk-In Customers and Non-Face-to-Face Banking Relationships .................. 40 2 Customer Acceptance: Situations Requiring Additional Diligence or Attention and Prohibited Customers ........................................................................................................... 40 3 Updating Customer Files ....................................................................................................... 40 ABS Anti–Money Laundering Principles for Private Banks (2015) ........................................................ 41 1 Customer Acceptance: General Principles ............................................................................ 41 1.2 Identification and Verification of Identity............................................................................. 41 2 Customer Acceptance: Situations Requiring Additional Diligence or Attention and Prohibited Customers ........................................................................................................... 44 3 Updating Customer Files ....................................................................................................... 45 4 Monitoring ............................................................................................................................ 45 ABS Anti–Money Laundering Principles for Retail Banks (2015) .......................................................... 47 1 Customer Acceptance: General Principles ............................................................................ 47 2 Updating Customer Files ....................................................................................................... 48 ABS Anti-Money Laundering Principles for Trade Finance (2015) ........................................................ 50 1 Objective ............................................................................................................................... 50 2 Overview ............................................................................................................................... 50 3 Money Laundering in Trade Finance..................................................................................... 50 4 Terrorism Financing and Proliferation Financing in Trade Finance ...................................... 52 5 Mitigating Money Laundering and Terrorism Financing in Trade Finance ........................... 52 7 Information for Establishing Trade Finance Facilities and Transactions Undertaken .......... 55 8 Additional Information for Trade Finance Transactions that Present Higher ML/TF Risks .. 55 9 Monitoring of Trade Finance Transactions ........................................................................... 57 10 Potential Trade-Based Red Flag Indicators ........................................................................... 57 11 Staff Training ......................................................................................................................... 57 Appendix 1 – Methods and Stages of Money Laundering .................................................................... 58 Appendix 2 – ABS Guidelines on Tax Crime .......................................................................................... 59 Appendix 3 – ABS Guidelines on the New Cross-Border Currency/Bearer Negotiable Instruments Reporting Regime ................................................................................................................................. 64 Appendix 4 – ABS Guidelines on Suspicious Transactions relating to Terrorism Financing ................. 67 Appendix 5 – Examples of Red Flags for Trade-based Related Transactions ....................................... 71 Appendix 6 – Recommended Reading for Practitioners ....................................................................... 72 1 Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Fundamentals 1.1 Definition of Money Laundering Money laundering is the process criminals use to try to conceal the true origin and ownership of the proceeds of drug trafficking and other serious crimes listed in the Second Schedule of the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefit) Act (Cap 65A) (CDSA) so that they appear to have originated from legitimate sources. Typically, the 3 stages of money laundering (it is not always necessary for one or more of these stages to have occurred in any money-laundering scheme) are: a. Placement: depositing cash proceeds from illegal activities into the mainstream financial system Objective: to get illicit cash into the financial system; b. Layering: distancing illegal monies from the source by creating complex layers of financial transactions to disguise the audit trail, therefore providing anonymity Objective: to make detection as difficult as possible by attempting to break the linkage between the criminal and the proceeds of crime; and c. Integration: making illegal funds appear legitimate Objective: to allow the laundered monies to re-enter the economy and appear as if it is from legitimate sources. Refer to Appendix 1 for examples of placement, layering and integration. 