MAS Information Paper: Strengthening AML/CFT Controls and Practices to Detect and Mitigate Risks of Misuse of Legal Persons/Arrangements and Complex Structures

On 30 August 2023, the Monetary Authority of Singapore (MAS) published an information paper on “Strengthening AML/CFT Controls and Practices to Detect and Mitigate Risks of Misuse of Legal Persons/Arrangements and Complex Structures”. In this information paper, the MAS highlights the ongoing risk of illicit misuse of legal persons and complex structures within the financial sector. While progress has been made in detecting front/shell company red flags using data analytics, and no systemic deficiencies were identified, the review highlighted lapses in the execution stemming from weak oversight, a lack of awareness, and vigilance in identifying unusual red flags.

The information paper presents typologies and case studies observed by the MAS during inspections of financial institutions (“FIs”) and outlines supervisory expectations to ensure robust anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) controls. It does not introduce new regulatory obligations but encourages FIs to benchmark their practices against supervisory expectations in a risk-based manner. FIs should conduct a gap analysis considering their business activities and customer risk profiles. If gaps are identified, FIs should implement specific remediation/enhancement measures in a timely manner. Senior management must be kept informed and oversee effective implementation.

Typologies and Supervisory Observations

Legal persons/arrangements and complex structures designed for wealth management purposes can be exploited for illicit activities. They may be used to:

Facilitate pass-through or round-trip transactions without clear economic purpose, often involving related entities or entities appearing legitimate; or
Create intricate layers of ownership solely to obscure true beneficial ownership.

FIs offering bespoke wealth management products for high-net-worth individuals should be vigilant against potential abuse to obscure ownership and wealth legitimacy.

In one case study regarding a policy owner of a portfolio bond, the FI failed to seek additional information despite the complex control structure of the policy ownership. The FI did not assess the legitimacy of:

The trust layer within the complex structure or the use of the foundation as settlor of the trust;
Discrepancies in the purpose of the foundation compared to the FI's understanding; and
The listing of an unrelated entity as a beneficiary, which could be changed at the settlor's request.

In another case study highlighted in the information paper, the FI has struggled to identify a company's true beneficial owner (“BO”) due to a complex structure and, as such, failed to be aware that the true BO was implicated in adverse news involving financial crime.

These case studies illustrate the critical importance of FIs understanding and accurately assessing the structures and ownership behind legal persons/arrangements and complex structures to prevent illicit misuse.

Customer Due Diligence (“CDD”)

FIs must identify and verify beneficial owners and understand the nature of the customer's business and ownership structure. Observations reveal that some FIs failed to identify the true BOs due to a lack of guidance and staff risk awareness and sometimes missed key opportunities to detect nominee/shell company red flags, such as:

Unusual ownership structure; and
Frequent changes in BO within a short timeframe

Actions Taken by Financial Institutions to Enhance AML/CFT Controls

Enhanced training and guidance for staff on complex ownership and structures to enable the identification of red flags in customer information and declarations;
Requirement for further assessment when unusual complex structures and ownership patterns are identified to assess the legitimacy of the customer.

Supervisory Expectations

The MAS emphasises the need for FIs to remain vigilant and attentive to red flags related to nominee/shell company characteristics. Expectations of the MAS include:

Awareness of red flags triggering additional due diligence checks, such as unusual or rapid changes in corporate structures or the BO owning a company through a nominee shareholder without a clear economic rationale;
FIs and their front-line staff should obtain sufficient information to understand and assess the legitimacy of complex ownership or control structures, especially in bespoke wealth management cases;
Adequate training and guidance for staff to identify and address red flags;
Performing additional checks or corroboration when doubts arise over customer declarations;
Establishing clear accountability and processes for timely escalation of concerns about ownership structures or BO information;
Implementing timely and appropriate risk mitigation measures.

Ongoing Monitoring

The MAS underscores the importance of ongoing monitoring in FIs to ensure transactions align with the FI's knowledge of the customer.

Transaction Monitoring Involving Escrow Arrangements

The MAS observed that FIs had established systems and controls for detecting unusual transactions. Adequate training of staff is essential to identify, scrutinise, and escalate unusual transactions effectively.

