Corporate Service Providers (CSPs) play a crucial role in facilitating the establishment, administration, and management of companies. However, due to their involvement in financial transactions and corporate structures, CSPs are vulnerable to exploitation by money launderers and terrorist financiers.

The Money Laundering (ML) National Risk Assessment (NRA), published in Singapore on 20 June 2024, also highlights that, within the DNFBP (Designated Non-Financial Businesses and Professions) sectors, corporate service providers (CSPs) pose higher money laundering risks due to their role in providing upstream services.

Therefore, it is essential for CSPs in Singapore to have a comprehensive understanding of the money laundering (ML) and Terrorism Financing (TF) risks, stay updated with the evolving legal landscape and latest developments, and establish sufficient and effective control measures to mitigate potential risks. By doing so, CSPs not only safeguard their reputation and business operations while avoiding legal and financial ramifications, but also contribute to upholding the integrity of Singapore’s financial system and business environment.

This article offers valuable insights into the specific vulnerabilities that impact CSPs and provides practical tips for CSPs to enhance their anti-money laundering and counter-terrorism financing (AML/CFT) efforts. By implementing these recommendations, CSPs can confidently navigate the increasingly regulated landscape and ensure compliance with regulatory requirements.

Unveiling AML/CFT Risks: Concealment of Beneficial Ownership in the Corporate Service Provider (CSP) Sector

Concealing the identity of beneficial owners is one of the most common typologies for money laundering and terrorist financing in the Corporate Service Provider (CSP) industry. This typology involves various methods aimed at obscuring the true beneficial ownership and control of assets. There are three common techniques used by criminals as indicators of AML/CFT risks that CSPs should alert.

(I) Multiple Layers of Legal Persons and Legal Arrangements

Criminals often employ complex ownership chains to conceal beneficial ownership through multiple layers of legal structures and legal arrangements. These legal structures and legal arrangements may be consolidated or established across different jurisdictions or involve various Designated Non-Financial Businesses and Professions (DNFBPs), such as attorneys, accountants or foreign corporate services providers.

While the sophistication of legal structures and arrangements is not inherently illegal, CSPs should exercise extra caution to prevent their services from being exploited for the purpose of disguising beneficial ownership and facilitating illicit activities such as money laundering, terrorism financing, proliferation financing, or other financial crimes.

When conducting assessments of complex structures, CSPs should diligently examine potential high-risk features. These may include:

Shell Companies
These are entities that lack real economic activity and primarily exist as a front to conceal the true purpose and ownership of the legal structure.
Fictitious Persons
The inclusion of fictitious individuals within the ownership structure is a red flag indicating an attempt to disguise the actual beneficial ownership of the legal entity.
Illegal Phoenix Activity
This refers to the creation of another company with the intention of continuing the operations of the other businesses of the original company, while evading obligations such as paying creditors, taxes, and other liabilities. This deceptive practice seeks to exploit legal loopholes for fraudulent purposes.

(II) Use of Nominee Shareholders and Directors

Directorship services are frequently exploited by criminals to conceal the identity of beneficial owners and exert control over legal persons or arrangements. Nominee shareholders hold shares on behalf of the actual owners, while nominee directors serve as representatives of the company without real decision-making power. Through the use of nominees, the actual owners can maintain their anonymity, as only the names of the nominees are listed on public documents. This practice makes it difficult for authorities and other service providers to ascertain the actual beneficiaries behind it. Therefore, the status of nominee directors is not recognized as legal in many jurisdictions to ensure any person who serves as a director is bound by their fiduciary duties and holds the legal obligations and liability.

Additionally, criminals may employ informal nominal shareholders and directors, often with personal connections to the true beneficial owners, to maintain fictitious ownership. These individuals, commonly referred to as “frontline” or “straw” personnel, may be unaware of the true activities conducted by the legal entities they represent. In some cases, stolen identities are exploited to establish legal structures, with victims of identity theft unknowingly serving as agents, shareholders, or directors.

(III) Forgery of Documents

Another method to conceal beneficial ownership is the forgery of documents. This can include:

Using fabricated loans and invoices, or other transaction documents to mask the true beneficial ownership of transactions.
Employing the “Cash Back” scheme, which involves issuing loans to third parties after paying commercial invoices.
Falsifying prospectuses, accounting records, and other statements to achieve a favourable outcome in registrations, acquisitions, or other business transactions

By promptly identifying and scrutinizing these indicators, CSPs can effectively mitigate the risk of involvement in money laundering, terrorism financing, proliferation financing, and other illicit financial activities.

Evolving AML/CFT Regulations for Corporate Service Providers (CSPs) in Singapore

Corporate Service Providers (CSPs), along with other professional service providers such as lawyers and accountants assisting clients in company setup and filing with ACRA, must register as Registered Filing Agents (RFAs) with The Accounting and Corporate Regulatory Authority (ACRA) in Singapore, and act through individuals registered as Registered Qualified Individuals (RQIs), to carry out transactions with ACRA. All directors, partners, and managers of RFAs must meet minimum fit and proper requirements.