1.2 Definition of Financing of Terrorism The International Monetary Fund (IMF) defines terrorist financing, or the financing of terrorism, as “the solicitation, collection or provision of funds with the intention that they may be used to support terrorist acts or organisations. Funds may stem from both legal and illicit sources”. Such legal sources may include donations or gifts of cash or other assets to organisations such as foundations or charities that in turn are used to support terrorist activities or terrorist organisations. The techniques used to launder money are similar to those used to conceal the sources of, and uses for, terrorism financing. The diagram below from the World Bank training book shows the similarities between money laundering and terrorism financing. Source: World Bank Training Book The stages of money laundering described above may occur at any banking institution, depending on the nature of its products and services. The placement stage mainly affects retail banking as the activities relate to depositing money into bank accounts or buying monetary instruments such as money orders or cheques. In the layering stages, the launderers or the terrorist financiers may use a series of wire transfers to distance themselves from the funds. Any institution with wire transfer services or remittance services would be at a higher risk of facilitating the layering stage. In the integration stage, money launderers and terrorist financiers will generally use private banks and investment banks to get monies into the legitimate economy by making medium to long-term investments in ventures such as businesses and real estate. 1.3 Overview of the Singapore AML/CFT Regime The following is an overview of the AML/CFT legal regime in Singapore and it is important that banks1 are familiar with, and conduct their business operations, in compliance with the regime. The first money-laundering prosecution in Singapore dates back to 2001. Teo Cheng Kiat, a former employee of Singapore Airlines, pleaded guilty to money laundering, among many other offences. The landscape has changed significantly since then, and authorities have intercepted a record number of money-laundering cases. According to the Commercial Affairs Department of Singapore, 29,082 Suspicious Transaction Reports (STRs) were submitted to the Suspicious Transaction Reporting Office (STRO) in 2014, a 30% increase on 2013. As Singapore is a member of the Financial Action Task Force (FATF), banks in Singapore should heed the FATF statements released on the MAS website2 from time to time. Banks are required to take appropriate actions and due diligence measures, as recommended by the FATF with respect to the named jurisdictions. 2 Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap 65A) (CDSA) 2.1 Predicate Offences A predicate offence is an offence the proceeds of which may become the subject of a money laundering offence. Over time, legislation globally has broadened the definition of predicate offences to cover any serious crime, including terrorism financing activity and tax crimes. Money laundering predicate offences in Singapore are listed in the CDSA. 2.2 The CDSA defines 4 distinct predicate offences. An offence is committed under the CDSA when a person: a. (i) conceals or disguises any property which (in whole or in part whether directly or indirectly) represents his/her benefits from drug trafficking or from criminal conduct; or (ii) converts or transfers that property or removes it from Singapore; b. who, knowing or having reasonable grounds to believe, that any property (in whole or in part, directly or indirectly) represents another person’s benefits from drug trafficking or criminal conduct, acquires that property without consideration; c. knowingly assists a person to commit the first offence to avoid the prosecution of a money laundering offence or to avoid the enforcement of a confiscation order under the CDSA. The concept “knowingly” under this section implies both a subjective and an objective element; and/or d. when a person enters into an arrangement, knowing or having reasonable grounds to believe that by the arrangement (a) the retention or control by or on behalf of another for that other person’s benefits of Drug Trafficking or Criminal Conduct is 1 Throughout these Guidelines, “Banks” will, where applicable, refer to banks licensed under the Banking Act and merchant banks licensed under the Monetary Authority of Singapore Act. 2 www.mas.gov.sg/Regulations-and-Financial-Stability/Anti–Money-Laundering-Countering-The-Financing-OfTerrorism-And-Targeted-Financial-Sanctions/Anti–Money-Laundering-and-Countering-the-Financing-ofTerrorism/AMLCFT-Announcements.aspx. facilitated (whether by concealment, removal from Singapore, transfer to nominees or otherwise); or (b) that other person’s benefits from Drug Trafficking or Criminal Conduct are (i) used to secure funds that are placed at that other person’s disposal, directly or indirectly; or (ii) are used for that other person’s benefit to acquire property by way of investment or otherwise and knowingly or having reasonable grounds to believe that the other person carries on/has carried on Drug Trafficking or engages/has engaged in Criminal Conduct and has benefited from these criminal activities. 2.3 Tipping-Off Offence Tipping-off is the act of providing confidential information or advance notice on an investigation to another person, generally the customer, or somebody close to them, which is likely to prejudice the investigation. It is important to note that this includes situations where a disclosure is in the process of being made. It is vital that banking professionals understand, and manage their customers accordingly, to avoid being caught under this section of the law. Under the CDSA, the tipping-off offence is covered as follows: a. Disclosure Relating to Authorised Officer’s Investigation & Lodging of STRs Any person who: i) knows or has reasonable grounds to suspect that an Authorised Officer is acting, or is proposing to act, in connection with an investigation which is being, or is about to be, conducted under or for the purposes of the CDSA; or ii) knows or has reasonable grounds to suspect that a disclosure has been or is being made to an Authorised Officer under the CDSA; and iii) discloses to any other person information or any matter which is likely to prejudice the investigation, or proposed investigation, or any investigation which might be conducted following the disclosure, shall be guilty of an offence. b. Disclosure Relating to Production Order or Search Warrant i) Where, in relation to an investigation into Drug Trafficking or Criminal Conduct, as the case may be, an order under