Legal Digest. The Fight Against Money Laundering. Naina Parwani & Tan Loo Ying. An online repository of various articles published by our lawyers

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1 An online repository of various articles published by our lawyers The Fight Against Money Laundering Naina Parwani & Tan Loo Ying 1 Rajah & Tann 4 Battery Road #26-01 Bank of China Building Singapore Tel: Fax: eoasis@sg.rajahandtann.com Website:

2 The Fight Against Money Laundering Naina Parwani & Tan Loo Ying Money laundering, the process by which criminals mask ill gotten gains, is an areas which is of increasing concern not just to regulators, but to various organisations and persons who are likely to encounter attempts at money laundering. Certain persons and areas of business are particularly at risk. The Internet has also afforded criminals a new and efficient means of money laundering. This article looks at these two issues, and also looks at what authorities can do and are doing in their battle against money laundering. The laws prohibiting money laundering are also considered. Introduction Money laundering refers in general to the process intended to mask ill gotten gains so that they appear to have originated from a legitimate source. Initial legislative efforts to fight money laundering in Singapore focused on proceeds from drug trafficking activities. However, it has become increasingly clear that money laundering concerns are not limited to ill gotten gains from drug trafficking but extend to criminal activities. In particular, an area that has attracted a lot of attention internationally is the concealing of improperly obtained assets of senior government officials and the proceeds of financial fraud schemes. Recognising this, wide ranging amendments were made to the money laundering legislation in Singapore. The amendments to the Corruption, Drug Trafficking (Confiscation of Benefits) Act ( CDTA ) strengthened the powers of regulators to control money laundering and allows for greater co-operation between Singapore and foreign regulatory authorities to combat money laundering. Apart from providing an overview of the money laundering laws under the CDTA and in particular their implications for professionals, this article will also discuss the common areas at risk of money laundering, what are the procedures and laws in place to assist the authorities in the detection and investigation of money laundering and the use of the Internet in money laundering. Common Areas At Risk Of Money Laundering Industries that are considered by experts as being highly prone to money laundering activities are banking, gaming (including casinos), real estate, currency exchange, brokerage and insurance and reinsurance. With the ex plosion in the use of the Internet, Internet financial services, electronic payments, e-commerce, online gambling are also the target of money launders. By the nature of the services that they provide, bankers, solicitors, accountants, brokers and investments advisers are vulnerable to being implicated in money laundering activities. Page 1

3 Complexities Of Money Laundering, Especially Over The Internet The process of money laundering, which basically involves turning criminal profits into so called clean funds, goes through a complicated cycle of transformations. The first stage typically known as the placement stage, involves the placement of the illegally obtained cash proceeds into the financial system, the aim being to remove the cash from the place where it is acquired and to transform it into other asset forms, such as, travelers cheques, cashier s orders and banker s drafts. In the second stage, funds are sent abroad to be integrated into a foreign financial system. This stage also typically involves the creation of complex layers of financial transactions designed to disguise the audit trail and conceal the source and ownership of funds, and hence the reference to this stage as the layering stage. In the final stage, the funds are repatriated or placed back into the economy, re-appearing as legitimate business funds. In this age of the Internet, the ease, speed, convenience and ability to dispense with financial intermediaries that the Internet offers, have proved to be a boon to money launders. Money laundering activities have become so prevalent that the term cyberlaundering has been coined to refer to all activities carried out through the Internet that facilitates the laundering of money. One reason why the Internet is an attraction for criminals seeking to launder money is the anonymity it offers. This enables launderers to operate without leaving a trail of evidence. By using free, non-isp addresses (eg, xxx@hotmail.com), and providing false information, criminals can make it impossible for Internet Service Providers or other regulatory parties to trace accounts. Sophisticated programmes and methods also exist to allow connection to a remote computer over the Internet that enables users to use programs and data as if they were using the computer locally. For instance, one could hire an IP number and phone in to another computer to transfer funds. To make things even more difficult for regulators, there are sites that issue a random IP address, thereby creating a smokescreen which is impossible to penetrate. Furthermore, payment technologies such as e-cash and smartcard also provide some degree of anonymity. E-cash, freely transferable between parties, is an untraceable online payments system which uses a blind signature protocol designed to be as watertight and faceless as cash. Moreover, many of the ever-increasing variety of providers offering electronic cash alternatives are not subject to mandatory reporting requirements. This compounds the difficulty of enforcing laws against cyberlaundering. Programmes have also been developed that obstruct the investigation of cyberlaundering, for instance, programmes designed to remove evidence in sensitive files to the extent that even sophisticated recovery software will be unable to unscramble them. Page 2

