Singapore regulatory enforcement update: Q3 2016

Key areas of regulatory focus

1. Hot topic: Anti-money laundering controls failings

The Monetary Authority of Singapore (MAS) announced this week that it is withdrawing the merchant bank status of Falcon Private Bank Ltd, Singapore Branch (Falcon Bank), and fining it S$4.3 million, for systemic failures in anti-money laundering (AML) controls and improper conduct by senior management in Switzerland and Singapore. Falcon Bank is the second Swiss bank to face closure in Singapore this year, following in the footsteps of BSI’s Singapore branch, which was shut down in May for almost identical breaches (article can be found here).

MAS has also fined DBS S$1 million and Swiss-based UBS S$1.3million for AML failings. However, the regulator stressed that the inspections did not reveal pervasive control weaknesses or staff misconduct. This is in contrast to the widespread systems and controls failings that were uncovered at Falcon Bank. 

Falcon Bank

The MAS imposed financial penalties amounting to S$4.3 million on Falcon Bank for 14 breaches of AML rules. The breaches included failures to adequately assess irregularities in activities pertaining to customer accounts and file suspicious transaction reports. The MAS also said that Falcon Bank had failed to guard against conflicts of interest when managing the account of a customer who was associated with the bank’s former Board Chairman and that the improper conduct of senior management at the Singapore branch “was wrongful and egregious in nature, and contributed to substantial breaches of AML regulations.” In connection with the MAS’ findings, Falcon Bank’s Singapore Branch Manager was arrested by the Commercial Affairs Department and faces criminal charges. 

Lessons not learnt…

The MAS conducted inspections on Falcon Bank in 2013 and 2015 and identified serious controls failures. The failure to heed these warnings was a significant factor in the closure: Falcon Bank had “demonstrated a persistent and severe lack of understanding of MAS' AML requirements and expectations” (MAS). Ignore repeated warnings from the MAS at your peril…

"Keeping Singapore a clean and trusted financial centre is a shared responsibility. The board and senior management of each financial institution play a pivotal role. They must put in place robust mechanisms to detect suspicious activities, promote strong risk awareness among their staff, and empower their compliance and risk management people. Most of all, they must set the tone from the top - that profits do not come before right conduct.” (MAS)

Consistent enforcement themes for AML failures

The Falcon Bank case is almost identical to the action the MAS brought against BSI in May and reflects many of the key themes of global enforcement actions for AML controls failures:

• failure to tighten controls despite repeated warnings
• poor conduct by senior management and ineffective oversight 
• unacceptable risk culture 
• failures to guard against conflicts of interest 
• inadequate scrutiny of suspicious customer transactions 
• failure to file suspicious transaction reports

The recent actions reinforce MAS’ commitment to rooting out money laundering and AML failures and act as a warning that banks should brace themselves for continued scrutiny and more intrusive inspections by the MAS. 

2. Two more ex-BSI bankers charged in 1MDB probe

Singapore prosecutors have charged two ex-BSI bankers with three counts of forgery and four counts of failing to report suspicious transactions between 2012 and 2014, in connection with the scandal surrounding 1MDB. The forgery charge, upon conviction, carries a maximum jail term of up to four years. Failing to report a suspicious transaction is punishable upon conviction by a fine of not more than S$20,000.

3. FATF publishes latest report on Singapore’s AML measures

The latest report by the Financial Action Task Force (FATF) found that whilst Singapore has a strong framework for combatting money laundering and terrorism financing, there is room for improvement. In particular, Singapore needs to "aggressively target" more complex cross-border cases of money laundering rather than domestic issues. 

In response to the report, the Ministry of Home Affairs, Ministry of Finance, and the MAS pledged (in a joint statement) that Singapore will rise to the challenge:

"Singapore's law enforcement agencies, which have been pursing complex transnational money laundering cases, will strengthen their capabilities to identify and investigate more of such cases." 

4. MAS prosecutes its first 'front-running' case for alleged insider trading

In August 2016, the MAS filed more than 300 charges against two dealers from First State Investments Singapore (FSI) and a remisier with UOB Kay Hian (UOB KH) in its first “front running” action for alleged insider trading. 

The alleged offences were committed on 49 Singapore-listed companies and another 51 companies listed abroad (including in Australia, Taiwan, Malaysia and Hong Kong). Among the charges brought, the two FSI dealers have been accused of possessing price-sensitive inside information on FSI's intended trades and procuring the remisier at UOB KH to execute trades (through his personal account) on the basis of such information. 

The case marks the second MAS-led criminal prosecution since the joint-investigation regime by the regulator and the Commercial Affairs Department was launched to strengthen enforcement against market misconduct.

What is “front running”?

Front running is the practice of a stockbroker trading a security in his own account by taking advantage of advance knowledge of pending orders from other parties.

Why is this significant?

This action is significant as it will be the first time the Singapore courts decide whether the practice of front running is an insider-trading offence under the Securities and Futures Act.

5. SGX working with firms to deter market rigging

The SGX has pledged to publish more data on market misconduct and will launch a trade surveillance handbook to help brokerages beef up efforts to detect and stop market malpractice. 

SGX chief regulatory officer Tan Boon Gin said: 

"Trading misconduct must be curtailed as early as possible to minimise market impact and maintain public confidence…The trade surveillance handbook and members surveillance dashboard will enable member firms to join forces with SGX as gatekeepers to take the fight to detect and stop market misconduct even further upstream."

The handbook will provide a set of guidelines that brokerages can incorporate into their surveillance programmes to improve their risk management and internal controls. The first dashboard will be released to brokerages at the beginning of October, and will cover alerts generated from April to August.