Section 30 (Production Order) has been made or has been applied for and has not been refused or a warrant under Section 34 (Search Warrant) has been issued, a person who, knowing or suspecting that the investigation is taking place, makes any disclosure which is likely to prejudice the investigation shall be guilty of an offence. Under the CDSA, the penalty for tipping-off is a fine not exceeding S$30,000 or a jail term not exceeding 3 years or both. 2.4 Complying with Court Orders A court order is an official proclamation by a judge (or panel of judges) that defines the legal relationships between the parties to a hearing, a trial, an appeal or other court proceedings. A court order must be signed by a judge; some jurisdictions may require it to be notarised. The CDSA defines 5 distinct types of court orders. These are: a. Production Order All banks must comply with a production order issued by the High Court under Section 31(1) of the CDSA within a reasonable period, but not less than 7 days3, as the order may specify. Penalty: Production order A person who fails to comply with a production order shall be liable on conviction to: i) a fine up to S$10,000; or ii) imprisonment up to 2 years; or iii) both. b. Search Warrant All banks must comply with a search warrant the court issues under the CDSA. Penalty: Search warrant A person who hinders or obstructs an Authorised Officer in executing a search warrant shall be guilty of an offence and shall be liable on conviction to: i) a fine up to S$10,000; or ii) imprisonment up to 2 years; or iii) both. c. Restraint Order d. Charging Order e. Confiscation Order Besides a production order and a search warrant, banks must also comply with a restraint order, charging order and confiscation order. A person who fails to comply with such court orders may be charged with contempt of court. 2.5 Record Keeping All banks must retain all Financial Transaction Documents (FTDs) for the Minimum Retention Period (MRP) of 5 years. A FTD includes any document relating to: a. account opening/closing 3 The period of time shall be reckoned in accordance with Order 3 of the Rules of Court (Supreme Court of Judicature Act). b. operation of accounts; c. safe deposit boxes; d. wire transfers; e. loan applications; and f. records of customer identification. Failure to retain these FTDs for the MRP is an offence punishable with a fine not exceeding S$10,000. In addition, where a bank is required by law to release an original FTD before the end of the MRP applicable to the document, the institution shall retain a copy of the document until the period has ended or the original is returned, whichever occurs first; failing which it is also liable to a fine not exceeding S$10,000. Apart from the above documents required under the CDSA, the MAS also requires banks to retain: a. CDD documents and information relating to: i) business relations; ii) wire transfers; iii) transactions undertaken without an account being opened; iv) account files; v) business correspondence; and vi) any analysis undertaken. b. data, documents and information needed to explain and reconstruct transactions for at least 5 years following the termination of such business relations or completion of such transactions. Under the MAS Act, a bank which fails to maintain CDD information as required under MAS Notice 6264 shall be guilty of an offence and liable on conviction to a fine not exceeding $1 million, and to a further fine of $100,000 for every day during which the offence continues after conviction. 2.6 Extra-Territoriality The CDSA, according to section 3(5), applies to any property situated in Singapore and elsewhere. This means that any person who launders property, even if the property is situated overseas, can be liable for a money laundering offence under the CDSA. 4 Throughout these Guidelines, all references to MAS Notice 626 as it applies to banks will, where applicable, also include references to the corresponding MAS Notice 1014 as it applies to merchant banks. 2.7 Cross-Border Movements of Physical Currency and Bearer Negotiable Instruments Part VIA of the CDSA aims to impose measures for disclosing information about movements of physical currency and bearer negotiable instruments into and out of Singapore for the purposes of detecting, investigating and prosecuting Drug Trafficking Offences and Serious Offences (Criminal Conduct). Please refer to Appendix 3 – ABS Guidelines on the New Cross-Border Currency/Bearer Negotiable Instruments Reporting Regime. 3 Countering the Financing of Terrorism Laws 3.1 The Terrorism (Suppression of Financing) Act (Cap 325) (TSOFA) On 23 September 2013, the TSOFA was amended to implement changes to the anti-terrorism financing regime. The amendments consolidated the provisions in the United Nations (AntiTerrorism Measures) Regulations and the TSOFA. The TSOFA defines 4 types of offences relating to terrorism financing. a. Providing or collecting property for terrorist acts Every person who directly or indirectly, wilfully and without lawful excuse, provides or collects property: i) with the intention that the property be used; or ii) knowing or having reasonable grounds to believe that the property will be used, in whole or in part, in order to commit any terrorist act, shall be guilty of an offence. b. Providing property and services for terrorism purposes Every person who directly or indirectly, collects property, provides or invites a person to provide, or makes available property or financial or other related services: i) intending that they be used, or knowing or having reasonable grounds to believe that they will be used, in whole or in part, for the purpose of facilitating or carrying out any terrorist act, or for benefiting any person who is facilitating or carrying out such an activity; or ii) knowing or having reasonable grounds to believe that, in whole or in part, they will be used by or will benefit