4 Detecting And Investigating It is in the first stage of the money laundering cycle that the illegal activities are especially vulnerable to detection since that stage often involves the placement of large amounts of cash into the financial system. Detecting money laundering at this stages involve vigilance among those who would most likely come into contact with money launders, for example, front line staff in a bank. The second stage also provides opportunities for detection. In the final stage, however, it can be difficult to distinguish between legal and illegal wealth because it appears that the assets have been legally earned. There are certain business practices that, in some cases, may indicate an increased risk of money laundering. An awareness of these practices would assist in the detection of money laundering. These practices include the following: Unusual method of customer payments such as payments in cash of relatively large sums. Payments received from unknown parties. Unknown customers with large transactions. Use of off-shore entities in tax havens where owners are unknown. Increase in frequency or amounts of currency deposits made by account holders who export to countries notorious to be havens for money landerers. High volume of inter-company transfers. Transfer of funds or property to unrelated or unusual entities. High or unusual wire transfer activity. Multiple currency deposits into one account which are all later wire transferred out of the country. A more direct or less expensive route to ship goods is readily available but not used. Business transactions which do not appear cost effective. Further examples of suspicious practices are set out in the guidelines issued by the Monetary Authority of Singapore ( MAS ) the central bank regulatory authority of Singapore to inter alia banks, merchant banks and finance companies ( MAS Guidelines ). To assist the authorities in the detection of money laundering, the MAS Guidelines also require the implementation of the Know Your Customer ( the KYC ) rule. The KYC is the cornerstone of any policy to combat money laundering. The KYC procedures as set out in the MAS Guidelines essentially require financial institutions to obtain satisfactory evidence of the customer's true identity and have effective procedures for verifying the bona fides of new customers. Another important aspect of the detection policy is the requirement in the MAS Guidelines for financial institutions to clarify the economic background and purpose of any transaction of which the form or amount appear unusual in relation to the customer, or whenever the economic purpose and the legality of the transaction are not immediately evident. This is closely tied to the KYC rule since only where one knows enough about the customer, would one be alert to changes or unusual business activities that might constitute money laundering. Page 3

5 To assist the authorities in their investigation of money laundering, law enforcement agencies (referred to as Authorised Officers under the CDTA) may obtain access to materials related to suspected money laundering transactions by applying to court for Production Orders under the CDTA. Material includes any book, document or other record in any form whatsoever, and any container or article relating to the material. There are two types of Production Orders, a general order under section 26 of the CDTA ( general Production Order ) and a specific one applicable to financial institutions under section 26A of the CDTA ( specific Production Order ). The general Production Order is available against any person, except obviously a financial institution for which the specific Production Order is applicable. While an Authorised Officer under the CDTA may apply for a general Production Order, only the Attorney -General can apply for a specific Production Order. This difference reflects the seriousness of a production order against a financial institution. A financial institution which complies with a production order and provides material to the authorities would not be in breach of obligations of confidentiality imposed by either legislation (under the Banking Act), or under contract. Nor would it be liable for any loss suffered by the customer consequent upon production of materials pursuant to a production order. A production order may even be made to assist a foreign authority investigating a foreign drug trafficking offence or a foreign serious offence in Singapore. An application for such an order must be made by the Attorney-General under section 26B of the CDTA. However, a number of conditions would have to be satisfied before an application under section 26B is taken out. Authorities investigating suspected money laundering, may also apply for warrant to enter and search specified prem ises. Perhaps one of the most helpful tools in the arsenal of investigative authorities is the legislative provisions under the CDTA which impose an obligation on persons who reasonably suspect a customer or client to be engaging in money laundering activities, to inform the authorities of their suspicion (discussed in greater detail below). Laws and Implications The CDTA now extends to cover benefits from crimes. However, not all crimes are covered but only those that fall within the category of serious crimes. A total of 182 offences have been listed in the CDTA as serious offences and they include bribery, corruption, criminal breach of trust, counterfeiting, theft, extortion, robbery, misappropriation of property and cheating. However, it is notable that fiscal crime, ie tax evasion (which would include duty evasion and exchange control) have not been included in the list of serious offences. The legislation extends to benefits derived from offences which took place outside Singapore. However, the foreign offence must be such that, if it were committed in Singapore, it would constitute an offence under Singapore penal laws. Page 4

