SINGAPORE (July 9): When Singapore was unceremoniously kicked out of Malaysia in 1965, the tiny island nation was forced to find a way to survive and thrive. Former prime minister Lee Kuan Yew took inspiration from another small nation: the landlocked Switzerland, which has a population of about eight million today. The country is famous for its chocolates, luxury watches, skiing and, of course, banking industry.
Today, Singapore is often called the Switzerland of the East. Many major foreign banks have set up shop here and offer a multitude of services, including private banking and wealth management. All three local banks — DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank — have also become sizeable players in the private banking and wealth management industry, thanks to several mergers and acquisitions in recent years.
At a July 4 media conference held in conjunction with the release of the Monetary Authority of Singapore’s FY2018 annual report, MAS managing director Ravi Menon says Singapore “continued to do well in asset management”, with assets under management increasing by an average of 12.7% a year over 2016 and 2017. “We are also doing well in wealth management, with private banking AUM expanding an average of 6.6% a year over 2016 and 2017.”
Singapore is attractive for many reasons, including being geographically accessible, and having a favourable tax regime and no significant capital controls. It also has a strong reputation for law and order. So, why did the perpetrators of the 1Malaysia Development Bhd (1MDB) scandal choose to send their money through Singapore in the first place? Was that reputation not a sufficient deterrent to wrongdoing?
Local authorities have already charged, penalised or convicted several individuals in relation to the scandal. The licences of two foreign private banks were also revoked. More criminal action may come. Currently, the Singapore Police Force is looking for key persons Low Taek Jho and Eric Tan Kim Loong as part of its investigation. Across the Causeway, former Malaysian prime minister Najib Razak is now facing a total of four charges of corruption and criminal breach of trust in connection with 1MDB.
How were several suspicious transactions cleared without drawing greater scrutiny? Are existing know-your-customer (KYC) procedures not robust enough? Would tougher regulation harm Singapore’s status as a regional wealth hub?
Switzerland became a hub for banking because of a long tradition of client confidentiality, which by some accounts dates back to the 18th century. The Swiss even codified this secrecy in 1934 with its Federal Act on Banks and Savings Banks. During World War II, Swiss bankers stashed Nazi loot without asking questions.
The Swiss banking industry has since come under pressure to clean up. It has implemented significant anti-money laundering legislation, such as the Anti-Money Laundering Act. Banks and other financial intermediaries have stricter KYC requirements and are required to do more to prevent money laundering and terrorist financing.
Switzerland also signed the US Foreign Account Tax Compliance Act in 2013. FATCA requires financial institutions to disclose information on US accounts to the US Internal Revenue Service on an ongoing and automatic basis. Singapore is among the more than 100 countries that are signatories to FATCA, which has been effective here since 2015.
Perhaps Singapore’s entanglement in an international financial crime is just another sign of its arrival on the global financial stage. As its position grows, its financial system may come under greater pressure too. Financial services institutions operating here must take heed and clean up their act before costly regulation is enacted to force them to do so.
This story first appeared in The Edge Singapore (Issue 838, week of July 9), which is on sale now. To subscribe, click here
