When money laundering leaves a stain on the economy
SINGAPORE’S operation to round up accused members of the “Fujian Family” organised crime ring has seen more than S$2.8 billion of assets seized so far – an eye-popping sum.
But that is small change compared with the dirty money sloshing through the global economy. Widely cited International Monetary Fund (IMF) estimates put laundered capital at between 2 per cent and 5 per cent of global gross domestic product (GDP) – or as much as US$2 trillion a year – today.
But these inflows are no bonanza for the countries where the funds wash up.
“Money laundering and illicit funds, in the short term, may appear to support an economy by injecting illicit funds into various sectors,” says Nydia Remolina Leon, an assistant professor of law at the Singapore Management University (SMU) who specialises in financial regulation. “However, this support is often illusory and comes with significant negative consequences in the long term.”
Property prices
The red-hot real estate market, in particular, has drawn heavy scrutiny around the world.
For instance, “corrupt foreign elites continue to be attracted to the UK property market, especially in London, to disguise their corruption proceeds”, according to the British government’s national risk assessment of money laundering and terrorist financing in 2020.
In the case of the Fujian gang, Singapore police issued prohibition of disposal orders against more than 150 properties and 62 vehicles, with an estimated value of more than S$1.2 billion altogether.
Singapore’s Second Minister for Finance and National Development Indranee Rajah said this week, in reply to parliamentary queries, that “the impact on property prices is likely to have been minimal”, as the transactions involved “make up an insignificant share” of overall deals.
Still, discussing the economic implications of dirty property transactions, Prof Remolina says money laundering can inflate real estate prices and create price bubbles.
“This can give the appearance of economic growth as property values surge, but in the long term, this causes economic instability and financial crises,” she adds.
Sumit Agarwal, the head of the real estate department at the National University of Singapore, has suggested that illicit wealth could account for up to S$3.7 billion of Singapore’s housing market each year.
In a 2021 paper, Prof Agarwal and two colleagues studied transactions involving buyers with the same names as individuals from the leaked “Panama Papers” database of offshore companies.
They found Panama-linked buyers paid about 3.8 per cent more than the actual value of the property, with a possible manipulation through collusion between buyers and sellers.
This so-called “Panama premium” may be linked to “large sums of illegitimate money sourced from offshore vehicles, as illicit individuals would try to obtain the largest possible mortgage with an aim to launder more funds”, the researchers wrote in their report.
The price premium spilled over into sales of nearby properties, with the researchers finding that transaction values in the same neighbourhood went up by 7.3 per cent in the year after the deal.
But real estate is just the tip of the iceberg, since “what we can catch is what we can see”, Prof Agarwal says in an interview.
He tells The Business Times: “Illicit funds are mostly parked in other markets, more mobile assets: diamond, gold, cryptocurrency, even financial transactions that are highly liquid… When you see such transactions in illiquid markets (like housing), you realise how much more of that there is in more liquid markets.”
Indeed, the Singapore police have already seized cash, gold bars and cryptocurrency, as well as hundreds of luxury bags, luxury watches and pieces of jewellery, in their ongoing probe.
Prof Remolina notes that the market for luxury goods – such as high-end art, cars, and jewellery – may also reflect “negative externalities generated by money laundering”.
“Illicit funds can stimulate these sectors, creating jobs and generating revenue,” she says. “However, this often leads to price distortions and contributes to wealth and social inequality, since the general population may not see improvements in their living standards.”
Public coffers
Money launderers may also take advantage of government programmes that reward investors. In fact, suspects in the Singapore case held passports from Cambodia, Turkey and Cyprus, as well as Saint Kitts and Nevis and Dominica in the Caribbean, and the Pacific nation of Vanuatu.
Their varied travel documents speak to the seedier side of “golden passports”, which are obtained through schemes in a slew of jurisdictions that grant citizenship in exchange for investments of as little as US$100,000.
Sociologist Kristin Surak, an associate professor at the London School of Economics and Political Science, notes that there are legitimate reasons to participate in such schemes.
Bad actors are likely only a minority, and even the funds that shady individuals invest to gain citizenship could well be clean, since “people aren’t going to put their application at risk by using dodgy funds if countries are doing decent due diligence”, she tells BT.
“But they may have dodgy sources of wealth – that’s a little bit harder for countries to investigate,” says Prof Surak, whose new book, The Golden Passport, is about these residency programmes.
Countries can derive enormous benefits from operating such schemes. “There are currently three countries where citizenship by investment is more than 10 per cent of GDP, and it can be as much as 30 per cent of GDP,” she adds, comparing these funds to foreign direct investment.
“If you’re a small island country and you have to import everything, you’ve got very little natural resources, you can’t really sustain yourself, it can be a massive injection of cash into an economy.”
She cites the example of timeshare units in the Caribbean, where tourism is a major economic pillar.
“If a programme is done well, this could be a way for a hotel to update its hotel stock, or even build a new hotel. That generates local employment, and it can have positive benefits,” she says.
Yet Prof Surak warns that the investment money is not always used productively, with commissions and kickbacks also opportunities for intermediaries to skim money off the top.
And being too open-handed with citizenship “risks the value of your country’s biggest export” as other countries may tighten visa-free access for citizens of these jurisdictions, she adds.
