Singapore Lawyers as Gatekeepers

By Andy Yeo, Allen & Gledhill

The Monetary Authority of Singapore (MAS) has been instrumental in the development of anti-money laundering legislation, regulations, notices and guidelines. These are intended to regulate the financial sector and apply to banks, merchant banks, finance companies, money changers and remitters, insurers, capital market intermediaries, financial advisers, approved trustees and trust companies.

Lawyers, law firms and legal practices (legal practitioners) in Singapore have also been given a role to play in combating money laundering. This comes as no surprise as legal practitioners are often the holders of large sums of money involved in the majority of commercial transactions. Furthermore, the confidentiality obligations of lawyers are also appealing to those who engage in money laundering or terrorist financing activities as their identities and activities will be “safe and hidden” away from the prying eyes of authorities under the cloak of legal privilege.

The property market in Singapore experienced a massive boom at the beginning of 2007 and an unprecedented number of property transactions took place. This boom entailed the prices of local properties achieving new heights. At the same time, the number of foreign buyers who entered into the local property market as a result of relaxed rules relating to foreign ownership of property, resulted in unprecedented volumes of transactions involving foreign individuals and entities. The majority of transactions involving foreign owners usually involve high-end properties often in excess of US$1 million. When taken together, these elements add up to a definite risk that the proceeds of crime from foreign criminal elements could be flowing into Singapore via local law firms under the pretence of being monies for legitimate transactions.

The existing legislative provisions under the Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act (Cap. 65A) of Singapore (CDSA) mandate that any person who, in his professional dealings or in his course of trade, comes across property that gives him reasons to suspect that it is connected to criminal conduct, must raise the red flag with the authorities. However, the truth is that, despite the high volume of transactions and huge amounts of money involved in the buying and selling of blue-chip properties involving foreign buyers in Singapore, it is commonly believed that not a single suspicious transaction report (STR) was filed by any lawyer.

To prevent legal practitioners from being used or targeted by money launderers, the Legal Profession Professional Conduct (Amendment) Rules 2007 (LPR 2007) was enacted to further supplement the existing legal framework to combat money laundering and terrorism financing activities. The Law Society of Singapore Council's Practice Direction 1 of 2008 on the Prevention of Money Laundering and the Funding of Terrorist Activities (the Practice Directions 2008) was also issued to explain the application of the LPR 2007 and to streamline the practical difficulties that were experienced by the legal profession in Singapore in complying with the previous practice direction issued in August 2007. The LPR 2007 is supplementary to the anti-money laundering provisions under the CDSA.

Key Aims and Provisions of the Practice Directions 2008
The key aim of the Practice Directions 2008 is to prevent legal practitioners from creating or maintaining anonymous client accounts. It is also intended to help streamline processes to allow lawyers to adopt a risk-sensitive approach in taking measures to “know their clients” (know your clients or KYC). In short, legal practitioners are required to know who their clients are before accepting instructions, monies, retainers or deposits from them. The Practice Directions 2008 introduced the risk-based approach for the performance of clients’ due diligence checks (CDD).

Risk-based Approach to Client Due Diligence Checks
Stricter CDD measures are obviously required when legal practitioners are dealing directly with a client who possesses large amounts of cash, the sources of which are suspect or uncertain and when the identity of the client, the veracity of the information given or the nature of the transaction to be procured or undertaken is suspicious. However, except for in relation to the larger and better established law firms, it was curious that such measures were never previously suggested by the Law Society of Singapore. Neither was there a consistent standard for Singapore’s legal practitioners when opening files. Needless to say, when the new, August 2007 legislation and Practice Direction was unveiled, it caught the wider profession off guard. More worrying was the air of uncertainty as to the application of the new rules and how best local lawyers could comply with them.

The Practice Directions 2008 require CDD to be performed when the client is acting through another person or entity. When a client is acting through his representative, legal practitioners must verify the representative’s authority and identity as though he is the actual client. For unlisted companies or partnerships, legal practitioners are required to perform CDD on all the directors and partners respectively as if each of them is the client. There is also a requirement to conduct CDD on any beneficial owner benefiting from the client’s transaction or instructions.

