Effective AML/CFT Controls in Private Banking

1 Effective AML/CFT Controls in Private BankingStrengthening AML/CFT Controls in Private Banking Giventheclientattributes,sizeoftransacti onsandcomplexityinvolved,PrivateBanks(PB s)haveinherentlyhigherexposuretomoneylau nderingandterrorismfinancing( ML/TF )risks, , ,elaboratesonsoundpracticesobserved,ands upplementstheMAS :ThispapersetsoutMAS ,andisderivedfromMAS , Control Areas for Improvement1. Corroborating Customers Source of Wealth and Funds Enhancing ControlsStrengthen Detection Improve Oversight32. Detecting and Mitigating Tax-related ML Risks3. Detecting and inquiring into Commercial/Third-party transactional flows4. Exercising Active Senior Management Oversight5. Instituting Sound Performance Management Framework to foster Strong Risk CultureIntroduction1.

2 Source of Wealth and Funds Corroboration2. Effective Tax Risk Management3. Scrutinising third-party/Commercial FlowsConclusion5. Performance Management Framework4. Right Tone from the TopRestricted1. Robust Corroboration of Source of Wealth and Funds Obtainaclearunderstandingofhowtheclients assetsarederived: Asktherightquestionstoassesslegitimacyof customer'swealthandthesourceoffunds. Obtainadequateinformation/documentstosup portthisassessment. Settherightexpectationsforclientrelation ship: FIshavezerotoleranceforillegitimatefunds . Tocontinuetherelationship, Source of WealthTo be Assured that the Clients Assets are Legitimate4 Understandcustomers totalwealthandhowitwasacquired. Inappropriatetorelysolelyonclients representations.

3 Objectiveinformationshouldbeobtained( ,commercialdatabasesorothercrediblesourc es)tosubstantiatetheassessment. Enquireintotheactivitythatgeneratedthefu nds. Informationobtainedshouldbesubstantivean dfacilitatethisassessment. Source of FundsIntroduction1. Source of Wealth and Funds Corroboration2. Effective Tax Risk Management3. Scrutinising third-party/Commercial FlowsConclusion5. Performance Management Framework4. Right Tone from the TopRestricted AccountBisbeneficiallyownedbyacouplewhos enetworthisrepresentedtobelargelyderived fromthehusband semploymentincome. ,theclientcouldnotproducepastincomestate ments. Incorroboratingthecustomer snetworth,thebank: Verifiedthehusband spreviouslyheldpositionattheglobalbankth roughonlinesearches.

4 Obtainedsalarybenchmarksoffinanceprofess ionalsintheMiddleEast. Documentedhisestimatedannualincomeandapp liedaconservativereturnoninvestments(wit hbasisdocumented) Study: Good Practices ObservedDetailed Establishment of Journey to WealthCorroboration using Objective Information Sources Duringon-boarding,ClientCindicatedthatth eaccountwouldbefundedwithaninitialamount ofUS$30m,whichwouldbetransferredfromanot herbank. Beyondascertainingthatthiswasafirstparty transfer, AccountAisownedby4beneficialowners(BOs), whosesourceofwealth(SOW)isrepresentedtob efromtheircardistributorshipbusinessbase dinaSoutheastAsianCountry. TheBOsrepresentedthatthecompanywassetupm orethan30yearsago,andtheirwealthwaslarge lyaccumulatedduringtheboomperiodsinthepa st.

5 AspartofSOWcorroboration,thebank: Obtainedthecompany sfinancialstatementsanddocumentationtove rifytheBOs ownershipinthebusiness. Conductedmarketresearchintothemarketshar eandvehiclesalesinthecountryoverthepast3 0years. Validatedthenetprofitandrevenueassumptio nsusingindustrybenchmarks. DocumentedtheBOs Inquiry into the Source of FundsIntroduction1. Source of Wealth and Funds Corroboration2. Effective Tax Risk Management3. Scrutinising third-party/Commercial FlowsConclusion5. Performance Management Framework4. Right Tone from the TopRestricted ClientFrepresentedthathisnetworthofUSD20 0mwasmainlyderivedfroma50%stakeinhisfami lybusiness. Althoughthefinancialstatementsobtainedby thebankshowedthatthebusinesshadbeenlossm akingovertheyears, ClientGattributedhersourceofwealthtoaccu mulatedemploymentincomefromseniormanagem entroles.

