A bill proposing amendments to the Financial Services and Markets Act was read for a second time in Parliament on May 9 to allow information sharing between financial institutions (FIs) on a secure digital platform set up by the Monetary Authority of Singapore (MAS).
In order to combat illicit financial activities, the platform dubbed Cosmic — short for Collaborative Sharing of Money Laundering/Terrorism Financing Information and Cases — will be jointly developed by MAS and six major commercial banks in Singapore.
The six banks are estimated to represent more than 90% of Singapore’s small and medium enterprises (SME) commercial banking market.
Together with these banks, MAS aims to strengthen Singapore’s defences against money laundering, terrorism financing and the financing of the proliferation of weapons of mass destruction through the use of Cosmic.
The digital platform will initially address three key financial crime risks in commercial banking: the misuse of legal persons, such as the abuse of shell companies; trade-based money laundering; and proliferation financing and the evasion of international sanctions.
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In its initial phase, slated to begin in 2H2024, the six banks will be permitted to share information with each other on customers who exhibit multiple red flags indicative of potential illicit activities on a voluntary basis.
This phase could take up to two years as MAS calibrates operations on the framework.
Subsequently, the central bank says it plans to make some aspects of sharing mandatory and progressively extend Cosmic’s coverage to more focus areas and FIs.
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Despite closely supervising and working with financial institutions to strengthen Singapore’s defences against the three key risks, MAS says a remaining weakness in the effective detection of illicit financial flows lies in the inability of FIs to alert each other to unusual activity in their customers’ accounts.
“Financial criminals exploit these ‘information silos’ by making illicit transactions through a web of accounts in different FIs and moving from one FI to another to avoid detection,” the MAS explains. “By eliminating the information gaps between FIs, it will be easier to detect criminals. A legislative framework will need to be introduced to enable and govern Cosmic.”
Cosmic sharing will also supersede any restrictions on the disclosure of customer information that any written law or contract may impose.
According to HSBC Singapore’s chief compliance officer Jamil Ahmed, Cosmic is a “ground-breaking platform” which will place Singapore as a market leader in the global fight against financial crime.
“With the launch of Cosmic, Singapore is well positioned to achieve a paradigm shift in how financial institutions, with the appropriate guardrails in place, can securely exchange information to protect Singapore and the global financial system from abuse. This will bolster Singapore’s position as a trusted international financial centre,” says Ahmed.
Safeguards in place
Minister of state for trade and industry Alvin Tan, who read the bill for the second time, emphasised that participant FIs would only be permitted to use Cosmic for the sharing of customer information in the detection or prevention of financial crimes.
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Customers must exhibit multiple “red flags” that indicate potential financial crime concerns and meet stipulated “objective thresholds” before their information is shared across participant FIs, says Tan.
To establish an objective standard for when information may be shared under each of these three modes of sharing, MAS will issue a directive to participant FIs detailing the threshold criteria for each of them, and the list of “red flags” associated with each threshold.
The “red flags” will correspond to known criminal profiles and behaviours for key financial crime risks. For example, where transaction activities are inconsistent with the business profile of the company and cannot be explained, or if there are clear discrepancies in supporting documents that also cannot be explained.
Tan says that this will set an “objective and reasonably high threshold” to ensure that Cosmic is used only for cases of significant concern and safeguards against frivolous requests that could unnecessarily expose customer risk information.
He adds, however, that the thresholds, details and permutations of these “red flags” must be kept strictly confidential among only the participant FIs, to prevent criminals from “circumventing” them.
Says Lam Chee Kin, group head of legal and compliance at DBS: "With financial crime, we have to assume that bad actors tend to engage each bank differently to make it very difficult for any one institution to weed out criminal schemes on their own. Cosmic provides banks with additional tools to bridge this information asymmetry by facilitating information sharing in a very controlled and targeted manner.”
The minister also provided assurances that the safeguards are in place to protect legitimate customers, even for those “inadvertently associated” with bad actors, such a company that unknowingly transacts with an illicit counterparty and becomes subject to a participant FI’s scrutiny. “There are safeguards in place to protect legitimate customers.”
“As part of the bank’s risk assessment, banks are also expected to reach out to customers to allow them the opportunity to address the bank’s risk concerns and to explain unusual behaviours observed,” says Tan. “Bank customers are thus strongly encouraged to be forthcoming and respond promptly to their bank’s due diligence requests.”
Even after information has been shared on Cosmic, he notes that FIs will be required to make an independent risk assessment of a customer. “A financial institution should not rely solely on the information received on Cosmic or from Cosmic to terminate a customer relationship, including the fact that a customer has been placed on the ‘watchlist’,” adds Tan.
Dylan Lee, Citi Singapore's country chief compliance officer says: “Cosmic enables banks to collaborate within the regulatory framework. This engagement and collaboration will enable Citi to further our efforts to protect clients and the franchise from the risk of money laundering, as well as strengthen the industry as a whole.
“Participating in an initiative like Cosmic creates a strong network for the financial sector to have a deeper and more holistic risk assessment regime that is derived through collaboration. Greater information sharing results in a safer banking environment for our clients, and at the same time enhances Singapore’s position as a global financial centre,” he adds.
According to MAS, for the vast majority of individuals and companies that are legitimate and do not exhibit risky behaviour, FIs will neither have any reason to share customer information, nor will they be allowed to.
The bill will allow MAS access to information on Cosmic for supervisory purposes. “This is necessary for MAS to monitor if participant financial institutions are using Cosmic appropriately, and will also support MAS’ broader supervisory and surveillance role to ensure that financial institutions have robust defences against financial crime,” Tan says.
The central bank says that Cosmic information, including material networks of suspicious actors that are escalated to MAS, will be integrated into MAS’ overall surveillance framework to target higher-risk activities in the financial system for supervisory intervention.
Meanwhile, the STRO (Suspicious Transaction Reporting Office), Singapore’s financial intelligence unit, will also have direct access to the information, which it will be able to use as an additional data source for its own analysis.
The bill has been approved by Parliament for a third reading.
