Know thy investor and source of funds as basic safeguards

Companies should conduct some level of understanding of their potential investors before rushing to accept investments.

With the uncertainties surrounding the implementation of tariffs by the US government and the increasing protectionist policies that governments in certain countries appear to be considering, this can contribute to increased inflows of investments into countries such as Singapore where there may be more preferred tariff rates as well as open trade policies.

As the influx of funds flow into Singapore and foreign investors approach Singapore companies, there is also an increasing need to ensure that such investments are genuine and legitimate. This is particularly so given the potential opportunities that also usually come with increasing risks.

On that note, it may not have been common for Singapore companies to conduct extensive or even any form of due diligence on their potential investors. However, in view of the above, it may be more pertinent for Singapore companies to conduct some level of understanding of their potential investors before they rush to accept the investments.

Below we explore three different areas that Singapore companies should at least consider when they are approached by foreign investors. We also explore the extent of the information seeking process that Singapore companies can consider which are not necessarily always resource intensive but may give sufficient preliminary information for Singapore companies to decide on the appropriate steps.

Depending on the outcome of the preliminary due diligence conducted, the Singapore companies can then better decide whether they are able to rely on the information and proceed with the investment or further external experts are required to be engaged to conduct further more detailed review of the foreign investor. In any event, either way, the Singapore companies can be more informed on the best way to proceed.

Understanding the country of incorporation and the corresponding legal entity structure of the foreign investors
It is important to understand where the foreign investors are incorporated and accordingly the legal entity structure of the foreign investor as determined by the laws of incorporation. This is an important first step of inquiry as the second inquiry step is only relevant if there is understanding of where the ownership lies to determine ownership of the foreign companies.

Further, based on the legal entity structure, it can help the Singapore companies understand where the control of the foreign investors rest in which can also in turn help to determine who has the authority to enter into agreements on behalf of the foreign investors when contracts are entered into.

In most cases, such basic information on country of incorporation and legal entity structure can be ascertained if the country of incorporation maintains a public registry of information of different entities in which case, one can extract information on the foreign investor including the office address, directors (or the equivalent), owners such as shareholders and stakeholders.

In certain cases where the constitution of the foreign investor is also made available through the public registers, such documents should be extracted which can determine which organ within the foreign investor has control as mentioned earlier.

Understanding the ultimate beneficiaries and shareholders of the foreign investors
Assuming after the first step of inquiry, it is ascertained that ownership rests in shareholders, beneficiaries, stockholders or the equivalent in the foreign investors, it is then important to find out the identities of such corporations or individuals.

Knowing the identities of the shareholders or beneficial owners not only ensure that the Singapore companies are dealing with legitimate entities but also aid in understanding whether the foreign investors indeed have sufficient capital to invest in the Singapore companies.

When considering legitimacy of entities, it is not simply to ascertain whether the entities that are owners of the foreign investors are entities that exist but also to help the Singapore companies determine whether the entities may be sanctioned by the United Nations Security Council or unilateral sanctions recognised by Singapore and imposed by the European Union, the United Kingdom or the United States.  

In order to find out if such entities are sanctioned, the Singapore companies can refer to the sanctions list maintained by the Singapore customs.

Knowing the source of the funds 
Finally, going through the first two inquiries may not be sufficient if one has not determined the legitimacy of the source of the funds that the foreign investors are looking to invest with.

This is especially important as Singapore has laws safeguarding against money laundering and terrorism financing risks. It may not be practical to try to trace the source of the funds provided by the foreign investors as that in itself can be a rather extensive and onerous inquiry. However, some levels of determination may still be helpful.

Generally, if the funds are transferred through bank accounts maintained with Singapore banks, that is a fact that should give comfort as banks in Singapore are now required to undergo more stringent checks of customers who open bank accounts and as such, to a certain extent, the Singapore companies can rely on the customer due diligence that the banks have conducted on the account holders.

However, if the funds are provided only in cash or other assets such as cryptocurrencies, it may be useful to engage in more detailed review to ascertain the source of the funding.

As explained above, conducting basic due diligence does not necessarily require extensive resources but some degree of due diligence can help in ensuring that your new investor and the funds it brings into your company is legitimate and can be used for supporting the expansion of your business in the right way.

As the recipients of such investments, it will be imperative to ensure that Singapore companies are not denied the use of such funds or in extreme cases, complicit in any potential money laundering activities.