1MDB review is over, but the effects are long-term

SINGAPORE - Regulators have wrapped up a two-year review of banks involved in 1MDB-related transactions known to-date but the after-effects of this probe will likely reverberate through the financial industry for many years to come.

As the Monetary Authority of Singapore (MAS) itself noted in a statement on Tuesday (May 30), the review is the most extensive it has ever taken.

The investigation was a deep dive into all the transactions that have flown through Singapore and were related to Malaysian fund 1MDB, which is under investigation in at least six countries over billions of dollars of suspected misappropriations.

It led to the shutting down of two banks, BSI Bank and Falcon Bank and financial penalties totalling $29.1 million being imposed on eight banks - BSI, Falcon, DBS, UBS, Standard Chartered Bank, Coutts, Credit Suisse and United Overseas Bank.

Prohibition orders have been issued against four former employees of financial institutions implicated in 1MDB-related transactions, with more such orders to come against another three current and former financial professionals.

MAS managing director Ravi Menon said in the statement that these enforcement actions are unprecedented.

"The two-year long 1MDB-related review holds key lessons for both MAS and financial institutions in Singapore. MAS has enhanced its anti-money laundering (AML) surveillance and taken unprecedented enforcement actions against errant institutions and individuals," he said.

"Financial institutions have increased their risk awareness and strengthened their AML controls. Our financial industry is in a better position today than it was when the abuses stemming from the 1MDB-related flows took place. The price for keeping our financial centre clean as it grows in size and inter-connectedness is unstinting vigilance."

It is that line about MAS enhancing its anti-money laundering surveillance that will likely have long-term implications for the financial industry, which since the 2008 global financial crisis has already been grappling with ever-tightening regulatory standards.

These have caused their regulatory costs to rise and profit margins to thin, so much so that a slew of private banks, including Coutts, have decided to exit Singapore - and sometimes even Asia - altogether, to focus on their core markets in Europe and the United States.

And to be sure, banks here are playing by the rules, by and large.

In announcing the financial penalties it was imposing on Credit Suisse and UOB on Tuesday, the MAS made sure to add that it had not detected pervasive control weaknesses at either institution.

 

What they did detect were "weaknesses in conducting due diligence on customers and inadequate scrutiny of customers' transactions and activities".

What this means is that banks will have to be even more vigilant in monitoring their employees' and customers' activities to ensure absolute compliance with the rules.

This is no mean feat, especially if you're a financial behemoth with tens of thousands of employees.

And yet, banks will still have to find a way to step up their compliance somehow.

PwC Singapore financial crime partner Denise Lim noted that this whole investigation highlighted how the standard of compliance is increasing, which is in line with the tone of enforcement, and that should not be taken lightly.

"We often forget the purpose of these type of regulations - which is to prevent illicit money from flowing through our financial system and prevent the use of funds to support illegal activities including trafficking and terrorism," she said.

"As a responsible global citizen, we need to continue to make Singapore a safe place to do business especially in light of the need to stay competitive in the global marketplace."