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Tax evaders, beware! From mid-2013 Singapore will be treating serious tax crimes as money laundering offences as part of the global campaign for tax transparency

This article was first published in the January 2013 Singapore edition of Accounting and Business magazine.

Tax evaders hoping to launder their proceeds through Singapore can expect to find themselves facing criminal charges in the near future. In line with the recommendations of the Financial Action Task Force, Singapore is designating serious tax crimes as money laundering offences, with criminalisation coming into force from 1 July 2013. Foreign jurisdictions will also be able to request assistance from the Singapore authorities in pursuing tax evaders and seizing their proceeds.

This move, which has been in the works since late 2011, is the latest step in an ongoing push for greater tax transparency that began in 2009, when the city-state committed to the internationally agreed standard on the exchange of information.

In the intervening three years, Singapore has updated more than half of its tax treaties with other countries to incorporate the standard. As of November 2012, the number of updated treaties stood at 38, well above the baseline of 12 set by the OECD. Singapore is also a member of the Global Forum for Transparency and Exchange of Information for Tax Purposes, the international standard-setter for tax transparency and information exchange.

Given Singapore’s standing as an international financial hub, there are particularly compelling reasons for the intensive implementation of the exchange of information standard. It sends a clear signal that the city-state will not permit itself to be used for tax evasion or any other form of illegal activities, said Singapore’s Ministry of Finance, which takes a strong position on tax transparency.

‘Our success as an international financial centre is built on our strong rule of law, robust regulatory frameworks and adherence to global standards,’ said a ministry spokesperson. ‘As an international financial centre, Singapore is highly vigilant against illicit funds that could threaten the integrity of the financial system. We have always taken a strong stance against crime and the successful development of Singapore’s financial sector has been underpinned by high standards of financial regulation and strict supervision.’

Tax experts say that Singapore’s close adherence to international standards has already been a pull factor in attracting businesses, and its ongoing efforts to implement tax transparency can only add to the city-state’s appeal.

‘Financial institutions, asset managers and others who want and need to be seen to be doing business in jurisdictions with high integrity and a clean reputation already find that Singapore answers their needs in this respect,’ says Chong Lee Siang, tax partner with Ernst & Young. ‘The further active steps taken by the Singapore government will shore up their case in locating and expanding their businesses in Singapore.’

Scotching rumours

Chong points out that the moves also serve to deflect any accusations by outside parties that Singapore’s wealth management hub is being used as a money laundering centre for the proceeds from international tax evasion – a suspicion which has several times been voiced despite strong denials by the authorities.

‘If you want to have credibility on the global stage, you have to be seen as squeaky-clean,’ says PwC tax partner David Sandison. ‘This move is an inevitable part of Singapore’s progress as an international financial centre.’
Greater transparency is inevitable not just for Singapore but for the rest of the world too. According to data from the OECD, the number of jurisdictions that had substantially implemented the internationally agreed tax standard jumped from 40 to 89 between April 2009 and May 2012 – all but three of the jurisdictions surveyed by the OECD Global Forum.

The shift is at least in part due to the global economic downturn, says Mak Oi Leng, head of tax risk and dispute management with KPMG in Singapore. ‘Tax authorities around the world are facing tremendous pressure to maintain or increase tax collections in a declining tax rate environment, and are also trying to keep tax administration costs to the minimum.’ The global economic downturn has intensified calls for greater transparency, accountability and good governance, he points out, and this has prompted tax authorities to step up their efforts to combat tax crimes.

Against this backdrop, it is in Singapore’s interest to maintain a level of transparency that is on a par with other jurisdictions, particularly the US and Europe, which are at the forefront of the transparency trend, says Andrew Packman, total tax contribution leader for PwC UK. ‘Singapore is well regarded as a financial centre that doesn’t stand still,’ he says. ‘Introducing similar requirements to other jurisdictions may be an appropriate response to the growing pressure for transparency around the world.’

