Money laundering lurks amid small banks, funds

Malaysia’s prime minister, Najib Razak, has yet to explain how or why unnamed donors put $700 million into his personal accounts, including $630 million placed in his name at the Singapore branch of Switzerland-based Falcon Private Bank, according to the Wall Street Journal.

The unorthodox transfers raise the possibility of money laundering, which experts say remains all too commonplace in Asia. And it is usually smaller financial institutions – private banks and hedge funds – that are the vehicles for such activity.

Second-tier private banks may lack the internal resources to address money laundering concerns, which is why individuals who need to handle illicit sums – derived from anything from drug trafficking to tax evasion ­– use them instead of big-name brands.

Falcon does not release information regarding the size of its assets under management or advice; its website says the Zurich-based firm is “firmly committed to participating in international efforts to combat money laundering and the funding of terrorist and criminal activities”.

A spokesman at the bank declined to comment.

Wealthy people can easily set up a trust and a business entity in an offshore jurisdiction for tax purposes. “Then it can become very challenging for the banks to get the right resources to be able to identify these risks,” said BC Tan, head of risk research for Asia Pacific at Thomson Reuters.

Tan said big banks have the capacity to comply fully with complex regulations. “It is the medium to smaller financial institutions that may lack the experience, knowledge and resources that I am most concerned about,” he said.

One executive at a private bank disputed this general characterisation, however. He noted that high-profile clients such as politicians, particularly those from emerging markets, are risky. Any bank that is willing to accept such a client would have to be prepared to conduct enormous due diligence, because the risk to a bank’s reputation that such people pose is huge.

“You think twice or even five times before getting engaged with a client,” this person said. The bank must be confident the person is absolutely clean. “There is only downside potential: reputational, financial or litigation risk,” he said.

Moreover, big banks have been caught aiding clients illegally: last year HSBC admitted to handling funds for drug cartels in Mexico, while UBS, Credit Suisse and Julius Bar are among those which have settled with US or Swiss regulators after helping rich clients in the US or Europe evade taxes.

As regulators respond with tighter rules, however, these same big institutions are best positioned to afford the rising compliance costs.

Hedge funds and private-equity funds are also increasing areas of concern when it comes to money laundering in Asia. This is speculative, as no cases involving such vehicles have come to light, but lawyers and hedge-fund officials expressed concerns that their industry may not be immune.

This seems odd. The high fees and illiquid structures of these products makes them appear useless as vessels for dirty money. But they do offer privacy, and as politically exposed people find private banks more difficult to use, they are turning to alternative investment products.

“Hedge funds that deal directly with individuals have to know who the heck is investing in it, because hedge funds don’t want to sell partnership interest to some corrupt individual interested in investing their money,” warned one Hong Kong-based financial lawyer.

Another lawyer in Singapore agreed the threat is real: “When you’re trying to raise funds from investors, there is a pretty high risk of suspicious transactions coming from our emerging world.”

Information on individuals from China’s smaller cities or from countries such as Myanmar is hard to find and of poor quality.

“There are high-net worth investors from fourth-tier cities in China who come from the countryside,” explained a financial advisor. “The guy owns a coal mine or a copper mine. There is virtually no information on the person other than the company website, so when you ask for proof of source of funding, you take what you can.”

The generic mutual funds industry in Asia may well be circulating tens or hundreds of millions of dollars of dubious provenance that has gone offshore from countries such as China.

“There is now enhanced difficulty with know-your-client processes for some people. So instead of opening up private banking accountings, they buy into funds with all the trappings of the infrastructure to legitimise their cash,” the insider noted.

To some extent, that’s the main purpose of city-states such as Hong Kong and Singapore, whose financial systems feed off the wealth being generated in huge but restricted markets. But some fund managers said they worry that regulators might launch campaigns against their industry, subjecting fund houses to the sort of scrutiny that banks must endure.

This might involve more detailed and disclosed know-your-customer processes. Smaller funds that can’t afford to pay for the extra paperwork would probably outsource as much of this as possible.

But a hedge fund executive said outsourcing work doesn’t mean outsourcing responsibilities.

“If we get into trouble, we are liable in the eyes of the regulator,” he said.