any terrorist or terrorist entity, shall be guilty of an offence. c. Using or possessing property for terrorism purposes Every person who: i) uses property, directly or indirectly, in whole or in part, for the purpose of facilitating or carrying out any terrorist act; or ii) possesses property intending that it be used or knowing or having reasonable grounds to believe that it will be used, directly or indirectly, in whole or in part, for the purpose of facilitating or carrying out a terrorist act, shall be guilty of an offence. d. Dealing with property of terrorists No person in Singapore and no citizen of Singapore outside Singapore shall: i) deal, directly or indirectly, in any property that he knows or has reasonable grounds to believe is owned or controlled by or on behalf of any terrorist or terrorist entity, including funds derived or generated from property owned or controlled, directly or indirectly, by any terrorist or terrorist entity; ii) enter into or facilitate, directly or indirectly, any financial transaction related to a dealing in property referred to in paragraph (i); or iii) provide any financial services or any other related services in respect of any property referred to in paragraph (i) to, or for the benefit of, or on the direction or order of, any terrorist or terrorist entity. Any person who contravenes this prohibition shall be guilty of an offence. If a person acts reasonably in taking, or omitting to take, measures to comply with Section 6 of the TSOFA, he shall not be liable in any civil proceedings arising from having taken or omitted to take the measures, if he took all reasonable steps to satisfy himself that the relevant property was owned or controlled by or on behalf of any terrorist or terrorist entity. A person who commits a terrorism financing offence, if found guilty, shall be liable on conviction: a. in the case of an individual, to a fine up to S$500,000 or to imprisonment up to 10 years, or both; or b. in any other case, to a fine not exceeding S$1 million. Disclosures relating to a police officer’s investigation will constitute a tipping-off offence. Any person who: a. knows or has reasonable grounds to suspect that: i) a police officer is acting or is proposing to act, in connection with an investigation which is being, or is about to be, conducted under or for the purposes of the TSOFA; or ii) a disclosure or report has been or is being made under Sections 8, 9 or 10, b. discloses to any other person information or any other matter which is likely to prejudice that investigation or proposed investigation, or any investigation which might be conducted following the disclosure or report, shall be guilty of an offence and shall be liable on conviction to a fine up to S$30,000 or to imprisonment up to 3 years or both. It is a defence in proceedings under Section 10B(1) or (2) for a person to prove that he did not know and had no reasonable grounds to suspect that the disclosure was likely to be prejudicial in the way described in the relevant section. 3.2 Reporting Obligations Disclosure of Information Relating to Property of Terrorists Every person in Singapore and every citizen of Singapore outside Singapore who: a. has possession, custody or control of any property belonging to any terrorist or terrorist entity; or b. has information about any transaction or proposed transaction in respect of any property belonging to any terrorist or terrorist entity, shall immediately inform the Commissioner of Police of that fact or information. The Commissioner of Police may require such person to furnish such further information or particulars as the Commissioner may think fit. Any person who contravenes the above regulations shall be guilty of an offence. It shall be a defence for a person to prove that he had a reasonable excuse for not informing the Commissioner of Police. Disclosure of Information about Acts of Terrorism Financing Every person in Singapore who has information which he knows or believes may be of material assistance: a. in preventing the commission by another person of a terrorism financing offence, or in securing the apprehension, prosecution or conviction of another person, in Singapore, for an offence involving the commission, preparation or instigation of a terrorism financing offence; and b. who fails to disclose the information immediately to a police officer shall be guilty of an offence and shall be liable on conviction to a fine not exceeding S$50,000 or to imprisonment for a term not exceeding 5 years or to both. It shall be a defence for a person charged with such an offence to prove that he had a reasonable excuse for not making the disclosure. 3.3 Penalties A person who fails to disclose under Section 8 or Section 10(1) of the TSOFA shall be liable, on conviction, to a fine not exceeding S$50,000 or to imprisonment for a term not exceeding 5 years or to both. 3.4 Court Orders Section 11 of TSOFA allows the Attorney General to apply for a search warrant, seizure warrant, forfeiture order or restraint order against terrorist property. Banks must comply with such orders. Failure to comply with a restraint order is a criminal offence punishable on conviction with a fine not exceeding S$50,000 or a term of imprisonment not exceeding 5 years or both. 3.5 Statutory Protection No criminal or civil proceedings shall be taken against a person for any disclosure made in good faith under Section 8(1) or 8(2), or Section 10 of TSOFA. The identity of a person making a disclosure or report pursuant to Sections 8, 9 or 10 of the TSOFA cannot be revealed in any civil or criminal proceedings, subject to the power of the court to permit inquiry and require disclosure under certain circumstances. A bank to which a direction is issued (e.g. MAS Notices) or which is bound by any regulations (e.g. MAS Regulations) made by the MAS for the purposes of discharging or facilitating the discharge of any obligation binding on Singapore by virtue of a decision of the Security Council of the United Nations shall comply with the direction or regulations notwithstanding any other duty imposed on the bank by any rule of law, written law or contract. A bank shall not, in carrying out any act in compliance with any direction or regulations made under Section 27A(1) of the MAS Act, be treated as being in breach of any such rule of law, written law or contract. 