All financial institutions in Singapore must ensure that offshore vehicles are not used for illicit fund flows, even though these vehicles are not inherently illegal, the Monetary Authority of Singapore (MAS) has said.
The recent release of the so-called Panama Papers has sparked soul-searching around the globe over the use of offshore vehicles.
It has directed attention at whether centres such as Singapore have enough checks in place to ensure transparency and regulatory compliance of the set-up and operation of such vehicles.
The MAS noted in a response to The Straits Times' queries that "Singapore is firmly committed to being a clean and trusted financial centre, and does not tolerate the abuse of its financial system as a refuge or conduit for illicit fund flow''.
Secret documents leaked a week ago from Panamanian law firm Mossack Fonseca revealed a complex network of offshore entities set up by public figures to stash away their fortune for tax avoidance.
High-level politicians from Iceland to Russia to China have been implicated, while global wealth centres, including Singapore, are set to face tougher scrutiny on the regulation of offshore vehicles.
An offshore vehicle is set up in an overseas jurisdiction, often one with better tax rates, but its use is not necessarily illegal.
While stressing that there are enough safeguards against illicit fund flows, the MAS said: "Businesses and individuals may set up offshore vehicles for a variety of legitimate commercial or other reasons. However, it is important that offshore vehicles are not used for illicit purposes."
TSMP Law joint managing director Stefanie Yuen-Thio agreed: "Offshore vehicles tend to be used for tax planning purposes. For example, fund companies are often set up in jurisdictions with tax benefits such as under a double taxation agreement. Businesses which enjoy lower or no taxes in certain jurisdictions will also choose to hold their assets through entities in those jurisdictions. Panama is a case in point for shipping. It also has the benefit of a long history of administering the ship registry."
Singapore has already taken steps to ensure that there is robust regime to tackle money-laundering.
For example, financial institutions here are required to know the customers and their source of wealth, the MAS said. "If offshore vehicles are being set up, financial institutions must ascertain their purpose and satisfy themselves that such vehicles are not meant to be used for unlawful ends. Financial institutions must also monitor their customers' accounts for suspicious transactions on an ongoing basis and report any they come across."
This is coupled by MAS inspections to ensure compliance, while an active information exchange between domestic authorities and foreign enforcement agencies will help in the investigation of cross-border fund flows.
The stringent framework here is the result of international efforts in recent years to enhance the rules around cross-border financial regulations, CIMB Private Banking economist Song Seng Wun said, citing the Singapore-United States Foreign Account Tax Compliance Act agreement last year as one example.
"As a result, Singapore's rules are already tougher than the likes of Cayman Islands or British Virgin Islands. I don't see a lot of space for further tightening despite the greater scrutiny from now on. But it does offer a powerful reminder to our front-line bankers and fund managers to be more cautious and responsible, even though the technical implication of the scandals is likely very minimal on Singapore," he said.
This article was first published on April 12, 2016.
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