Realising that there is no one-size-fits-all CDD for the various types of clients that a legal practitioner may come into contact with, the Practice Directions 2008 introduced a risk-based approach. Under this approach, the depth of the checks on potential clients’ background and dealings varies from the less likely to the highly suspect. This variation was in response to the fact that the Practice Directions issued in August 2007 had created a lot of uncertainty and, at the same time, placed an onerous burden on the legal profession to conduct KYC/CDD on all clients irrespective of transaction types.

Low-risk Clients
Under the Practice Directions 2008, simplified CDD measures may be performed on clients who pose a low risk of money laundering and terrorist financing. “Low risk” includes:

• Where reliable information on the client is publicly available to the financial institution;
• Where the client is a listed company that is subject to regulatory disclosure requirements;
• Where the client is working through a financial institution whose anti-money laundering and countering terrorist financing (AML/CTF) controls are familiar to the legal practitioner by virtue of a previous dealing; and
• Where the client is working through a financial institution that is subject to and supervised for compliance with AML/CFT requirements set by the Financial Action Task Force on Money Laundering.

High-risk Clients
A client may be considered to be high-risk when

• It is a business or corporate entity that the legal practitioner has not met;
• The client is from or based in countries with high level of corruption or where terrorist organisations are known to operate from; and
• When they are a “politically exposed person”. A politically exposed person (PEP) was defined by the MAS as “a natural person who is or has been entrusted with prominent public functions in a foreign country, including the roles held by a head of state, a head of government, government ministers, senior civil servants, senior judicial or military officials, senior executives of state-owned corporations and senior political party officials (foreign PEP).”

For high-risk clients, enhanced CDD will be required. For foreign PEPs, a stricter CDD must be performed on them and their immediate family members and close associates. Legal practitioners are not required to conduct extensive investigations to establish whether a person is a foreign PEP on their own, but are permitted to rely on third-party database service providers. Thus, an internet-based engine or a reputable international electronic identity verification provider can be used for this purpose.

It is interesting to note here that, whilst stricter CDD must be performed on foreign PEPs, there is no mention of an individual who is a Singapore PEP. However, it follows that, as the MAS made no distinction between a foreign PEP or a local PEP, lawyers in Singapore should adopt the stance that enhanced CDD is required when dealing with any PEP.

For clients hailing from countries known to be plagued with terrorist activities, further enquiries must be made into the type of client, the nature of the service they require and the geographical area of operation of the client. This is to assess the presence of any risk of money laundering and terrorist financing. The CDD to be conducted in relation to a foreign PEP will also be applicable where appropriate.

The risk-based approach in the Practice Directions 2008 effectively lowers the allocation of monetary resources and time taken to conduct CDD. This allows legal practitioners to concentrate their CDD resources on high-risk clients and directly improves their chances of detecting and monitoring suspicious transactions. In turn, this reduces the chances of Singapore’s legal system being used as a vehicle for money launderers.

The risk-based approach also allows small-scale legal firms or practices to cut or reduce their allocation of resources for CDD purposes. They can choose between a simplified check or a detailed one depending on the likelihood or risk of money laundering or terrorist financing in a particular transaction. However, our view is that the success of these checks lies not in the formula or process, but in the action of the local practitioners to raise the necessary red flags when confronted with a suspicious situation. The most robust set of rules are only as effective as the people who adhere to and/or enforce them.

Shortcomings of the Practice Directions 2008 and LPR 2007
Despite all the mechanisms in place, the Practice Directions 2008, which are supplementary to the CDSA’s provisions on anti-money laundering, are still lacking in a few areas.

