On July 26, 2024, the Monetary Authority of Singapore (MAS) issued a circular i.e. AMLD 08/2024, aimed at financial institutions (FIs) operating in the wealth management sector. The circular provides detailed guidance on establishing the sources of wealth (SOW) of customers, a critical component in mitigating money laundering and terrorism financing (ML/TF) risks. As Singapore continues to attract high-net-worth individuals (HNWIs) seeking wealth management services, this circular emphasizes the need for rigorous due diligence to ensure that the influx of funds remains legitimate.
Singapore has long been recognized as a premier financial center for HNWIs, offering access to global and regional financial markets through a wide range of services and expertise. However, the wealth management business is inherently susceptible to higher ML/TF risks due to the nature of its clientele, the size of transactions, and the complexities involved in managing substantial wealth. Given this, MAS recognizing the crucial gatekeeper role that FIs play in safeguarding the legitimacy of fund flows into Singapore, particularly in the context of wealth management.
To address these risks, the new circular mandates that FIs must take appropriate and reasonable measures to establish the SOW of their customers before commencing any business relationship. This involves not only gathering information directly from customers but also independently corroborating this information against documentary evidence or publicly available data. By doing so, FIs can form a clearer understanding of their customers and assess the legitimacy of their assets, which is essential for ongoing transaction monitoring and risk management.
The circular advises FIs to adopt a risk-proportionate and reasonable approach in designing their policies and procedures for establishing the SOW of customers. A one-size-fits-all approach is discouraged; instead, FIs should consider the unique circumstances and profiles of each customer. For instance, in the case of customers with prominent public profiles, FIs might corroborate their SOW using reliable public information sources to expedite the process without compromising due diligence.
MAS has outlined several key principles that FIs should consider when establishing SOW. These include materiality, prudence, and relevance. Under the principle of materiality, FIs are expected to seek comprehensive information on a customer’s entire wealth to the extent practicable, with a focus on identifying the more material or higher-risk sources of wealth. While it is important to understand how the customer’s total wealth was acquired, MAS acknowledges that it may not always be feasible to corroborate every aspect, particularly older SOW. In such cases, FIs should concentrate on corroborating the most material or risky aspects and assess whether any residual risk is acceptable.
Prudence is another critical principle highlighted in the circular. For material sources of wealth, FIs are encouraged to use more reliable corroborative information, such as audited accounts or documents issued by independent third parties like tax accountants. If FIs use benchmarks or assumptions to assess the plausibility of customer-provided information, these must be reasonable, relevant, and appropriate to the customer’s specific risk profile. It is crucial that these tools are used to evaluate the plausibility of the SOW rather than to justify or support potentially suspicious circumstances.
The principle of relevance requires FIs to obtain pertinent, fit-for-purpose corroborative evidence where possible. This means exercising reasonable judgment to determine which documents are essential for corroborating a customer’s SOW and which can be reasonably omitted, particularly if they are outdated and no longer relevant to the wealth’s generation. FIs are encouraged to use independent and reliable documents from credible public sources whenever possible, reducing the reliance on customer-provided evidence.
MAS also emphasizes that establishing the SOW is just one part of a broader set of AML/CFT controls. Senior management within FIs is expected to exercise close oversight, particularly over higher-risk accounts. For example, if an FI is unable to corroborate a significant portion of a customer’s wealth, the case should be escalated to senior management for approval before the relationship is established. Additional risk-mitigating measures, such as enhanced transaction monitoring, may also be necessary.
Ongoing monitoring is another critical aspect of the guidelines. FIs are expected to incorporate customer information obtained during the SOW establishment into their ongoing monitoring controls, including the customer’s total net worth and expected sources of funds to ensure that account activities align with the customer’s profile and risk assessment.
MAS has indicated that it will continue to engage with the industry on these issues and supports ongoing work by the AML/CFT Industry Partnership (ACIP) in developing best practices for SOW establishment. The collaborative efforts between the financial sector, regulators, law enforcement, and other government entities are essential in addressing the key and emerging ML/TF risks facing Singapore. By adhering to these guidelines, FIs can better protect themselves and the broader financial system from the risks associated with illicit assets, ensuring that Singapore remains a secure and attractive destination for legitimate wealth management activities.