6 Whileonlinesearchesshowedthatsheindeedhe ldseniormanagementpositionsinpublic-list edcompanies, Study: Inadequate CorroborationOver-Reliance on Client s RepresentationOver-reliance on Client s Representation ClientEinformedthebankaton-boardingthatt heinitialfundingofUSD80mwouldbetransferr edfromhisaccountfromanotherbank. Due Diligence Performed Failing to Establish Source of Funds6 ClientDrepresentedthathisnetworthofUSD20 0mwasderivedfromhisbusiness,whichwasrepr esentedtohaveanannualturnoverofmorethanU SD150mwithanetprofitmarginofabout3%to4%. Thebankacceptedthecustomer srepresentationsanddidnotobtainanydocume ntationorobjectiveinformationtosubstanti atehisnetworth. Learning Points: FIsshouldobtainobjectivesupportinginform ationwhenestablishingsourcesofwealth,and notrelysolelyoncustomers Inestablishingcustomers sourceoffunds, Source of Wealth and Funds Corroboration2.

7 Effective Tax Risk Management3. Scrutinising third-party/Commercial FlowsConclusion5. Performance Management Framework4. Right Tone from the TopRestricted2. Instituting an Effective Tax Risk Management FrameworkFIs should remain vigilant and implement Effective Controls to detect and prevent the laundering of proceeds from serious tax crimes1In2013,thePrivateBankingIndustryG roup(PBIG) , Controls Strengthenabilityaton-boardingtoidentify customerspresentinghighertax-relatedMLri sks,forenhancedduediligence. Monitoring Instituteongoingmonitoringcontrolstoenab lepromptdetectionoftax-relatedredflagsof customers' Enhance Staff Risk Awareness Enhancestaffawarenessofemergingtaxevasio ntypologiesandrelatedredflags.

8 Continuedvigilanceovercustomers Source of Wealth and Funds Corroboration2. Effective Tax Risk Management3. Scrutinising third-party/Commercial FlowsConclusion5. Performance Management Framework4. Right Tone from the TopRestricted BankAconductsacomprehensivetaxriskassess mentofcustomersaton-boardingandperiodicr eviewsusingamulti-factorapproach,includi ng: Useofholdmailservices Typeofcustomerandpurposeofaccount Presenceoftax-relatedadversenews Useofcomplexstructures CountryoftaxresidenceCase Study: Good Practices ObservedUse of Multi-Factor Tax Risk Assessment at On-boarding Aspartofon-boardingcustomerduediligence( CDD)measures,BankBrequirestheconductofad ditionaltaxduediligencemeasuresoncustome rsassessedtopresenthighertaxrisk.

9 Suchmeasuresinclude: Completionofanin-depthtaxduediligenceque stionnaire Obtainingofficialtaxdocumentation Securinglegaladviceortaxattestationsfrom anindependentparty,asappropriate8 Aspartofongoingmonitoring,BankCrequirest heRMstopayattentiontotaxriskred-flags,in cluding: Large/frequenttransferstohightaxriskjuri sdictions Re-depositorreinvestmentoffundsintoorigi naljurisdictionafterbeingtransferredtoah ightaxriskjurisdiction Purchaseoflargeamountsofpreciousmetals. AnytaxadversenewsDetecting Tax Red flags during Ongoing MonitoringIntroduction1. Source of Wealth and Funds Corroboration2. Effective Tax Risk Management3. Scrutinising third-party/Commercial FlowsConclusion5. Performance Management Framework4.

10 Right Tone from the TopTax Due Diligence Measures required of Higher Risk Customers Restricted AcustomerinBankEhadindicatedaton-boardin gthathewasaSingaporetaxresident. Whilethebanknotedaton-boardingthatthecli ent ssubstantialincomewasinsteadsourcedfroma nothercountry,thebankstaffdidnotinitiate ataxreviewnorconductedadditionaltaxduedi ligenceonthecustomertounderstandwhethert hecustomerhadothertaxobligations, Study: Control Deficiencies and/or LapsesInsufficient Guidance for Robust Tax Risk Assessment and Mitigation WhileBankD spolicyrequiredstafftopayattentiontoalis toftaxredflagindicators,theguidancelacke dclarityontheadditionalduediligencemeasu restoperformoncustomersexhibitingthesere dflags. Staff Risk AwarenessFailure to detect and follow-up on Tax Red Flags9 Aton-boarding,thecustomersinformedBankFt hattheyweremovingtheaccountrelationshipf romanotherjurisdictionduetotheonsetofCom monReportingStandards(CRS)inthatjurisdic tion,citingconfidentialityconsiderations .