Two suspicious minds better than one in curbing dirty money flows

Singapore

EVERY year, roughly 35,000 suspicious transaction reports (STRs) are filed with the Singapore regulators by banks and other businesses to flag financial transactions that may smell fishy, Singapore regulators told The Business Times.

These are used to drive the rising use of data analytics by both the Singapore authorities and the banks to hunt down criminal typologies. Regulators and banks are joining forces by using a combination of STRs and individual bank's payment networks to shut bank accounts used to funnel illicit flows.

In 2017, the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD) set up a partnership with eight banks here and the Association of Banks in Singapore, to work to meet higher standards in anti-money laundering and in countering the financing of terrorism activities, known in the industry globally as AML/CFT.

The Singapore collaboration, known as ACIP - the AML/CFT Industry Partnership - is a way that MAS can send a system-wide view of STRs to individual ACIP banks. The banks drill through their specific banking network to shut down more entities' accounts that are suspected to be funnelling dirty funds. The ACIP banks include the three local banks.

The network analysis is important, given the swift adaptation by fleet-footed criminals to new typologies. For Singapore-incorporated firms that are effectively fronts for illicit activities, these shell companies are typically linked to a larger money-laundering network, with each company adding another layer, thereby masking the ultimate source of the funds, regulators said.

And notably with the 1MDB scandal that ensnared Singapore, the parties involved used "elaborate networks" spanning several financial centres and jurisdictions, and deployed "highly sophisticated" methods, they added.

Valerie Tay, head of the anti-money laundering department at MAS, told BT: "We gave the ACIP banks a challenge, to use data analytics to find these suspicious shell and front companies. Then we would come in and look at their capabilities and outcomes.

"There was a focus of minds."

To be clear, STRs are filed as long as banks have a reason for suspicion, but this is also balanced against the risk that "low-quality" STRs - so deemed when suspicions turn out to be wrong - can hurt legitimate companies if their funds from genuine business dealings do not flow through.

For this reason, the comparison of the relatively higher STRs in other jurisdictions would be difficult. In Hong Kong, the number of STRs were about 75,000 in 2018. UK's National Crime Agency received 463,938 suspicious-activity reports between April 2017 and March 2018.

In a similar vein, bankers point out that the risk of flagging false positives as part of their transaction monitoring remains. Ms Tay acknowledged that there is a balancing act for banks, and regulators want to avoid banks "de-risking" to the point of excluding legitimate customers from the financial system.

Still, banks have reported success in closing dodgy accounts, following their collaboration with the Singapore authorities, and are using technology to reduce false positives more quickly than before.

Banks in Singapore systematically run through a list of red flags for shell companies, they told BT.

These typically include watching for entities transacting with tax havens or high-risk countries, entities with a low paid-up capital relative to monthly value of transactions; and those with common beneficial owners, directors, addresses, contact details, and counterparties.

Such an approach has allowed UOB to narrow its focus from more than 200,000 companies to 350 companies which were red-flagged, and by deploying the necessary people more effectively to investigate these companies, the number of high-risk companies and potential shell companies were trimmed further to just 42, UOB's head of group compliance Victor Ngo told BT.

UOB has teamed up as well with regtech firm Tookitaki to build machine learning features. Results from a six-month pilot showed a 40 per cent drop in false positives in transaction monitoring.

Its peer DBS has also developed tools to boost transaction surveillance, by aggregating data from over 10 sources so analysts have a full view of the customer and their transaction history. With the tool, data consolidation is done 2.5 times faster, providing analysts more time to investigate.

Much of the anti-money laundering efforts today still involves keen observation on the ground. At OCBC, the bank earlier this year exited a relationship with a newly incorporated trading company with large transaction volumes that were inconsistent with the scale of business of a newly incorporated company in that industry. The suspicion continued even as the customer provided invoices to support its business operations. Compliance officers later found that the address was a small space in the Central Business District with no signage on the door.

Criminals will continue to evolve their modus operandi to avoid detection. With that, said Loretta Yuen, head, group legal and regulatory compliance, OCBC Bank, the bank has "hundreds" of its frontline employees helping to fight money laundering, and is constantly upgrading its technology to keep pace.

"One of the main challenges we face is the evolution of techniques used by the criminals. While technology has made completing tasks more efficient and effective, it has also enabled criminals to do more with new techniques," she said.

Industry observers concede that more needs to be done to prevent illicit flows from coming through, as the detection process currently still looks at patterns of fund flows that have already zipped in and out of the banking system. Against this backdrop, banks expect more information-sharing between the industry and the regulators ahead.

DBS's group head of legal, compliance and secretariat Lam Chee Kin said: "Professional money laundering is sophisticated, well resourced and can use networks of shell companies to evade detection. The MAS and CAD partnership excels in aligning efforts across the industry by sharing information and facilitating ideas, which has led to tools and techniques to counter the common adversary."

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