SINGAPORE (REUTERS) - Private banks in Singapore are sharing with local police the names of clients embracing an Indonesian tax amnesty, people aware of the matter said, a move that could undermine the amnesty and damage the banks' business with their biggest client pool.

Singapore's Commercial Affairs Department (CAD), a police unit that deals with financial crime, told banks last year they must file a report whenever a client takes part in a tax amnesty scheme, the sources told Reuters.

After initial resistance from the banks, worried they might lose clients, that message was reinforced this year by the Monetary Authority of Singapore (MAS) when Indonesia launched a tax amnesty aimed at wooing back some of the cash its wealthy citizens have stashed in Singapore, the sources said.

"The moment the client tells you he's participating in the amnesty, you have a suspicion that the assets with you are not compliant, and so you have to report to the authorities," said a senior executive at a Singapore-based wealth manager.

Singapore made tax evasion a criminal offence in 2013, and is toughening up the implementation of the law after a money-laundering investigation into state-backed fund 1MDB in neighbouring Malaysia exposed how some of its banks failed to impose robust controls on suspicious money flows.

Indonesians account for an estimated US$200 billion (S$273.25 billion) of private banking assets managed in Singapore, or 40 per cent of the total.

Both the Singapore police and MAS declined to comment.

A second person with direct knowledge of the matter said banks had started sending to the police so-called suspicious transaction reports (STR) related to Indonesian clients who have participated in the amnesty regime. The clients should not be informed about the STR filing, the person said.

The police website says it has used such filings to detect financial crime. That means if there is any evidence of wrongdoing from these filings, authorities can further probe clients or banks.

The fear of such scrutiny could deter Indonesians from considering the amnesty, which runs to March 2017 and has so far had a tepid uptake. The Indonesian tax office said 393 trillion rupiah (S$40.7 billion) of assets had been declared as of Sept 13, of which at least 30 trillion rupiah are in Singapore.

Bank Indonesia governor Agus Martowardojo said late on Wednesday the bank's modelling suggests the amnesty will secure just 11 per cent of its targeted revenue this year.

Indonesians are among the biggest investors in Singapore's property market and use banks there to invest in currencies or regional stocks, encouraged by the strong legal framework and security of the Asian financial centre.

Many moved money to Singapore after attacks against ethnic Chinese businesses in Indonesia in 1998, when economic problems triggered riots and the fall of the Suharto government.

The increased tax scrutiny in Singapore comes just ahead of the publication of a report on the island nation by the Financial Action Task Force (FATF), a global body that conducts regular evaluations of countries' anti-money laundering standards.

One of the FATF guidelines states that a financial institution needs to report suspicious transactions when it suspects or has reasonable grounds to suspect that a client's funds are proceeds of a criminal activity such as tax evasion.

Ong-Ang Ai Boon, director of the Association of Banks in Singapore, said the lobby group had told banks that amnesty programmes were a useful tool for individuals to regularise their tax affairs with their local tax authorities.

The association did not comment on the new filing requirements.

"If there's a red flag and we ignore it, that's our problem," a Singapore banker said.