However, some FIs have failed to inquire into unusual transactions involving an escrow arrangement, missing red flags, and exposing the FI to risk. FIs have also dismissed multiple alerts on transactions related to an escrow service, failing to conduct proper scrutiny.

Actions Taken by Financial Institutions to Enhance AML/CFT Controls

Improve training, guidance, and tools for transaction monitoring analysts;
Implement programs to identify high-risk customers proactively.

Supervisory Expectations

FIs should have a good understanding of the purpose of accounts and expected transactions, considering the complexity and frequency and whether there is a clear economic and legitimate purpose for such arrangements.
FIs must be alert to red flags and unusual transactions or patterns, conducting appropriate scrutiny and filing a suspicious transaction report (“STR”) where necessary.

Executional Lapses in the Review of Transactions

FIs must implement robust internal risk management systems and controls to identify and manage higher ML/TF risks associated with customers and their transactions and perform enhanced CDD measures as appropriate. However, the MAS observed that certain material adverse news and discrepancies between declared information versus public records were not identified or escalated for further review. One of the cases highlighted by the MAS involved a client that had represented to an FI that it had intentions to wind down its business in “trade finance and loans” and, as such, did not consider the business activity when assessing the client’s ML/TF risk during onboarding. However, transaction monitoring alerts indicated that the client was still actively involved in trade finance and loans business. The MAS also noted that using exact name matches during screening has resulted in FIs overlooking certain alerts. The failure to detect critical risk indicators subsequently led to the neglect of implementing timely risk mitigation measures, including the reassessment of clients’ ML/TF risk rating. These lapses had negated the effectiveness of control measures that were established to be alert of ML/TF risk changes.

Actions Taken by Financial Institutions to Enhance AML/CFT Controls

To address the above gaps in CDD, FIs should enhance their AML/CFT controls to:

Improve communication channels to ensure that CDD gaps discovered during investigations are promptly escalated to the appropriate parties for review;
Provide additional guidance and training to staff to raise their awareness of higher ML/TF risk associated with certain business activities;
Provide transaction monitoring investigators with the necessary data analytics tools and access to relevant financial crime information sources to bolster their capabilities during alert investigations.

Addressing Information Silos

The MAS observed that, while source of wealth (“SOW”) assessments on clients were generally conducted, there was a lack of collaboration and an established process for sharing information across business units in some FIs, which resulted in the failure to consider risks posed by clients holistically and for the FI to take the appropriate risk mitigating measures.

Actions Taken by Financial Institutions to Enhance AML/CFT Controls

To address the above gaps, FIs should:

Improve information sharing: FIs strengthened protocols for sharing information among different business units to ensure timely communication of pertinent ML/TF risk concerns;
Accountability for decisions: FIs established clear accountability measures to ensure that ML/TF risk concerns are shared across business units and escalated promptly. This ensures that risk concerns are effectively addressed in decision-making processes.

Supervisory Expectations

The MAS emphasises the importance of addressing information silos to enhance ML/TF risk management. FIs are to continuously evaluate the effectiveness of their controls and processes, keeping pace with evolving threats and typologies. FIs should also remain vigilant regarding unusual transactions involving complex structures and related entities, and conduct appropriate due diligence to prevent potential misuse for illicit fund layering.

Conclusion

During their reviews, the MAS noted that FIs generally have established the necessary frameworks and controls to identify clients, including BOs, that exhibit characteristics of shell companies and conduct enhanced measures where higher risks are identified. However, MAS emphasises that FIs should not become complacent but instead remain vigilant and should continually work on enhancing their awareness of risks and improving their AML/CFT controls. FIs should also assess the effectiveness of their controls based on MAS' inspection findings and guidance, and steps should be taken to address any gaps and consider if there is scope to incorporate the use of DA to deliver the effective outcomes illustrated in the paper.

For any further information, please contact:

Phoebe Mok

Manager

Ingenia Consultants Pte. Ltd.

phoebe.mok@ingenia-consultants.com