The Enforcement Aspect
In the legislative hierarchy, the Practice Directions 2008 are only guidelines and do not have the binding force of a statute. This in itself undermines the regulatory role of the Practice Directions 2008. If such a breach is uncovered, it should constitute a breach of the LPR 2007 which, in turn, should result in the direct breach of the Legal Profession Act (Cap. 161) (LPA). The legal practitioner in breach should then be subjected to the disciplinary provisions of the LPA. The LPR 2007 provides for the duty to report suspicious transactions. This is similar to the requirement of Section 39 of the CDSA so a breach of the LPR 2007 should logically also be a breach of the CDSA.

Following from this, it appears that only breaches of the Practice Directions, which in turn lead to a breach of the CDSA or any other legislations dealing with AML/CFT, will attract legal prosecution in the Singapore Courts. For example, it does not follow that any breach of the Practice Directions 2008 will necessarily be prosecuted in Court unless it also constitutes a breach of the CDSA. This means that the Practice Directions 2008 lack any real bite.

The sanctions that follow a breach are only as effective as the system of enforcement which uncovers them. Since the enaction of the CDSA in 1992, there has been only one prosecution for a breach of the reporting obligation, which, coincidentally, was a case brought to Court that same week when the FATF’s evaluators were in Singapore assessing Singapore’s AML/CFT systems and institutions.

Section 47 of the LPR 2007 obliges an entity, on its request or as a result of a written complaint lodged by a third party in respect of breaches of the LPR 2007, to provide documents, information and explanation to the Council. The Council may use these documents, information or explanation as a basis for enforcement under the CDSA or disclose the same for purposes of investigations of a related criminal offence. This again shows that the LPR 2007 is supplementary to the CDSA and it is obvious that the effective enforcement regime ultimately rests with the CDSA.

Therein lies the weakness of this system. Whilst the Law Society has been vested with the power to audit any law practice in Singapore and check whether they are in compliance with the Rules, it is clear that such a system will only be effective when breaches of the LPR 2007 are uncovered. At the present time, there is an unofficial six month moratorium on such enforcement steps in order for all local practices to get their internal compliance systems in order. It therefore remains to be seen how the Law Society of Singapore intends to enforce the LPR 2007 and deal with any breaches.

The Initiative for Legal Practitioners
When a report is lodged under the CDSA, legal practitioners may be left waiting if there is no definite or speedy reply from the Suspicious Transactions Reporting Office (STRO) on whether the legal practitioner can deal with the client in question. In fact, it is rare that the STRO will take a stance with respect to either sanctioning or prohibiting certain actions to be taken in relation to the subject of an STR.

It would be ideal if a reasonable deadline could be enforced for the STRO to give a decision on whether the legal practitioner can take on the client or not. This is important to avoid legal practitioners from fearing they will lose their clients, which will in turn reduce their initiative and propensity to “blow the whistle”.

In addition, there is little incentive to adhere strictly to the CDD required under the Practice Directions as strict adherence will inevitably transform into losses of income when clients fail to satisfy the CDD. This, coupled with the obligation to report to the STRO and the potential delays in obtaining permission to work with reported clients, will lower dramatically the incentive to report.

This situation will be further complicated by the potential backlash from genuine clients whose transactions are delayed, prolonged or even terminated. To avoid all these unfavourable situations, the temptation for legal practitioners to relax CDD requirements will be hard to resist and, if they do give in, the effectiveness of the LPR 2007 and the Practice Directions 2008 will be greatly undermined.

The Obligation to Report
Section 39 of the CDSA creates a reporting obligation that stipulates that an STR must be made when the practitioner knows, or has grounds to suspect, that any property in whole or in part, directly or indirectly, represents the proceeds of drug trafficking or criminal conduct or that the property was used or intended to be used in connection with such acts. Criminal conduct is defined as an act that is a serious offence in Singapore or a foreign country. A list of these acts is provided under the Second Schedule to the CDSA (money laundering offences). Acts that are illegal in another country but are not classified as criminal conduct or money laundering offences in Singapore will not constitute a reportable offence under the CDSA.