4 Risk Assessment and Risk-Based Approach 4.1 Overview The Singapore Government ran a nationwide exercise in 2013 to enhance and deepen the collective understanding of the ML/TF risks in the country. The results of the assessment were published in the Singapore National Money Laundering and Terrorist Financing Risk Assessment Report (NRA)5 in 2014. Banks are also required to carry out an Enterprise Risk Assessment (ERA) to identify and assess their ML/TF risks at all levels. The MAS Notice 626 allows banks to adopt a risk-based approach (RBA) when assessing their ML/TF risks. The ABS recognises a diverse range of banks operate in Singapore. They differ in size, nature of business, and products and services offered. As a result, banks are advised to consider their ML/TF risks in light of their business activities, operating environment and customers when developing an ERA framework. Banks shall identify, assess and understand their ML/TF risks. They should consider the following factors in their ERAs. a. Customers (especially high-risk customers); b. Countries or jurisdictions customers are from or in; c. Countries or jurisdictions the bank operates in; d. Products, services, transactions and delivery channels (especially those newly developed with new technologies, and that funds transfers); e. Internal audit and regulatory findings; f. Volume and size of transactions; g. Investigations and suspicious transaction reporting; and h. Training and communications. Banks should complement this information with information obtained from relevant internal and external sources, such as heads of businesses, relationship managers, national risk assessments, control lists issued by inter-governmental international organisations and national governments, 5 Based on the NRA, Singapore’s inherent ML/TF risks are high. Despite having a very low crime rate due to Singapore’s tough enforcement of its strong laws, the country’s role as an international transport hub and financial centre (with a significant foreign population) makes it a potential transit point for illicit funds for offences committed overseas. Singapore is exposed to money-laundering threats arising from foreign predicate offences (Singapore being used as a conduit to money launder foreign criminal proceeds). The main conduits are banks, remittance agents, shell companies and individual money mules. Similarly, due to Singapore’s regional neighbours, there is a risk terrorism financing occurs. See www.mof.gov.sg/portals/0/data/cmsresource/Press%20Release/2013/Singapore%20NRA%20Report.pdf. AML/CFT mutual evaluation and follow-up reports by the FATF or associated assessment bodies, as well as typologies.6 Banks should consider the results of Singapore’s NRA Report in their enterprise-wide ML/TF risk assessment process. As the NRA Report is specific to the ML/TF risks in Singapore, banks should not simply project their results to their global presence without taking into account the ML/TF risks in other jurisdictions. The consolidated assessment of a bank’s ML/TF risks shall take into account its branches and subsidiaries, to allow the bank to assess its ML/TF risks holistically. Each bank should consider all relevant risk factors that contribute to its overall ML/TF risks, and institute appropriate mitigating controls using an RBA, to reduce the residual ML/TF risks to an acceptable level. Inherent risk – Mitigation = Residual risk The scale and scope of ERAs should match the nature and complexity of each bank’s business. The ERA should include all risk and compliance functions and all relevant stakeholders such as business functional heads and risk and compliance functions. The risk assessment should be documented, and approved by each bank’s senior management and anti–money laundering governance committee (or equivalent). Where the bank is a branch or subsidiary of a bank incorporated outside Singapore, the local senior management of the branch or subsidiary is responsible for reviewing and approving the risk assessment of the Singapore bank entity. The approved risk assessment should be current, and readily available for sharing with the MAS on request. Each bank may conduct a consolidated ERA across businesses and legal entities within the financial group. However, each entity should be able to demonstrate to the MAS or its own auditors that its inherent ML/TF risks and mitigation measures adequately reflect the consolidated assessment, and controls have been strengthened where necessary. Each bank should review its risk assessment at least once every 2 years, or when a material trigger event occurs, whichever is earlier. A material trigger event might alter the bank’s ML/TF risks, and the bank should promptly update its risk assessment following such an event to assess the need for additional monitoring and control measures. 6 www.fatf-gafi.org/media/fatf/documents/reports/Risk-Based-Approach-Banking-Sector.pdf. 5 New Products, Practices and Technologies 5.1 Overview Banks usually perform a “new product assessment” covering the risks (including credit, market, operational, liquidity, legal, regulatory and reputational risks) and controls before introducing new products, practices or technologies. Banks should also assess ML/TF risks prior to launching new products, practices and technologies. Where the ML/TF risks of a new product, practice or technology are assessed to be material, banks should update their enterprise-wide risk assessment. Where a system or operational enhancement does not have any ML/TF risk implications, for example a system that allows customers to print their statement, banks may choose not to perform a ML/TF risk assessment. Where a new product, practice or technology does not involve moving funds or assets, the ML/TF risks could be lower, and may not affect the enterprise-wide risk assessment. Each bank’s local senior management and heads of businesses, risk and compliance is responsible for reviewing and approving the development and use of new products, practices and technologies, even if such roll-outs are global initiatives. 