It’s high time for property developers to implement effective anti-money laundering requirementsBy Marc Anley and Kalyani Vasan
Singapore’s real estate sector will soon see a tightening of its customer and transaction due diligence requirements. From 28 June 2023, property developers will need to implement enhanced measures to prevent money laundering and terrorism financing. This will include the requirement to conduct customer due diligence (CDD) checks on new and existing property purchasers.
These requirements will be regulated under the Housing Developers (Control & Licensing) Act and Sale of Commercial Properties Act. These new rules have been put in place by the Urban Redevelopment Authority (URA) to tackle the risk of money laundering and terrorism financing in the real estate sector.
It will be mandatory for developers to conduct due diligence checks on purchasers, notify purchasers (in the prescribed form) of the documents and information that developers must obtain, and keep proper records of these checks. If they suspect any money laundering or terrorism financing activity, developers will need to submit a report to the Suspicious Transaction Reporting Office of the Commercial Affairs Department.
URA has stated that developers must consider various factors, such as whether the purchaser is from a country that is subject to increased monitoring, and screen them against lists in the Terrorism (Suppression of Financing) Act and the United Nations Act. In addition, developers can also screen purchasers against other sources of information, such as public websites or third-party screening databases.
There are several possible red flags that can indicate a suspicious transaction based on the purchaser’s profile and behaviour and transactional patterns. These red flags include:
Purchaser’s profile and behaviour
- The use of a nominee to purchase the building
- A lack of economic purpose behind the purchase
- Misalignment between the type of property being purchased and the economic activity of the buyer
- Use of front companies, shell companies or complex structures to mask the true beneficial owner
- Source of funds, source of income and source of wealth are not in line with the background and profile of the purchaser
- Purchase was made with a significant amount of cash or with the use of complex financial instruments
- Payments were made from high-risk jurisdictions without any clear links to the purchaser
- The transaction price is much higher or much lower than the property market value
Challenges faced by developers
The new requirements may pose challenges to developers as they formulate strategies and frameworks to ensure that the checks they conduct are sound.
For instance, developers may not have implemented screening systems yet. They may also face a shortage of trained personnel with sufficient knowledge to conduct screening or CDD, or to review screening hits. In addition, purchasing property to disguise the funds from illegal or criminal activities generally happens in the third (and final) stage of money laundering. Therefore, there will be some distance created between the original illegal proceeds and the eventual purchase, which will make it difficult for developers to draw links to money laundering. Developers may also be subject to conflicts of interest, as property agents may focus on the rewards of a successful transaction instead of the risks posed by potential buyers and disregard the screening hits.
A multi-pronged approach to overcome these challenges
There are several actions that property developers should consider taking. Firstly, comprehensive and up to date policies and procedures to address financial crime should be implemented. A risk management framework should also be developed to enable developers to identify risks and introduce the required controls to manage them. The appointment of a screening vendor to aid in the detection of illicit activities should also be considered.
In addition, training sessions should be conducted to ensure that staff understand the new requirements and how to implement them. Finally, developers should examine the need to commission an independent audit of their existing financial crime framework, with recommendations provided on how to strengthen them.
Developers may engage third party firms, such as Deloitte, for support to overcome these challenges. For example, independent audit and assurance checks on the financial crime framework, implemented by the developer, can be performed to ensure that it is up to the required standard. The collection or remediation of CDD on property purchasers can also be performed by a third party by directly sourcing identifying information on the relevant parties.
External firms can also support the requirement to screen customers against the specific lists as outlined in the Guidelines for Developers on Anti-Money Laundering and Counter-terrorism Financing, by assisting with vendor selection and/or performing quality assurance over the alert handling processes. Such screening checks can identify whether the screened individual or entity is a politically exposed person (PEP), terrorist, or designated (sanctioned) person, and whether there has been any adverse media coverage on the individual or entity.
Independent system effectiveness testing on any tools or systems already used by the developer, to ensure that they are functioning effectively, can also be performed. This can provide assurance that the checks conducted are correctly identifying PEPs and/or designated (sanctioned) parties.
External parties can also provide training on these new requirements, which include case studies and quizzes, to ensure that staff members understand their responsibilities and can effectively implement the firm’s updated controls.
A proactive approach is key
With the date of implementation of the new requirements fast approaching, property developers ought to be proactive in establishing a robust framework rather than take a reactive approach, given the strong impact enforcement can have on the business both financially and reputationally. A developer’s license to operate can be revoked in serious cases of non-compliance.
The global anti-money laundering watchdog, the Financial Action Task Force (FATF), had previously cited deficiencies in Singapore’s due diligence requirements applicable to real estate, and the fact that record-keeping obligations for real estate were not provided by law. The Singapore government has therefore made it a priority to improve its requirements, with numerous regulations and circulars being introduced since 2018.
With another FATF evaluation due for Singapore, the real estate sector should expect additional scrutiny and potential enforcement in these aspects. It is therefore of utmost importance that businesses operating in this sector understand their anti-money laundering obligations and update their internal control frameworks to reflect them. In addition, it would serve them well to implement these changes sooner rather than later.