Singapore anti-money laundering rules to raise bar for family offices
Singapore has in the past two years attracted hundreds of single-family offices (SFOs) as it has offered a safe haven for the assets of rich-but-jittery mainland Chinese and other wealthy individual investors.
The city-state’s largesse when it comes to tax breaks and other attractive incentives has contributed to that influx.
The Monetary Authority of Singapore’s (MAS’s) most recent response to the explosive growth of the SFO sector, unveiled at the end of last month, is a set of proposed anti-money laundering (AML) requirements that SFOs must satisfy unless they wish to submit to the much more burdensome regulation that banks and securities businesses face.
TAMING THE BOOM
Joyce Woo, chief executive and head of Singapore at multi-family office Leo Wealth said the proposed AML regulations, which were put out for a public consultation on July 31, represented not just a tightening of standards when it comes to questionable money, but also a means by which the MAS could improve its general oversight of the SFO sector.
Leo Wealth
“At some point in time, the MAS probably realised it needed to know how many SFOs are actually here,” she told AsianInvestor. “By coming out with these guidelines, it probably just wants to build a registry of sorts – the MAS will suddenly get a grip on the sector.”
Kia Meng Loh, co-head of the private wealth and family office practices at law firm Dentons Rodyk identified two main groups of family offices – those that had made use of the MAS’s tax incentives, and which were therefore on its radar, and those that had not done so and therefore beyond the oversight of the MAS.
“There are these two disparate groups, and the MAS seems to be patching things together to align them a little more,” he told AsianInvestor.
Woo said that in addition to giving the MAS some visibility in the SFO space, its AML initiative was likely a means of “weeding out bad actors”.
Woo said: “You'll probably find a few bad apples that started out as single-family offices and then decided to go into managing funds for third parties, so I think that’s also the objective.”
Under MAS rules, single-family offices are forbidden from engaging in asset management for third parties.
Loh said that among the estimated 1,500-plus family offices operating in Singapore, some were likely to be incorporated in other jurisdictions, which would be in contravention of the provisions of the proposed new rules.
Dentons Rodyk
“There could be family offices that are incorporated outside Singapore, in the British Virgin Islands, or even Europe or the US, for which it makes sense to set up in Singapore because the taxes are much lower than in Western countries,” he said. “The MAS doesn’t currently have the means to capture this group and it doesn't even know how big it is, so it’s saying, ‘Well, we want this third category of family offices to be on our radar as well’.”
Loh said that still another small group of family offices the MAS wanted oversight of were those that had balked at the length of the queue for SFO registration and calculated that forfeiting the MAS’s tax breaks was more profitable than losing business by standing in line.
“Because the application process is so long now – 12 months or more – some of them might say, ‘Well, time is money. I don't want to wait 12 months to deploy my investments because I'm losing opportunities by waiting for the MAS to come back to me, so I’ll start my private company, make the investments, and I may make gains bigger than the [tax] incentives’.”
SHUTDOWNS AHEAD
Woo and Loh, alongside Philippa Allen, managing director of regulatory compliance for Asia at consulting firm ComplianceAsia, now part of IQ-EQ, which helps set up family offices, and Michael Marquardt, Asia chief executive at IQ-EQ, said that the planned new AML rules would lead to the closure of some Singapore-based SFOs. They described that as a welcome outcome.
ComplianceAsia
“There's a big group of regulation- and governance-aware SFOs in Singapore that are really trying to build something, and those guys are going to be fine,” Allen told AsianInvestor. “But the smaller, less well-run end of the market – which we all know is out there – will close. Potentially there's a pitch for a mainland China-oriented multi-family office to consolidate them.”
Referring to the proposed new regulations, Marquardt said: “If you’re a high-quality family office, you want this. If you’re a high-quality family office, you want to be with other high-quality family offices. You don’t want to be one in of those financial centres that people hear the name of and they think, ‘money laundering’. This continues to keep the neighbourhood clean.”
Marquardt, Allen and Woo said that the proposed new rules would prompt many SFOs to engage – or re-engage – with multi-family offices and other third parties to help them manage their affairs.
“It goes full-circle,” Woo said. “Before granting SFOs exemptions from licensing requirements [as part of its tax break scheme], smaller SFOs would actually approach fund managers like ourselves to help run some of their money. But then the MAS started granting exemptions and they were like, ‘Ok, great, I can save money because I don’t need to employ third-party managers’. Under these MAS rules, hopefully we may get some of that business back.”
FLIGHT TO QUALITY
Arguably the most important result of the proposed AML regulations would be to increase the quality and sophistication of Singapore’s SFO sector, the industry participants said.
“A lot of family offices in Asia are first-generation, so professionalising them, running them properly and making them agnostic when it comes to the importance of particular individuals is a good way to make the industry grow up,” Allen said.
Loh said: “It’s a continuing maturation of the SFO sector from no minimum assets under management (AUM), to the MAS first raising the [AUM requirement] to S$10 million plus another S$10 million in the second year of operation, and now it has raised it to S$20 million. And the quality becomes better and better.
“The MAS is deterring lower-rung operators that don’t have the resources to run a proper family office, so we’re moving from quantity to quality.”