At the same time, Packman adds, there will definitely be a burden of compliance on companies and financial institutions. For example, extractive industries operating in the developing world have had to change their reporting systems to comply with the tax reporting requirements of the Extractive Industries Transparency Initiative (EITI), and things will be no different for banks operating in developed countries. Packman says: ‘The cost is immediate and obvious because of immediate demands. The benefits are harder to quantify – it’s clearer for developing countries, and Singapore is likely to see a different set of benefits entirely.’

On the other hand, Chong suggests that the changes may actually be an opportunity for financial institutions to step up their risk and control efforts. This includes strengthening their compliance reporting and controls frameworks, and ensuring that the necessary IT systems, infrastructure and training are in place. Businesses, meanwhile, may want to ensure they maintain legitimacy in their tax planning efforts. ‘The global legislative and regulatory stance towards tax evasion and transparency can only become more stringent in the long run,’ she observes.

Crucial role

Financial institutions have always played a central role in the detection of tax crimes, and their responsibilities are no different under the revised tax laws. The Monetary Authority of Singapore has in the past called on financial institutions here to be vigilant against suspicious transactions – under the MAS notice on preventing money laundering and countering terrorism financing, for example, financial institutions are required to identify and know their customers, conduct regular account reviews, and monitor and report any suspicious transactions. MAS has also advised financial institutions to adopt a more stringent approach to asset transfers into Singapore from countries which have withholding tax agreements with Switzerland.

The Ministry of Finance has also acknowledged the role that the financial institutions have to play in ensuring the revised laws have teeth.
‘Our financial institutions must enhance their control systems to detect and deter the laundering of proceeds from serious tax offences,’ says the ministry spokesperson. ‘Foreign jurisdictions may seek mutual legal assistance to pursue such proceeds which will complement the cooperation provided under Singapore’s exchange of information regime. This will further safeguard Singapore’s financial system from being used to harbour illegitimate funds and send a strong deterrence message that Singapore does not welcome them.’

Financial institutions here will have to put in some work to develop the systems required for compliance. Two areas that particularly need clarification stand out, according to the experts. The first is what constitutes tax evasion. It may seem ‘instinctive at first glance’, says Chong, but the practice must be properly understood.

Agreeing, PwC’s Sandison points out that it can be difficult to tell with any clarity what is legitimate tax planning and what is tax avoidance or tax evasion. ‘This definition will have to be more fully developed,’ he says. ‘Second, the implementation will need some work. If bank employees, for example, identify a case of tax avoidance, what procedures should they follow and who should they report it to?’

Chong says: ‘Financial institutions will need to review their client onboarding processes to factor in questions that will let them flag customers who are high risk for tax evasion. They also need to come up with the appropriate procedures in respect of existing customers, as the rules apply to these customers as well. Employees will have to be trained on the new procedures.’

It may take some time for financial institutions in Singapore to adapt to the new requirements – the Private Banking Industry Group is already developing a set of industry practices for implementing them. But whatever the challenges, it is certain that Singapore’s latest move against tax evasion can set at least one issue to rest. With the law now clearly opposed to money laundering, any future accusation that Singapore is a tax haven will be much less likely to cast a shadow on the city-state’s carefully built reputation for good governance and a strict regulatory regime.

Weighing it up

As each successive tax transparency initiative comes into force – whether it is about the updating of tax treaties, or the current move towards criminalising the laundering of tax evasion proceeds – governments may wish to review the implementation and results with an eye to gauging whether the rules and procedures are indeed necessary. ‘This is to avoid disproportionate focus on tax transparency, neglecting other needed tax focus areas such as the simplification of tax rules to attract investments into the country,’ explains KPMG’s head of tax risk Mak Oi Leng.

The changing regulatory environment also poses a new challenge to other financial services, including the accounting sector, Mak adds. ‘Accounting firms should now be watchful of international developments on tax transparency, and how the respective countries’ position on, for instance, tax crime and avoidance evolve. The shift towards more stringent positions by various governments would impact on how accounting firms should advise on international tax structuring as well as information disclosures by their clients on tax returns.’

Mint Kang, journalist

Last updated: 19 Mar 2014