Modern AML – an impossible task?
THE Commercial Affairs Department’s (CAD) S$1 billion sting operation has dominated nationwide headlines over the past two weeks. The foremost question on Singaporeans’ minds is perhaps how the suspects pulled this off – how did a small group of individuals amass so many assets, over a considerable period of time, in Singapore’s tightly-regulated landscape?
Singapore’s regulatory framework is a robust one, with a good degree of compliance with the global standards set by the Financial Action Task Force (FATF). An international organisation that sets the gold standard for anti-money laundering (AML) and counter-terrorism financing, the FATF has been described colloquially as “the most influential body you’ve never heard of”. Not only is Singapore a member of the FATF, but a Singaporean, T Raja Kumar, presently sits as its president.
Among the Singapore presidency priorities for the FATF are countering the illicit finance of cyber-enabled crime and increasing the effectiveness of global AML measures. In tangent, Singapore has over the last decade significantly stepped up its own AML efforts. Beyond financial institutions, AML requirements apply to payment service providers, casinos, real estate agents, pawnbrokers, accountants, lawyers, and precious stones and metals dealers, among others. As cryptocurrency went mainstream, Singapore also developed regulations for digital assets and their service providers, in the form of the Payment Services Act 2019.
Technology outpacing regulations
Unfortunately, the advent of technology significantly raises the challenge of front-running or even keeping pace with modern criminal syndicates in identifying and addressing fallibilities. Just as Singapore operationalised the Payment Services Act, new technologies such as non-fungible tokens and “property” in the metaverse gained traction. These novel species of commodities are equally conducive to serving as a vehicle for laundering as traditional assets. For instance, a house in Second Life could easily be purchased outside Singapore, then exchanged within Singapore for legal tender with a willing buyer. Such assets have yet to be regulated.
On the horizon is the marriage of artificial intelligence (AI) and blockchain. Savvy criminals can now deploy AI to determine how and when proceeds of crime should be dissipated, and use algorithms to execute transfers across thousands of accounts instantaneously, far beyond what a single human person, or even groups of people, could accomplish. Such technology makes the tracing and recovery of stolen or defrauded assets a gruelling task. It also makes the detection of criminal proceeds far more difficult, because proceeds can be distributed into micro-deposits, extensively layered, and then subsequently pooled. The greater the number of transactions between an asset and its criminal origin, the lower the chances of discovery.
Sophistication of criminal syndicates
The suspects apprehended in CAD’s raid exhibit all the hallmarks of a sophisticated syndicate. It has been reported that among the Bearbricks and Birkins seized were 11 documents with information on virtual assets. While digital asset service providers require a licence to operate in Singapore, this does not stop individuals from accessing unregulated offshore operators. There also exists a thriving black market for the purchase of credentials to cryptocurrency exchange accounts, whether hijacked or sold by users for a commission. Purchasing an existing account enables the new user to circumvent any “know your customer” checks by licensed operators intended to detect money laundering.
Digital assets also serve as a way to circumvent Beijing’s capital controls, which restrict the outflow of yuan except for certain purposes. Blockchain analysis expert Chainalysis reported that more than US$50 billion had moved out of East Asian accounts to areas outside the region between 2019 and 2020, before the People’s Bank of China outlawed all cryptocurrency transactions in September 2021. This includes US$18 billion of Tether, a token pegged to the US dollar.
The suspects in question have also been linked to no less than 20 companies, 11 of which were not found at their registered addresses. This is a hallmark of trade-based money laundering (TBML), which allows the movement of value cloaked as legitimate trade, often involving falsified documents, over- or under-invoicing. For example, recurring invoices for the provision of non-existent services can be used to legitimise a company’s receipt of the invoiced sums, when in fact the sums are the proceeds of a pig butchering ring. In Singapore’s 2016 FATF evaluation, TBML was highlighted as a particular concern – in line with the Republic’s status as a trade hub. The risk of TBML is increased by the involvement of offshore companies with opaque beneficial ownership structures, especially in jurisdictions with lenient disclosure requirements.
The power of suspicious transaction reports
Reports thus far indicate that CAD’s operations were preceded by a number of suspicious transaction reports (STR). It is an encouraging sign that stakeholders are vigilant of the risks of money laundering, and that CAD is receiving information that is both meaningful and timely enough to facilitate the apprehension of suspects and their assets. However, stakeholders that provided banking, property purchase or other services to the suspects can surely expect to have their AML processes relooked by authorities, especially if they had not filed any STRs.
Singapore also prescribes a sector-agnostic reporting requirement for all businesses which know of, or suspect, money laundering. This case presents a valuable chance to stress-test the effectiveness of this provision, as well as for market education. For example, while financial institutions would be well aware of what “red flags” to look out for, a seller of expensive handbags or watches may not be as familiar. Such red flags can include part-payments calibrated just below reportable or currency-control amounts, payments from third parties with no obvious connection to the customer, or unusually high cash payments. Regulators may also consider whether certain goods, characterised by their particularly valuable, speculative and easily commoditised nature, may benefit from expanded regulation.
All told, while we conventionally refer to money laundering, this heuristic perhaps limits our ability to envisage – and protect against – the multitudinous ways laundering can in fact occur. A better way is perhaps to think about money laundering as the transfer of value, any value, from one point to another, in a manner whereby the source of value-creation is obfuscated. Anything of value can serve as a vehicle for laundering.
Singapore’s next FATF assessment will be in 2025, shortly after the present Singapore FATF presidency elapses. No doubt, assessors arriving on our shores then will keenly scrutinise the steps Singapore takes following the arrests. This case presents both an opportunity for us to showcase the seriousness with which we take our AML obligations, but equally, to also reflect on what more we can do.
The writers are from Setia Law, a boutique law firm specialising in financial crime, disputes and corporate distress. Danny Ong is managing director of the firm. Victoria Ting is an associate director, and a former deputy public prosecutor and deputy senior state counsel of the Attorney-General’s Chambers, Singapore.
