How banks can shore up defences against illicit financial flows
IN TODAY’S globalised financial ecosystem, the fight against money laundering and terrorism financing has become paramount. Financial institutions (FIs) play a critical role in safeguarding the integrity of the financial system.
Recent penalties imposed by the Monetary Authority of Singapore (MAS) on four FIs illustrate the critical need for stringent protocols for anti-money laundering and countering the financing of terrorism (AML/CFT).
Yet with digital evolution, financial crimes have become more complex, with criminals exploiting technology to launder illicit funds. FIs need to evolve to fortify their defences, protect clients, uphold the integrity of Singapore as a global financial hub, and contribute to a safer and more secure global economy.
Lessons from the breaches
MAS discovered breaches when examining the FIs’ dealings with individuals and entities linked to Wirecard’s financial irregularities. While no wilful misconduct was found, the banks and insurer were found to have inadequate AML/CFT controls, allowing for illicit financial flows.
Such shortcomings pose a significant risk to the stability of the financial system. To improve AML/CFT safeguards, banks should do more in the following three areas – but in each case, practical limitations may apply.
First, banks need to strengthen their verification of sources of wealth. Verifying the source of a customer’s wealth, particularly for higher-risk individuals or entities, is essential to preventing illicit fund laundering.
Yet, it is insufficient to rely solely on customer representations without adequate corroboration. Furthermore, a client may intentionally obfuscate their actual wealth source. The verification process may also be complicated by restricted access to information, lack of transparency, complex financial structures, and the rapidly changing economic environment.
Second, the real beneficiaries must be unmasked. It is important to comprehend the control structure of customers.
FIs must not only identify individuals or entities with direct ownership, but also delve deeper into complex ownership arrangements and determine the ultimate beneficiary ownership (UBO) – that is, the individuals who ultimately control and benefit from a particular entity or account.
But banks may struggle with cross-border transactions due to varying UBO disclosure requirements and the need to work with multiple authorities. Accurate identification may be obstructed by limited access to reliable UBO information and pseudo-UBOs acting as stand-ins. Country-specific data privacy laws further limit UBO information sharing.
Third is continuous customer profiling. FIs must prioritise a robust and comprehensive “know your customer” process to develop a thorough understanding of their customers. To exercise increased vigilance, banks must continually profile customers to ensure their risk profile remains consistent, and recognise when there are changes in behaviour and transaction patterns.
However, the rising cost of compliance has made banks reactive rather than proactive. Banks may also lack sufficiently skilled individuals and face gaps in data quality. Other problems may include a dependency on legacy systems or a single vendor.
The path forward
Notwithstanding the limitations above, FIs must go beyond mere compliance to regain and maintain public trust, and adopt a proactive and multi-faceted approach to combat financial crimes.
In this, they should leverage technology and innovation. Artificial intelligence, data analytics and machine learning can strengthen banks’ ability to detect, analyse, and respond to suspicious activities effectively. These tools can analyse large volumes of data, detect patterns, dissect complex structures, and identify suspicious transactions more efficiently.
In addition, FIs should periodically supplement the screening systems with additional data feeds, instead of just relying on one vendor and their parameters.
Enhancing defences against financial crime also requires collaboration between banks, regulatory authorities, and law enforcement agencies. Sharing information and intelligence is crucial in detecting and preventing illicit financial flows.
One example is the MAS’ Collaborative Sharing of Money Laundering/Terrorism Financing Information and Cases initiative, aimed at streamlining and enhancing the financing ecosystem for small and medium-sized enterprises. This centralised approach bolsters risk management.
Finally, banks must foster a strong culture of compliance from top to bottom, emphasising ethical behaviour, integrity and zero tolerance for financial crimes. To embed a culture that prioritises AML/CFT measures, it is essential to have continual staff training, education, and a robust governance framework with clear accountability at all levels.
Regular independent audits and comprehensive risk assessments can help identify gaps – not just current vulnerabilities, but evolving ones – and should result in the implementation of appropriate controls.
The penalties imposed by MAS serve as a clarion call for Singapore banks to enhance their financial crime defence strategies. As Singapore’s stature as an international financial centre grows, the imperative for banks to bolster their defences has never been more critical.
Through comprehensive customer profiling, industry collaboration, improved due diligence, heightened transaction scrutiny, and investment in technology, Singapore banks can fortify the integrity of the financial system, safeguard investor confidence, and protect the Republic’s reputation as a leading global financial hub.
The writer is partner for Singapore, consulting (financial services) at Mazars in Singapore