News outlets such as Bloomberg and the Financial Times report that customers holding passports from the same countries as Fujian Family suspects are already facing enhanced checks from Singapore banks.
Or else, funds linked to suspicious individuals may end up in public coffers through another route: taxation.
One of the individuals in the Fujian Family case bought 20 units at a luxury condominium in Singapore last year, and was said to be contemplating getting another 10 units. The follow-up purchase would have yielded about S$30 million in stamp duties, local media reported then.
But “it is an economic imperative that Singapore not become a safe haven for laundering, which it is really far from”, says lawyer Danny Ong, the managing director of Setia Law.
He notes that Singapore’s status as a financial hub depends on its international reputation as clean and rules-based. “The government is, of course, very conscious of this and has spared no effort to put in place robust laws and regulations and has actively been prosecuting financial crimes,” he says.
Agreeing, Prof Agarwal says: “This is the trade-off most regulators, most policymakers have to make: how much is the revenue we will be generating from such activities and how much is the brand value we will be sacrificing…
“The Singapore government has always held the view that our brand value is much higher than the additional tax revenue that we can generate from allowing such activities.”
On the other hand, in countries with weak enforcement, “brand value is very low, so the regulators then say, ‘We don’t have a brand value to protect anyway, so why worry about it?’”
New risks
The money laundering landscape continues to evolve, with new vulnerabilities and risks.
“Because of our high standards and strong reputation, assets in Singapore are highly valued and monies sent from Singapore may perhaps be received with less suspicion overseas,” says Ong, who calls the Republic “the victim of our own success” in this regard.
“It is precisely these same factors which draw sophisticated criminals to channel illicit funds here,” he says.
For instance, family offices have become more popular here in recent years, possibly because they are one avenue to gain permanent residency (PR) under the Global Investor Programme. Principals can apply for PR status through the scheme if they have net investable assets of at least S$200 million.
The number of single family offices (SFOs) in Singapore has surged, from 400 that were receiving tax incentives as at end-2020, to 1,100 as at end-2022, according to official figures.
Prof Surak – who suggests that golden passport schemes conduct a “heightened due diligence” process that is more stringent than what is carried out for other forms of naturalisation – applauds Singapore’s residency system for its “almost brutal selectivity” of requiring proof of skills and track records on top of investments.
But she adds: “A lot of the family offices being set up in Singapore are coming out of the Chinese market, and the concept of a family office in China is very, very new.
“Even in the West, it’s very loosely defined legally, which is why people like it, because they can move their money around in a lot of different ways without it coming under the rules. I think that’s even more so in China.”
Still, “some of those areas that need to be calibrated to prevent money laundering from happening have been already identified”, says Prof Remolina, citing the Monetary Authority of Singapore’s (MAS) July proposal to bring SFOs under tighter anti-laundering rules.
Minister of State for Trade and Industry Alvin Tan told Parliament this week that at least one of the accused individuals in the Fujian Family case may have had ties to SFOs that received tax benefits. The MAS is now reviewing its internal incentive administration process.
Separately, the criminal activity from which laundered funds are derived is also changing.
Granted, drug trafficking remains a common source of illicit funds globally – although the specific drugs, production locations, and distribution networks will differ, as Prof Remolina notes.
She adds, though, that “criminals are quick to adapt and exploit new opportunities” from increased digitalisation in society: “The aftermath of the pandemic has seen a surge in fraudulent activities, widespread ransomware attacks and cybercrimes.”
On Sep 26, the United Nations Office on Drugs and Crime released a report on how transnational organised crime in South-east Asia “has evolved dramatically in recent years”.
The rise in human trafficking, where victims are forced to commit online scams and fraud, “has emerged as a new and growing trend” – especially in parts of Cambodia, Laos and Myanmar, and even Malaysia and the Philippines, according to the report.
“Generally, we see money laundering connected with syndicated frauds or cyber-attacks, Ponzi schemes, scams, tax evasion, and evasion of Chinese capital controls,” says Ong.
His firm has come across these cases through asset-tracing efforts that uncover shady transactions, as well as from clients who have suffered fraud or hacking.
Reputational damage
Given the risk of reputational damage, as well as the social ills from criminals and criminal activity, it makes both business and moral sense for governments to tackle money laundering.
Back in 1998, then-IMF managing director Michel Camdessus noted in a speech, “in the beginning, good and bad monies intermingle, and the country or region appears to prosper” from these funds.
“But in the end, Gresham’s law operates, and there is a tremendous risk that only the corrupt financiers remain,” he added. “Lasting damage can clearly be done, when the infrastructure that has been built up to guarantee the integrity of the markets is lost.”
Singapore minister Indranee told Parliament this week that the Republic “is determined to preserve our hard-earned reputation as a clean and trusted business hub”.
“We will continue to uphold our zero-tolerance approach towards money laundering, and do our best to ensure a strong and robust regulatory regime,” she said.
Curtin University adjunct professor Michael Schaper says that most developed wealthy economies have taken a “fairly strong approach” to clamping down on money laundering and associated risks.
“This strong anti-laundering stance helps attract foreign investment, gives citizens and foreigners encouragement to grow or start new businesses, and builds confidence that they won’t lose their funds. So there is a very strong upside to clamping down on money laundering,” he adds.
