The Singapore penalties show the inherent difficulties in changing banking mindsets and corporate culture. finews.asia takes a look. 

As a banker, if business is good, you don’t ask many questions. That at least, again seems to be one of the key implications of the Monetary Authority of Singapore (MAS) penalties reported by finews.asia Thursday.

Looked at in isolation, it is nothing new. You might even argue that is even human nature when it comes to the large sums of money involved. But it is still discouraging and it highlights how relatively little progress has been made regionally, inside banks, since the days of Jho Lho and 1MDB.

It is also something that is not specific to the city-state.

Little Understanding

Much of the global AML regime as laid out by the Financial Action Task Force (FATF) relies on a risk-based approach. In other words, you keep areas you suspect as problematic in close check. Otherwise, you are free to take a relatively hands-off approach by just monitoring.

Specifically, when it comes to due diligence, banks must take so-called «reasonable measures» to verify beneficial ownership, including understanding the control structure of the client and scrutinizing transactions to make sure they are consistent with both the business and source of funds.

But what do you do when the organization is utterly fraudulent? It is almost impossible to figure that out beforehand. When it comes to Wirecard, we might have suspected something was amiss in advance, but we only know everything now with the benefit of hindsight - after a massive public trial in Germany.

Now Defunct

When the three banks and their relationship managers were conducting business with the now collapsed entity, it was not only listed on the German stock exchange, but it was also a blue chip that had managed to kick Commerzbank off the DAX (freely available, «Deutsche Welle» English service).

And the exact wording of the MAS fine indicates how hard it is to get to the bottom of all, particularly when the entity is a going concern and transactions are being made.

In Citibank’s case, the MAS said it had failed to «adequately understand» Wirecard’s control structure and hadn’t «correctly» identified the beneficial owner even though it had information «which suggested» that these were all incorrect.

Under German Oversight

Reading between the lines, that likely means that internal committees made up of relationship managers and financial crime specialists probably looked at Wirecard’s financial statements as signed off by Ernst & Young. They may have also considered its market listing and the fact that it was under oversight by German regulators BaFin.

They probably weighed all that against the negative media reports on Wirecard that were becoming increasingly prevalent. But it is clear what wins the day in such cases. Even if the internal transactions were off, there are some very hard facts on paper.

At most, the relationship manager was likely asked to contact Wirecard to recheck beneficial ownership information and reconfirm the transactions. He or she, or the members of a team, likely received verbal reassurance, which was then probably recorded and then discussed internally.

Larger Fine

DBS was penalized significantly more than the other two banks. For one, it appeared to have a substantially larger relationship with Wirecard in Singapore. It also seemed to have larger gaps related to its framework at the time.

Those inadequacies would have been wearingly familiar to anyone active in private banking or wealth management in the mid-2010s. According to the MAS, DBS didn’t update customer due diligence information, including beneficial ownership. It didn’t adjust risk ratings for clients, which had a knock-on effect on CDD, and it didn’t «adequately establish» the source of wealth of higher-risk clients and beneficial owners.

What the MAS then indicates is important. The regulator said the bank took the source of wealth information at face value by «relying instead on customer’s representations of their wealth without adequate corroboration».

Brief Call

That means the information could have potentially been given with little more than a brief telephone call - or something similar.

But what follows is even more material than that. The MAS indicated that the bank did not «adequately inquire into the background and purpose of unusually large transactions» and that these were not consistent with the bank’s knowledge of the client. Some of them also appeared to have no economic purpose.

It appears that DBS had more concrete evidence than the other two banks when it came to the transactions that Wirecard had been making.

Ostensibly Legal

But still, it would have been easy for the relationship managers to point towards the library of ostensibly legal documentation out there in any internal discussions. The fine handed out to OCBC was much the same as that for DBS, albeit on a smaller scale given it apparently involved one client. 

So where does that leave banks, bankers, and the industry? In a tough spot. That is probably why the MAS characterized the breaches as serious but that it «did not find wilful misconduct by any staff».

Few Answers

That is the whole problem with the entire global AML framework. And, in truth, there are no easy answers. Bankers should be asking more questions, not less, when internal suspicions are raised, but the industry remains a very long way from that point.

Unless the suspicions come wrapped in some very large, very concrete red flag – an actual criminal conviction or legal case – no bank is going to unilaterally exit what is a potentially profitable client relationship based on ostensibly suspicious activity without being ordered to do so by authorities.