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SFS Guide Series

MAS releases guidelines on: Effective Practices to detect misuse of the legal person (Company, LLP etc)

MAS Guidelines

Introduction

As an international business and financial center in southeast Asia, Singapore welcomes legitimate businesses to establish a presence here. Every year close to 30000-40000 companies are registered in Singapore out of which a sizable number of companies are promoted by foreigners. Such legal persons, including companies and partnerships, can play important roles in supporting the entrepreneurship and economic growth of the country.

In recent years, Singapore also has become a startup hub, where hundreds of new startups have setup operations in the areas of logistics, Fintech, blockchain etc.

However, there is always a risk that these legal entities can also be misused for illicit purposes. Instances have happened where a company was established in Singapore, and later on funds of criminal origin were received in the company.

ML / TF Vulnerabilities and Typologies

CSPs involved in the business of incorporation of companies for foreigners are exposed to certain ML / TF risks where there is a risk of clients using the corporate structure and the bank account for certain illegal or criminal purposes. Notably, the following few types are observed here.

Type 1 : Outright Criminal Use of Company and its bank account

In this typology, a promoter opens the company in Singapore, and avails services like Bank account opening, Nominee Director, Secretary etc. After the company and its bank account is operational, suddenly there is inflow of funds in the account and immediate outflow. So money is received over a short period where there can be many remittances, and it is moved out of the account in a very short period.

In most of the cases the money received is of criminal origin. Maybe it is from investment fraud, impersonation scams and anything like that. Once these activities happen in the bank account, the bank will close the account and the company will become inoperative. Attempts to contact the promoter will go futile. The promoter will simply vanish. It is also possible that the promoter might have used fake documents for company registration.


Type 2 : Money Laundering of self funds

In this typology, a promoter opens the company in Singapore, and avails services like Bank account opening, Nominee Director, Secretary etc. After the company and its bank account is operational, normal transaction starts. Deceiving and fraudulent remittances from other people are not involved here (As in type 1 above).

But the transactions, that happen in the company are mostly fake. Meaning there is no actual delivery of products or services. It's just fake purchase/sales invoices, thereby creating fake profit.

So here somebody who has illicit funds stashed somewhere is using the Singapore Company structure to make that money white. Since this is the money which belongs to the promoter, there is no external trigger here to alert you.


Type 3 : Receiving Dirty Money in the Company bank account

In this typology, a promoter opens the company in Singapore, and avails services like Bank account opening, Nominee Director, Secretary etc. Afterword’s, dirty money is received in the company bank accounts. For example, bribe for some contract maybe remitted to this account. Since there is no real trade involved, most of the remittances received are pure profit. The promoter then declares almost all of the remittance as profit, pays taxes on it and then makes the dirty money white.

Drive against shell companies

Government authorities have specifically noted that the risk of misuse of a corporate structure is high in the case of shell companies. The typical indicators that the company is a shell company are as follows.

  • These entities have no business activities in the jurisdiction registered
  • These entities have almost no amount of assets
  • They are basically set up to facilitate cross-border currency and asset transfer, often transacting with the companies belonging to same owner but in another jurisdiction.
  • They do not have any physical existence at the registered address. Often the registered address of the Company incorporation agent is used for registration purposes.
  • Multiple companies share the same registered address.
  • These companies have no economic rationale of any kind behind their banking transactions. Often the remittances are done without any underlying transactions.
  • These companies carry out rotational transactions of money without any apparent legitimate business.
  • High-value transactions are seen which are inconsistent with the operations of the business.

MAS Guidelines to Banks for dealing with Accounts for Legal Persons (Latest Guidelines 2021)

Banks must detect shell companies, though challenging at account registration. By properly training the staff the banks should gather right information from the customer.

Banks should continually enhance controls to address gaps identified from post mortem reviews of relevant cases and STRs, to strengthen banks’ ability to detect potential shell companies.

Multi factor risk assessment

MAS has asked banks to implement a multi-factor risk assessment protocol at the time of customer onboarding. A single red flag is typically not a sufficient indicator of suspicion,

But the presence of many factors requires banking institutions to be alert and ask for more data.

  • The unclear economic purpose for a common set of people linked to multiple companies / Bank accounts
  • The unclear economic purpose for requiring bank accounts in Singapore
  • No activity in Singapore – Only Import / Export Companies
  • Use of address provided by the secretary firm is used for the company
  • Use of nominee Directors / Shareholders in the company
  • Owners of the company residing abroad
  • Low or insignificant balance in the company bank account
  • Unusual change of corporate structure/ beneficial ownership after account opening
  • Unrelated third parties added to operate account after account opening (e.g. authorized signatories or internet banking users)
  • Bank accounts of the company managed by the unknown third parties
  • Suspicious transactions which are not in line with the bank’s understanding of customers
  • Superficial corporate websites which are inconsistent with scale of business

Additional indicators recommended by MAS for detection of misuse of bank accounts for Legal Person

  • Where the Beneficial owner of the company is also the beneficial owner of many other companies, but generally not the authorized signatory of the bank account, which is kind of unusual
  • Changes to the beneficial owners / Authorised signatories of the bank account soon after the account is opened
  • Complex corporate structures or unusual changes in corporate structure, especially not matching with the size of the business (Eg a parent company in UAE which in turn is owned by a fund in Panama)
  • Locally incorporated customers who appear to be controlled remotely by foreign parties without a clear rationale

Use of Technology for detecting the misuse

With the development in computing technologies the banking institutions are able to deploy advanced techniques for detecting the misuse of bank account. Some of these techniques are listed below.

Network Link Analysis

In the past, banks use to spot the suspicious transactions only based on the specific data of a company or of a bank account. However modern software enables banks to spot these indicators now across the companies.

For example, if an account has come for approval, however, if the authorized signatory of the same was previously flagged as suspicious for a specific transaction in some other company, it can now be immediately alerted by the banks internal system.

Similarly, if the transactions for a specific authorised signatory are flagged as suspicious, then all other transactions in any other company where this signatory appears in any capacity can be highlighted for a review.


Integration with Logistics Systems for identifying Trade-Based Money Laundering

Many banks now have access to logistics data to check the validity of the goods moving through the international logistics network. This enables them to identify the nature of goods moving and ascertain the genuineness of the transaction.

Summary

While the above changes do not impact genuine business, the shell companies will be significantly impacted. As a result, many companies set up as billing entities are already impacted in Singapore. Promoters intending to incorporate a company in Singapore but with no business as such in Singapore are finding it difficult to open bank accounts with the major banks in Singapore.

The new guidelines seem to be in the right direction to deter the use of Singapore companies for money laundering Purposes.
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