6 Customer Due Diligence 6.1 Risk-Based Approach Risk-based approach (RBA) refers to the process that drives a dynamic framework for addressing risk. The RBA should strengthen controls where banks have identified high-risk concerns. The RBA would guide the customer due diligence (CDD) assessment and it should highlight high-risk concerns when evaluating the ML/TF risk of a new customer. MAS Notice 626 paragraph 4 provides an overarching regulatory expectation in the approach. 6.2 Customer Defined Banks should refer to the MAS Notice for the definition of a customer. In addition, banks should screen names and adopt an RBA when performing due diligence on guarantors given that they will be the next source of repayment if a customer is not able to meet their obligations. 6.3 Customer Risk Assessment Banks generally assess the ML/TF risk of a customer at the CDD stage and assign a score or risk rating. Once banks onboard a customer, they should use an RBA to review their transactional behaviour and activities, and update the customer’s risk assessment 6.4 Know Your Customer Know your customer (KYC) commonly refers to the process of understanding a customer. MAS Notice 626 and the accompanying Guidelines apply to a wide range of banks including retail banks, private banks and investment banks, which have vastly different business products, services, processes and clientele. Accordingly, while the MAS Notice and Guidelines outline minimum standards to guide banks on the requirements they must meet, how they do so may differ from bank to bank according to the size, nature and complexity of each bank’s operations and business in Singapore. As a result, banks are advised to formulate CDD policies and procedures that suit their business operations. Banks should note that under MAS Notice 626 paragraph 6.2, prior to establishing business relations or undertaking any transaction without opening an account, where a bank has reasonable grounds to suspect that the assets or funds of a customer are proceeds of drug dealing or criminal conduct as defined in the CDSA, or are property related to the facilitation or carrying out of any terrorism financing offence as defined in TSOFA, the bank shall: a. not establish business relations with, or undertake a transaction for, the customer; and b. file a Suspicious Transaction Report (STR)7, and send a copy to the MAS for information. There are no set standards for undertaking CDD. Apart from the Guidelines to MAS Notice 626, banks may also take guidance from a Basel Committee Paper published in January 20148, which refers to an effective structure between the first line of defence and the second line of defence for capturing and assessing the required information of the customer and, if necessary, driving any escalation process. The KYC process is a key control in the AML/CFT framework and drives the other ML/TF controls such as monitoring and surveillance. All banks must know their customers and understand the purpose of their accounts. This means that each bank must be able to establish the identity and some basic background information on their customers. Each bank must establish its own KYC program, tailored to suit the size, nature and complexity of its operations and business in Singapore. Where a bank is unable to complete verification after factoring in the delayed verification allowed under paragraph 6.34 of the MAS Notice, the bank shall terminate or not commence the business relationship, and determine whether to file an STR. The bank’s management should be kept informed of such occurrences. Banks should institute policies, procedures and controls to mitigate the ML/TF risks arising from deferring the completion of verification, including: a. having appropriate limits on the financial services available to the customer; b. limiting the number, type and value of transactions that can be undertaken (e.g. limiting the amount of funds that can be deposited or not allowing withdrawals); and c. closely monitoring procedures until verification is complete. 7 Please note in particular Section 48 of the CDSA on tipping-off. 8 www.bis.org/publ/bcbs275.pdf. 6.5 Customer Identification Program The Customer Identification Program (CIP) sets the standards for what information should be gathered on the customer for identification and verification purposes. The program is generally driven by the regulatory requirements in the country in which the bank is operating, as well as the business risks associated with the bank’s activities. When banks in Singapore set up their CIP program, they should take into account the requirements of MAS Notice 626 paragraph 6. Completion of CDD measures entails obtaining customer information, screening the customer (including their connected parties, beneficial owners and natural persons appointed to act on their behalf) and verifying customer information. Given the different nationalities of bank customers and that not all 5 customer identification information fields required under MAS Notice 626 may be available from a single customer identification document, banks should require customers to provide the necessary information using various identification documents. Banks should identify and verify the identities of connected parties and beneficial owners as required under MAS Notice 626. They may apply an RBA based on an assessment of the ML/TF risks in each case. In verifying the identity of a natural person appointed to act on a customer’s behalf, where banks encounter genuine difficulties in obtaining proof of his residential address due to valid reasons, a business address may be used in situations where the assessed ML/TF risks are not high. Such assessments must be clearly articulated and documented. 