6 The offences of money laundering under the CDTA are directed at two types of offenders as follows. Firstly, the primary offender who is actually engaged in the unlawful activity which has produced the money and for whose benefit the money is laundered. Second, and more importantly for professionals, are the provisions directed at the secondary offender any person who assists in one way or another the primary offender, or who fails to discharge a duty imposed on him. The benefits derived by both the primary offender and the secondary offender may be the subject of a confiscation order made by a court following the conviction of the offenders. The money laundering offences fall into one of the following categories: assisting the primary offender to retain, conceal or transfer the benefits of drug trafficking or serious offence; a secondary offender acquiring the proceeds of drug trafficking or serious offence for no or inadequate consideration; the failure to disclose knowledge and/or suspicion of money laundering to the authorities or employer; and prejudicing a money laundering investigation by tipping off any person. The offences are all extremely serious. For the first two categories, custodial sentences of up to seven years or fines of up to S$200,00 or both, may be imposed. The third carries a maximum fine of S$10,000. For the fourth category, a fine of up to S$30,000 or a custodial sentence of up to 3 years, or both, may be imposed. In general, to prove liability for the offence, the CDTA provides for an objective knowledge test. Thus the prosecution does not have to show actual knowledge on the part of a defendant; it is sufficient if, for example for the offence of providing assistance, it is shown that as a reasonable person, the defendant ought to have known that the transaction was part of a money laundering scheme. This will make it easier for the prosecut ion to secure a conviction. A matter of immediate concern to professionals would be the extent of the duty of disclosure imposed on them by the CDTA. Section 38 of the CDTA imposes a positive duty on a person to disclose knowledge or suspicion that any property is derived from, or that it is used in connection with, drug trafficking or criminal conduct. The duty arises where the information or matter on which the knowledge or suspicion is based, came to one's attention in the course of one's trade, profession, business or employment. The matter must be disclosed to the relevant authorities as soon as reasonably practicable. However, where an employee has disclosed his suspicion to a compliance officer within his organisation, he is not obliged to further disclose the same information to the relevant authorities. Where a disclosure has been made in good faith, section 38 of the CDTA provides protection to the party disclosing by stating that such disclosure will not be a breach of any obligations of confi dentiality imposed either by legislation (such as the Banking Act), or contract. Further, there Page 5

7 will be no liability in damages for any loss arising out of such disclosure, or any act or omission in consequence of the disclosure. Where suspicions have been raised but there is a doubt as to whether the source of funds are from a serious offence covered by the CDTA or from criminal conduct not so covered, such as tax evasion, it would probably be best to disclose. As long as one s suspicions or beliefs are bona fide, one is protected. The upshot of the new and enhanced money laundering offences is to require individuals to be more alert to the possibilities of money laundering. Conclusion Money laundering is a transnational activity and detecting and investigating this crime requires a co-ordinated response. The amendments made to the CDTA reflects Singapore s commitment to co-operating with foreign enforcement agencies to curb this menace. The need for enhanced cooperation between nations is even more important in the area of cyberlaundering. The effectiveness of the authorities in their fight against money laundering also depends on a large part on the alertness and co-operation of professionals whose services are likely to be utilised by money launders. This article was first published in the Financial Post, October 2000, Vol.9. Rajah & Tann is one of the largest law firms in Singapore. It is a full service firm and given its alliances, including US premier firm Weil, Gotshal & Manges, is able to tap into a number of countries. Rajah & Tann is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealings with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The information contained in this newsletter is correct to the best of our knowledge and belief at the time of writing. Specific professional advice should be sought before any action is taken. In this regard, you may call the lawyer you normally deal with in Rajah & Tann or e -mail the Knowledge Management team at eoasis@sg.rajahandtann.com Rajah & Tann Knowledge Management. All rights reserved. Page 6