This therefore creates a situation in which the practitioner may have knowledge or a suspicion that money received is highly suspect but has no obligation to report it if it transpires that the source of the money is “legal” in the country where the money originates from.

Proceeds from acts involving the pollution or destruction of the environment (such as illegal logging and clearing of forests) and even tax evasion activities are not listed under the Second Schedule of the CDSA. As a result, although the proceeds from such activities may be crimes in another jurisdiction, they can be legally deposited in Singapore without incident. This creates an anomaly which must be addressed appropriately.

It is also interesting to note that legal practitioners will not be able to invoke the statutory protection for whistle blowers under the CDSA for reports made against transactions that are not money laundering offences.

The protection under the CDSA is limited to informers of money laundering offences only.

Distinction Between Foreign PEP and Singapore PEP
As mentioned, there is apparently a distinction drawn between a foreign PEP and Singapore PEP. Stricter CDD is required for foreign PEPs but there is no mention of how Singapore PEPs are to be treated. Logically, there should not be any distinction between the two as both are equally susceptible to commit, or be used as a vehicle to carry out, money laundering and terrorism financing activities.

Therefore, the same degree of CDD should be in place in order to ensure that foreign and Singapore PEPs alike are filtered and checked thoroughly.

Lawyers as Gatekeepers
The various legislations on AML/CFT have given rise to arguments that these legislations undermine the independence of the Bar and have, in effect, turned legal practitioners into agents of the government. The accepted and entrenched principle of privileged communication between solicitor and client has also been undermined as legal practitioners are now put in a difficult position of whether to blow the whistle or keep quiet when dealing with grey areas or borderline cases.

For that matter, the main objective of any AML legislation must necessarily be the banks and financial institutions as they are on the frontline of financial activity.

Bearing that thought in mind, in practice however, can legal practitioners be effective or even necessary as gatekeepers? For instance, when a bank in Singapore has apparently performed the CDD required by the MAS, it will be an entirely repetitive exercise for legal practitioners to re-do that same exercise to achieve that which should have been already achieved by the bank. The efforts expended would have been unnecessary and duplicitous.

It has been suggested that the Singapore banks have been lacking in vigilance and that the recent changes to the law to involve lawyers in the fight against money laundering is not just to present another layer of obstacles to criminals. Could it be that the lawyers are being encouraged to monitor and blow the whistle on errant banks? Given the unremarkable track record of AML enforcement action in Singapore and the huge amount of financial intelligence gathered through STRs filed by banks in Singapore annually, it remains to be seen whether Singapore can protect itself from money laundering and terrorist funding.

Conclusion
In conclusion, the overall effectiveness of the Practice Directions 2008 remains to be ascertained. The uncertainties in enforcement, the practical lack of incentive to adhere to the requirements of the Practice Directions 2008, the narrow scope of application of the Second Schedule to the CDSA, the differential treatment of who is a PEP and the dilemma faced by legal practitioners, will allow careful and experienced money launderers to escape detection. In the meantime, bona fide entities seeking legitimate commercial transactions may be held up in pointless paper chases.

Nonetheless, the Practice Directions 2008 are a big and important step away from the onerous and uncertain obligations imposed by its precursor. They are also an important step towards countering money laundering and terrorist financing, especially in Singapore’s booming economy. What remains to be seen is how effective this will be when it countervails against Singapore’s own ambition to be a viable and tempting tax haven in Asia.

Andy Yeo is a Partner in Allen & Gledhill’s Litigation & Dispute Resolution.  He has wide experience in advising and handling white-collar criminal work involving corruption, fraud, risk management, market misconduct, counter-proliferation, money laundering, insider trading, asset tracing and recovery as well as securities and banking compliance. Andy has also been involved in the training as well as the advisory aspects of many matters and issues, from the local law perspective, including those relating to the US Department of Treasury's Office of Foreign Assets Control, the Sarbanes-Oxley Act as well as the Foreign Corrupt Practices Act. Contact Details: Tel: + 65 6890 7833 Email:  andy.yeo@allenandgledhill.com