1MDB saga: What the public needs to know

FOR a country well-reputed for its robust regulatory framework, the 1Malaysia Development Berhad (1MDB) saga has brought the vigilance of financial institutions in Singapore sharply into the spotlight.

Questions remain as to how gross breaches of our anti-money laundering (AML) rules occurred, and why the public has not been kept meaningfully informed of the progress of investigations being undertaken. It is now opportune for the Monetary Authority of Singapore (MAS) to consider its disclosure framework regarding regulatory matters.

THE EUROPEAN PRACTICE

The MAS has taken the consistent stance that it cannot comment on live investigations, nor its dealings with specific financial institutions. However, an overly legalistic approach would only impede constructive dialogue and result in a lack of public confidence. MAS deputy managing director Ong Chong Tee said that "building a strong corporate governance ecosystem is most effective when there is collective effort involving multiple gatekeepers - beyond the regulators and the boards of companies". Transparency is required to achieve such market discipline.

A central bank is transparent when it provides - in a comprehensive, accessible, and timely manner - sufficient information for the public to understand its policy regime, check whether its actions match the regime, and pass judgment on its performance. Principles of good governance require that central banks act in a transparent manner by keeping the public duly informed.

The European Central Bank (ECB), in their decision on the disclosure of confidential information in the context of criminal investigations, illustrates this, providing that while the ECB should refrain from disclosing certain information where disclosure would undermine public and certain private interests, this should not lead to an absolute prohibition of disclosure altogether.

The disclosure of the progress of investigations carried out by the Central Bank of Ireland (BOI), demonstrates the value of keeping the public informed. The BOI had published regular, detailed updates on a large and complex consumer protection review while it was being undertaken.

In 2018, BOI governor Phillip Lane highlighted this and emphasised the importance of the public being kept informed when unacceptable failings by financial institutions have occurred, even while the central bank is in the midst of reviewing, challenging and verifying the work undertaken by financial institutions in terms of regulatory compliance.

The handling of the Danske Bank scandal by the Financial Supervisory Authority of Denmark and the Estonian Financial Supervision Authority further demonstrates the European approach to disclosure. In a comprehensive report, which was published publicly, information including actions that were undertaken by the Estonian FSA and the Danish FSA, and a performance review of Danske Bank in relation to its AML regulatory compliance, were detailed.

Although MAS does not track the funds flowing through banks in Singapore, it does require financial institutions operating in Singapore to have in place and enforce robust controls, in order to detect and deter the flow of illicit funds through our financial system.

Our financial institutions, supervised by MAS, need to identify their customers, know the beneficial owners of the accounts, conduct regular account reviews, and monitor and report suspicious transactions. Given these requirements, how did the money looted from 1MDB manage to be funnelled circuitously through our banks? To date, little light has been shed on the lapses that have occurred, as much has not been made publicly available.

POSSIBLE FRAMEWORK FOR DISCLOSURE

We believe it would be beneficial for a report to be published so that the public may understand how the crime occurred and be informed regarding the steps taken by financial institutions and authorities since to prevent further occurrences. As was done in the Report on the Non-Resident Portfolio at Danske Bank's Estonian Branch, the report could emphasise that as investigations are ongoing, it cannot be concluded with reasonable certainty to what extent criminal activity had taken place.

Such a report could describe the AML procedures which were then in place. It should compile, in chronological order for ease of reference, press releases (by the relevant authorities or banks) as well as internal communications and reporting that took place at the time. Analyses regarding the accuracy and timeliness of such internal reporting should follow. The report should set out when and how the breaches of AML procedures occurred, and details regarding the cause of the lapse. For example, if the crimes were uncovered due to a whistleblower, the report should disclose whether the allegations had been properly investigated.

If, for instance, the banks had insufficient knowledge of customers, beneficial owners of the accounts, controlling interests, or the sources of funds, this should be stated. Other suggested points of disclosure include how the screening of customers and transactions was done (for example, manually or electronically), why there was a lack of an earlier response to identify the suspicious accounts or prevent dubious transactions, whether any other suspicious fund flows have been uncovered, or whether any collusion between employees, former or current, and customers may have occurred. The steps taken by the banks and authorities to prevent further breaches since should also be published.

A review into accountability could also be included. It is understandable that a specific individual's liability should not be commented upon prematurely so as to prevent prejudice. Yet, individual accountability is crucial when it comes to understanding how financial institutions become implicated in a crime. Therefore, in addition to analysing the institutions' exposure and legal responsibility, individuals in leading positions should also be assessed to determine whether they had fulfilled the responsibilities and legal obligations that formed part of their employment and designations.

To balance public and private interests in this situation, perhaps an assessment of individual liability be shared only if agreed to by the individual in question. For example, in the aforementioned report, the board of directors, chairman, and chief executive officer had requested for the results of their assessment of liability to be shared (they were assessed not to have breached their legal obligations towards the bank). For individuals who do not agree to their individual assessments being disclosed publicly, their reports should be made public only after the relevant investigations have been completed.

The MAS, through various prompt actions it has taken, has displayed its willingness to enforce its rules regardless of the stature of the parties involved. However, the enhancements cannot be merely procedural. Efforts must be made to mitigate real risks.

Of course, Singapore is neither bound by European decisions nor practices regarding disclosures. However, as the public remains anxious about how our well-reputed regulatory system had failed to prevent our financial institutions from being used as conduits for criminal activity on such a large scale, it may be appropriate for MAS to consider its disclosure framework regarding regulatory matters, and to provide timely and apposite updates to the public on the 1MDB saga.