6.6 Customer Due Diligence The type of CDD assessment may depend on the type of customer, (e.g. whether retail or corporate) and many other factors. It is not limited to screening only politically exposed persons, and sanctions screening for name, adverse news and business assessment. The assessment should highlight any high-risk concerns from an ML/TF perspective that would require enhanced due diligence. When dealing with an unfamiliar or new customer, the bank should exercise caution and if the customer is assessed to be of a higher ML/TF risk, more information should be obtained to better understand the customer, their connected parties, beneficial owners, and natural persons appointed to act on their behalf. Banks should be mindful when undertaking transactions for customers who are non-account holders. Two or more transactions undertaken by non-account holders may be related or linked if they involve the same sender or recipient. Such transactions may be entered separately to deliberately restructure an otherwise single transaction to circumvent the respective transaction and wire transfer thresholds of S$20,000 or S$1,500 to avoid CDD measures. Apart from the 5 customer identification information fields that banks must obtain under MAS Notice 626, banks should also request each customer’s telephone number. Banks should refer to Appendix A in the Guidelines to MAS Notice 626 on CDD information to be obtained for different types of customers. Banks should ensure that CDD documents are current. If the bank becomes aware of material changes to a customer’s information (e.g. change in nationality), and such changes are not reflected in the CDD documents (even though they are within the validity period), updated CDD documents should be obtained from the customer. Any bank staff may certify CDD documents to be true copies or confirm that he has sighted the original documents. Where a customer is unable to produce original identification documents for valid reasons, banks may apply an RBA and accept copies of identification documents (e.g. certificate of incorporation and board of directors’ resolution) certified by an authorized person (e.g. company secretary) assessed to be independent. Banks should not accept certification of identification documents by a company director as he is not considered to be independent. Banks may, using an RBA, accept electronic copies of certified true copies of CDD documents (e.g. a syndication loan arrangement9). To verify the authenticity of electronic CDD documents, such as proof of address (e.g. for credit card applications), banks may perform validation checks such as sending correspondence to a customer’s address to test for returned mail. CDD documents that are not in English should have the key clauses translated to facilitate the bank’s KYC process. Such clauses should identify the customer, their connected parties, beneficial owners, and natural persons appointed to act on their behalf, and the purpose of the account, to allow assessment of the money laundering risks. For example, key clauses in the Memorandum and Articles of Association of a corporate customer in a foreign language should at least be sufficiently translated into English to show whether the customer is allowed to issue bearer shares. Similarly, key clauses in a company search document in a foreign language should be sufficiently translated to facilitate the identification of the customer’s connected parties and beneficial owners. Banks should obtain documentary proof that the appointed natural person is authorised to act on a customer’s behalf. Such a document could be a board resolution authorising a person to act on behalf of a corporate customer, or a power of attorney authorising a person to act on behalf of an individual customer. Under MAS Notice 626 paragraph 6.10, a bank has to identify and verify the identity of natural persons who act on a customer’s behalf in establishing business relations. In the case of dealers (or staff members) of a bank or financial institution counterparty (customer) who executes trades on behalf of the counterparty but cannot move funds, such dealers (or staff members) can be treated like employees of the counterparty. There is no need to perform CDD on these dealers (or staff members). However, banks are expected to obtain periodic updates of the list of such dealers (or staff members) acting on behalf of their customers for risk management and control purposes. 6.7 Screening MAS Notice paragraphs 6.39–6.42 set out the expectations of the standards in customer screening for banks operating in Singapore. Screening is fundamental to managing ML/TF risks and enhances sanctions compliance. Banks are expected to have adequate systems, procedures and processes to screen any parties who are sanctioned or suspected to be involved with money laundering, terrorism financing or proliferation activities. Banks should document the results of screenings and assessments of potential matches. 