Asian regulators continue to set high expectations on tracing sources of wealth

Asian regulators continue to keep tabs on sources of wealth, particularly in the private banking sector, setting high expectations by requiring these institutions to understand account holders in greater detail. If the recent increase in the hire of compliance professionals specialising in tracing sources of wealth and funds by Singapore-based private banks is any indication, regulators in Singapore and elsewhere in the region have not relented on the topic.

Source of wealth and funds have been an area of focus, particularly for private banks because of the risks of corruption and tax evasion in addition to foreign exchange controls associated with capital flight in certain jurisdictions, said Josh Heiliczer, Asia Pacific financial crime compliance leader at EY in Hong Kong. “The reason banks, particularly private banks, are going through source of wealth information is to ensure the source is not illicit and you also understand how a person got wealthy. Governments in jurisdictions such as Hong Kong, China, Taiwan and India maintain foreign exchange controls restricting the movement of funds to offshore locations.

In addition, people are trying to avoid taxes. That is why source of wealth is of great interest, also in relation to the CRS [Common Reporting Standard] exchange of information, which will provide offshore holdings transparency through the exchange of information between tax authorities globally, for example, between Singapore and China, leading to additional tax amnesties and enforcement actions against both banks and high net worth individuals,” he said. Sources of wealth a focus for many Asian regulators Tracing sources of wealth remains a focus for many Asian regulators, spiked further by a number of market events in recent years including the Panama Papers leak and the 1Malaysia Development Berhad (1MDB) fund flows spanning a number of jurisdictions. “It’s [sources of wealth] been a very focused issue for private banks.

The real shift from Switzerland to Singapore due to loss of anonymity and Singapore trying to build up its private banking sector have meant that regulators are very focused on sources of wealth issues,” said Tim Phillipps, Southeast Asian leader, forensic and analytics, and APAC leader, financial crime network at Deloitte in Singapore. Every crime leads back to the sources of funds, particularly with private banking, which can trace its history to the private banking sector in Switzerland. The global private banking activities saw a real shift from Switzerland to Asia, especially Singapore, more than 10 years ago after Switzerland lost its anonymity as a consequence of tax problems involving a number of Swiss banks, namely Credit Suisse and UBS.

There was a lifting of the veil and the ability to have anonymity with Swiss private banks was reduced enormously. A FATF requirement The concept of sources of wealth emerged about four years ago when the Financial Action Task Force (FATF) required financial institutions to examine not just how their clients derive their funds but also how they generate their wealth. That means asking their clients a whole host of questions including what their business is, how they made the money originally, and what volume and frequency of funds financial institutions should expect from their clients in the future. “It’s a complete proposition that will relate to how you, as a bank, rate your clients, whether they are high risk clients and how you monitor them going forward,” Phillipps said.

A lack of understanding of their clients and not knowing how they generate their funds and wealth make it difficult for banks to assess their clients for risk and potential crime, Phillipps said. “When you understand what risk your clients pose, then you can monitor them and assess their transaction patterns. It is to see if it is consistent with their sources of wealth. When you ask lots of questions, you get an opportunity to understand how their business operates,” he said. By requiring banks to ask questions about sources of funds and wealth enables them to generate a more accurate picture of what they can expect to see in terms of future transactional activity,” said Lisa Dobbin, lead partner, financial crime at Deloitte Australia based in Sydney.

Particularly in Asia, the banks are required to establish sources of wealth as a basis for making a risk assessment, which will in turn determine whether they can adopt a risk-based approach, according to Phillipps. AML processes and tax departments operate in silos Most international private banks have put in place processes and equipped their relationship managers with the skills to understand clients’ sources of wealth, but they remain beset by a number of issues in relation to utilizing the information for tax transparency and now CRS purposes largely because the AML processes and the tax department continue to operate in silo, according to Heiliczer. “Even though you have two things interconnected, there isn’t a way for information sharing.

Traditionally they don’t necessarily manage their information together. Now a real challenge for banks is that they have to be able to fight the silo and put [in place] a holistic approach to managing and understanding the clients, while being able to answer regulators’ questions for the CRS reports,” he said. Heiliczer also pointed out that regulators in a number of jurisdictions are going to come back and ask banks how their clients were able to get the money out of their country. A long list of questions remains unanswered. “The answer is really sources of wealth. Banks haven’t really looked into the information because they haven’t merged the information on sources of wealth with the information on taxes,” he said. “I wouldn’t say banks are not able to give regulators a good answer. I would say they are not good at anticipating future risks.

All the things we are talking about [regarding] reviewing source of wealth and CRS information gathering are reactionary. It’s all related to governments requiring these new standards, [particularly] in the case of CRS information sharing,” he said. Heiliczer urged banks to take a proactive approach in anticipating the questions that are going to come from regulators. “This is a key risk for private banks, a key risk to their business models,” he said. Specialist skills required Tracing sources of wealth has been a major challenge for banks and their clients because of its intrusive nature, Phillipps said. “It does involve a lot of relationship management. Relationship managers have to talk to clients and collect a lot of data, and in some cases, they have to inspect the clients’ operations,” he said. Understanding a client’s source of wealth is exceptionally difficult and requires specialist skills, Dobbin said. “If you think of the level of skills required, the question really is: where does my customer derive his wealth from and does that gel with the business background? It requires reasoning and awareness of the commercial environment. This is where the specialists come in particularly [to assess] high-value and high-risk clients,” she said. Produced by Thomson Reuters Accelus Regulatory Intelligence 03-May-2019

Published 29-Apr-2019 by Patricia Lee, Regulatory Intelligence

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