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Compliance

Singapore’s tough stance on AML

Posted on 7 Jul 2014

The recent risk assessment report from the Monetary Authority of Singapore (“MAS”) on the money laundering and terrorist financing found that many sectors in Singapore have in place robust regimes to combat money laundering. It also noted that the regulatory authorities have put in place effective measures for prevention of money laundering, though some areas would benefit from further improvement.

In addition, last year’s designation of “serious tax crimes” as money laundering predicate offences shows the MAS’ increased focus on pushing financial institutions to adopt appropriate controls and to take anti-money laundering (“AML”) regulations more seriously than ever.

Nevertheless, many Singapore fund management companies (“FMCs”) feel they have unclear guidance in relation to AML checks on fund investors.

Who is a client of an FMC?

There are two crucial questions on which FMCs feel they do not currently have a clear answer: Who are considered to be clients of the FMC, and do fund investors fall within this category? The existing guidelines lack clarity in that regard and leave room for misinterpretation which could ultimately lead to serious compliance breaches.

Our recent discussions with FMCs in Singapore show that AML checks performed and kept on file on the “clients” of the FMCs are primarily related to the fund with which the FMC has a contractual relationship. Meanwhile, as is typical in the fund industry, AML checks on fund investors are outsourced by the fund to the administrator. Not providing FMCs with further guidelines as to who are considered the clients of an FMC has left a lot to interpretation. As a result, many firms in the industry admit they do not keep AML records on fund investors and to date have limited their checks to the direct clients of the FMC, being  the fund.

Reliance on administrators

According to the MAS’ Prevention of Money Laundering and Countering the Financing of Terrorism – Capital Markets Intermediaries notice revised in January 2013, AML responsibilities can be delegated to a third party such as an administrator, if certain requirements are met:

• the FMC is satisfied that the administrator is subject to and supervised for compliance with AML requirements consistent with standards set by the Financial Action Task Force, and has adequate measures in place to comply with those requirements;

• the administrator is not one which the firm has been specifically precluded by the MAS from relying on;

• the administrator is able and willing to provide, without delay, upon the FMC’s request, any document obtained by the administrator, which the FMC would be required or would want to obtain.

According to the MAS, notwithstanding the reliance on an administrator, FMCs remain ultimately responsible for AML obligations and bear the consequences of any breach of AML rules. In addition, the administrator cannot be relied on for conducting ongoing monitoring of investor AML. As such, the FMC is putting itself at risk if it wholly relies on service providers to perform AML checks. This is highly contentious as it means that FMCs should potentially redo the work of the administrator which raises concerns on costs as well as liability. The undefined regulations are causing uncertainty in respect to what services can actually be outsourced and how FMCs can ensure that the administrator is performing all necessary checks while avoiding duplication of work.

How can FMCs and administrators work together?

From a global perspective, if we take the example of  the UK where Laven also operates, it is widely held that a regulated manager does not need to perform AML checks on fund investors, as long as the manager ensures that delegation is monitored and for example the manager carries out regular checks of the administrator’s records and the adequacy of its processes. This is the case even though the fund’s agreement with the administrator often states that the administrator is not ultimately responsible for AML.

This is however not the view held by the MAS today which believes FMCs should directly control checks even where those are delegated.

We therefore recommend FMCs to work with the administrator and carefully review the AML collected by the administrator on a periodic basis and ensure compliance of those checks with the relevant investor profile. FMCs should keep tight records of what the administrator is doing especially when dealing with unregulated institutions or natural persons. AML files should be kept at the FMC’s office for ease of access to any auditor, and ultimately to satisfy the regulator’s requirements. Further, attention should in particular be paid to ongoing monitoring.

We also advise that the FMC acts as the relationship gatekeeper, liaises with each investor in collaboration with the administrator and ensures their full cooperation with the administrator’s AML requests.

Finally, our hope is that the MAS can provide further guidance to licensees which takes into consideration the practice of using administrators and perhaps the rules can be aligned with those in the EU to avoid increasing the cost of doing business for FMCs.

For further information on that topic, please contact Gordon Lai in our Singapore office : gordon@www.lavenpartners.com