9 Refer to the respective ABS Anti–Money Laundering Principles sections in this document for more information. It is important that screening tools be appropriately calibrated to capture name permutations and abbreviated or misspelt names. For sanctions screening, banks are encouraged to set lower thresholds. A 99% or 100% match setting would be unacceptable as banks risk not picking up sanctions hits. Banks should perform periodic back testing with different calibration levels to see if the screening throws up accounts with sanctioned parties, or those with adverse information. As part of continuous monitoring, each bank shall maintain CDD information of its customers (and their connected parties, beneficial owners and natural persons appointed to act on their behalf) in its customer database for periodic name screening. This enables the bank to check for any incremental adverse news (including sanctions) associated with its customer base, for timely responses. Banks must also screen all wire transfer originators and beneficiaries to check for the possibility of ML/TF and hits against sanctions lists (refer to Section 10 for more information on wire transfers). For transactions where the assessed ML/TF risks are lower such as where payments are only facilitated for account holders of banks in Singapore (e.g. local FAST/GIRO payments), banks need not conduct real-time screening of the originators and beneficiaries when processing these transactions. If a bank has a positive hit against a sanctions list, it should stop all action on the account, assess if it is required to freeze the funds or other assets of the designated person or entity without delay and prior notice, and consider filing an STR. It should also consider re-assessing the risk rating of the customer and whether to terminate the business relationship. 6.8 Simplified Due Diligence A bank need not inquire on the existence of beneficial owners in relation to a customer that has been assessed to be of low risk and for which it has no doubt on the veracity of CDD information, if the customer is:a. a Singapore Government entity; b. a foreign government entity; c. an entity listed on the Singapore Exchange; d. an entity listed on a stock exchange outside of Singapore that is subject to:i) regulatory disclosure requirements; and ii) requirements relating to adequate transparency in respect of its beneficial owners (imposed through stock exchange rules, laws or other enforceable means); e. a financial institution set out in Appendix 1 of MAS Notice 626; f. a financial institution incorporated or established outside Singapore that is subject to and supervised for compliance with AML/CFT requirements consistent with standards set by the FATF; or g. An investment vehicle where the managers are financial institutions:i) set out in Appendix 1 of MAS Notice 626; or ii) incorporated or established outside Singapore but are subject to and supervised for compliance with AML/CFT requirements consistent with standards set by the FATF. Where the bank has not made an inquiry on the existence of a beneficial owner in relation to a customer corresponding to (f) or (g)(ii) above, it should document the basis for its determination that the requirements under (f) or (g)(ii) have been met. For Singapore Government entities, banks are not required to verify the identity of natural person(s) appointed to act on the customer’s behalf as stated under paragraph 6.12 of MAS Notice 626. However, banks must obtain information to confirm that it is a Singapore Government entity. Banks should, however, continue to monitor the relationships for which SDD were conducted including updating customer identification information, periodic screening of names and transactions in the transaction monitoring surveillance systems. Banks must scrutinise the transactions to ensure they are consistent with the bank’s knowledge of the customer, their business and risk profile and, where appropriate, source of funds. Banks should pay special attention to all complex and/or unusually large transactions and unusual patterns of transactions that do not make economic, commercial or legal sense. Banks must support and document any assessment of low risk. 6.9 Enhanced Due Diligence Enhanced due diligence (EDD) refers to the additional documents and/or reviews that are required to assess the risks associated with a customer following a high-risk concern identified in the CDD assessment. Such additional documents and/or reviews may also be triggered by other controls in the AML/CFT framework, such as alerts from transaction monitoring and inquiries from relevant authorities. Depending on the business segment of the bank, the EDD assessment may differ. EDD in private banking may differ from that in investment banking, commercial banking and retail banking. For more information, refer to the sector-specific ABS Anti–Money Laundering Principles in this document. EDD measures relating to tax crimes may include checking for signs that funds are not proceeds from serious tax crimes, and establishing that complex structures are not being used to launder proceeds from serious tax crimes. Banks should consider EDD measures for customers who live in and/or source funds from countries identified as having inadequate anti–money laundering standards or that represent a high risk for crime and corruption. Similarly, EDD measures may be warranted for customers who engage in sectors or business activities known to be susceptible to money laundering. [PBIG – paragraph 3-2 and Wolfsberg PB Guidelines – paragraph 2.2] 6.10 Beneficial Ownership MAS Notice 626 paragraph 2.1 defines the beneficial owner as the natural person who ultimately owns or controls a customer, or the natural person on whose behalf a transaction is conducted or business relations are established. It includes any person who exercises effective control over a legal person or legal arrangement. MAS Notice 626 paragraphs 6.13–6.17 set the key regulatory expectations for identifying and verifying the beneficial owner. Where the customer is a legal arrangement, banks should identify and verify the identities of the persons who have effective control or ultimate ownership of the arrangement (e.g. settlors, trustees and protectors). In cases with beneficiaries, banks should identify and verify the beneficiaries’ identities before making any distributions to them. For example, th