The Accounting and Corporate Regulatory Authority (Filing Agents and Qualified Individuals)
Regulations were introduced in 2015 to impose the AML/CFT obligations to RFAs. RFAs are required to

Identify and verify the identities of the beneficial owners (BOs) of their customers
Conduct enhanced customer due diligence (ECDD) for higher-risk or non-face-to-face customers
Carry out ongoing monitoring of their customers
File suspicious transaction reports (STRs) if they encounter any suspicious activity

In 2024, The Ministry of Finance (MOF) and ACRA proposed the Corporate Service Providers (CSP) Bill to strengthen the regulatory regime for Anti-Money Laundering/Countering the Financing of Terrorism and Proliferation of Weapons of Mass Destruction (AML/CFT/PF) in the CPS sector.

The proposed bill mandates that any company providing corporate services or engaging in designated activities related to accounting services must register as a registered CSP, regardless of whether they file transactions with ACRA. The proposal also holds CSPs criminally liable for breaches of AML/CFT/PF requirements. Additionally, CSPs must appoint at least one registered qualified individual, ensure nominee directors are fit and proper, and file nominee directors and nominee shareholders information with ACRA.

Effective Customer Due Diligence in the Corporate Service Providers (CSPs) Sector

In order to safeguard Corporate Service Providers (CSPs) from being exploited by criminals for illicit activities, and ensure compliance with anti-money laundering and counter-terrorism financing regulations, it is important for CSPs to implement robust customer due diligence (CDD) measures and conduct thorough background checks.

Customer due diligence (CDD) is a crucial process to verify the identity of customers, understand the nature of their business, and assess the potential risks they pose. In practice, conducting customer due diligence becomes more challenging when dealing with legal persons or companies that have complex multi-level ownership structures. Identifying the actual beneficiaries in such cases can be a demanding task. Professional institutions often face the delicate balance of promoting business development while ensuring compliance with legal requirements. This ongoing challenge is one that all CSPs will continue to grapple with in the future.

However, it is crucial for corporate service providers to implement robust measures to address this issue and mitigate the risks of money laundering and terrorist financing. Here are some tips on AML/CFT for CSPs to protect them from money laundering risks while balancing the business needs and operations:

(I) Adoption of a Risk-Based Approach

The adoption of a risk-based approach is paramount in effectively preventing and reducing money laundering and terrorist financing risks. This approach ensures that implemented measures are proportionate to the identified risks, enabling efficient allocation of resources by prioritizing attention to areas posing the greatest threats.

In contrast, allocating resources equally or considering factors other than risk when making resource allocation decisions can result in ineffective mitigation efforts. Corporate Service Providers (CSPs) should align their internal AML/CFT policies, procedures and control (IPPC) with regulatory and professional requirements, diversifying their approaches as needed.

A risk-based AML/CFT regime benefits CSPs by balancing the facilitation of services for honest customers while creating barriers to deter potential misuse of trust and company structures. An effective risk assessment based on risk-based approach should be capable of identifying areas where the risks of money laundering and terrorism financing are highest, including considering the factors of the products, services, delivery channels, and geographical locations of their customers. These assessments should be dynamic, adapting to evolving environments and changing threats.

(II) Customer Background Check

Customer background checks, also referred to as customer screening, encompass thorough investigations into the individuals and entities associated with a customer, such as beneficial owners, directors, key executives, and related parties. Background screening helps uncover any adverse information or red flags linked to these individuals or entities. This may include involvement in criminal activities, sanctions lists, politically exposed persons (PEPs), or negative media coverage.

Corporate Service Providers (CSPs) are advised to leverage technological solutions and external data sources to enhance the screening process, such as utilizing AML/CFT screening software and reputable databases. By harnessing these tools, CSPs can streamline the customer background check process, improve accuracy, efficiently identify potential risks and make informed decisions.

SentroWeb AML/CFT screening and customer due diligence software is one of the reputable tools that help Corporate Service Providers (CSPs) conduct customer background checks against sanction lists, politically exposed persons (PEPs) and special interest persons and entities. Check out the features now:
📌SentroWeb AML/CTF Solutions

(III) Enhanced Verification Procedures

When dealing with high-risk customers or complex ownership structures, Corporate Service Providers (CSPs) should employ enhanced verification procedures, by requesting additional identification or business supporting documentation, and asking appropriate questions, such as the reason for making large cash transactions, or receiving numerous remittances within a short period of time, to ensure the accuracy and authenticity of the information provided by customers.

(IV) Ongoing Monitoring and Reporting

Implementing robust monitoring systems allows for ongoing scrutiny of customer transactions, business activities, and patterns. CSPs must promptly file a suspicious transaction report (STR) with STR Office (STRO) via SONAR if encounter any unusual or suspicious activities.

(V) Staying Abreast of AML/CFT Requirements & Development

CSPs must prioritize staying informed about future developments and publications by both international standard setters, such as the Financial Action Task Force (FATF), and local regulators. This is crucial as it enables CSPs to remain updated on the latest risk indicators and regulatory requirements in the development of effective risk management frameworks. By actively monitoring and adapting to evolving guidelines and recommendations, CSPs can enhance their ability to detect and prevent illicit activities while maintaining regulatory compliance

Conclusion

In the ever-evolving landscape of financial crimes, Corporate Service Providers (CSPs) must remain committed to upholding the highest standards of transparency, due diligence, and compliance. By doing so, they will contribute to a stronger and more resilient financial system, preventing the exploitation of their professional service, and safeguarding the integrity of global markets and protecting the interests of both their clients and society as a whole.

Tagged Accounting, AML101, Company Secretary, Singapore

Combating Concealed Beneficial Ownership & AML/CFT Risks in Corporate Service Providers (CSPs) in Singapore