Tax net closing on private banks
Private banks have been under sustained pressure to provide more transparency on the work they carry out for their client base in recent years. In Asia, where wealth is growing at the fastest rate globally, local scandals are combining with global regulation to create a thorny environment for the industry. Peter McGill reports.
The head of Singapore’s central bank was in sombre mood. “Recent findings have made a dent in our reputation as a clean and trusted financial centre,” Ravi Menon told journalists on 25 July. “What happened is simply unacceptable.”
The Monetary Authority of Singapore, of which Menon is managing director, had found “lapses and weaknesses” in the anti-money laundering and countering financing of terrorism (AML/CFT) controls of DBS, UBS and Standard Chartered in Singapore, as well as “substantial breaches” in AML/CFT regulations by Falcon Private Bank’s Singapore branch.
These findings were part of an intensive investigation underway in several countries into a sprawling money-laundering and corruption scandal surrounding 1MDB, Malaysia’s sovereign wealth fund founded by prime minister Najib Razak. In May the MAS had cancelled the licence of Swiss-based private bank BSI to operate in Singapore because of its dealings with 1MDB.
Singapore’s vulnerability to money laundering and illicit financing was “part of our karma as a financial centre,” Menon said. “Billions of dollars flow every day through hundreds of financial institutions in Singapore. And given our prominence and growth as a wealth management centre, that vulnerability is even greater.”
Asia Pacific is the world’s fastest growing market for private financial wealth. By 2020, it will reach $59.8tr, surpassing Western Europe and trailing only North America, the Boston Consulting Group forecasts. Offshore wealth booked in Hong Kong and Singapore will grow roughly by 10% a year to 2020, by which time Singapore will be attracting more offshore wealth than London, according to BCG.
This assumes that present trends continue, with nothing between now and 2020 to upset the apple cart, which may be wishful thinking. Among the issues that now cause sleepless nights for Menon and other financial regulators is that an embarrassingly large proportion of the wealth bonanza for Asia’s private banking appears to be illicit.
Private banking has long been synonymous with secrecy, a feature irresistibly attractive to rich people seeking to hide their wealth. This wealth may have been legitimately acquired but illegally shielded from the taxman, or it may have been ill-gotten, through crime or corruption.
The past decade has seen a rising tide of scandals involving private banks and a growing clamour for greater transparency [see timeline below].
The United States for many years was in the driving seat for change, with a sustained assault against Swiss banking secrecy, including landmark cases against UBS and Credit Suisse, and the 2010 enactment of a ground-breaking law, FATCA, that requires financial institutions of co-operating jurisdictions to file reports sent to the US government about their American clients. As well as mandatory FATCA reporting, the clampdown involved extracting huge fines from foreign banks in exchange for deferring criminal prosecution that would have cost them their US banking licences. The resulting terror among American taxpayers is believed to have added tens of billions of dollars to the coffers of the Inland Revenue Service.
The rest of the world has been quick to learn the fiscal lesson. As economic growth has slowed, tax revenues have declined, but not the appetites of governments to spend money. One obvious remedy to rising public debt – apart from printing money – is to widen the tax net, as America has done.
A global movement for the Automatic Exchange of Information (AEOI) relating to tax matters, using a common reporting standard (CRS) developed by the Organisation for Economic Cooperation and Development, has proved a remarkable success. As of 26 July, 101 jurisdictions have committed to implement the CRS, 54 of them by next year, and the remainder by 2018. Most of Asia’s sizeable economies have agreed in principle; Taiwan is one notable exception.
Once CRS jurisdictions have satisfied each other that their standards of data security are up to scratch, their financial institutions must identify each citizen of other CRS countries who are holding accounts and pass that information to the local tax authority, which then forwards the information to their counterpart in the account holder’s home country. Singapore, Hong Kong and China have committed to undertake their first AEOI exchanges in 2018, a deadline with profound consequences for private banking in the region.
“Singapore and Hong Kong will become much less convenient places to park assets that you want hidden from your taxman. Banks there will need to change their offerings, but it’s very difficult to create new appetising products that meet with regulatory approval to attract all those customers who all of a sudden can’t use offshore banking,” Richard Grint, a financial expert with PA Consulting in London, told Asiamoney.
Clients who have paid a premium for secrecy may prove less willing once that secrecy is overridden by tax reporting and they discover what else their private banks have been providing.
Jason Collins, a tax partner at law firm Pinsent Masons, says he was surprised by the “pretty poor” performance of financial assets banked in Swiss private banks that had been offering “a secrecy product, not investment returns.”
Hunger for revenue and the new cross-border weaponry of AEOI have combined in Indonesia’s tax amnesty to create a perfect storm for Singapore private banking [see box on following pages]. The government in Jakarta has long coveted hundreds of billions of dollars in undeclared Indonesian assets that are believed to have been salted away in neighbouring Singapore, and now sees a golden opportunity to have much of that stash repatriated. In his July 25 speech, Menon, who was so concerned about the reputational damage from money-laundering to Singapore’s financial industry, did not once mention the grave material danger that an exodus of Indonesian wealth represents to Singapore’s private banks.
Singapore and Hong Kong are not the only wealth centres in Asia at risk from tax transparency.
In spite of the hydra-headed 1MDB scandal, Malaysia is set to join the CRS club in 2018, and the reporting obligations will include its tax haven of Labuan, off the coast of Sarawak. As of last year, 57 of the world’s banks were registered in the tropical island. Asiamoney received no replies to questions emailed to the director-general of the Labuan Financial Services Authority and his deputy concerning the status of Labuan trusts under the CRS regime.
Taiwan is also fretting about the future of a substantial renminbi business that flourishes in its offshore banking units (OBU). “An OBU account is not subject to interest income tax, corporate value-added tax, sales tax, or stamp tax,” Bank SinoPac advertises on its website. “OBU is outside the legal jurisdiction of domestic banking operations” and “OBU account information is strictly confidential.”
An official of Taiwan’s Ministry of Finance, who asked not be identified, told Asiamoney that legislation needed to implement automatic exchange of information under the CRS was being drafted but a date for implementation had yet to be decided. “It may have a big impact on our banking industry,” he said.
Asiamoney asked three leading Taiwanese banks for the likely impact of implementing the CRS on their offshore banking businesses. Two of the banks did not reply. An official of the third bank said that so far none of its OBU clients – mostly registered as being from the British Virgin Islands, Cayman Islands, and Hong Kong - had sought migration to other jurisdictions or requested assistance on this matter. He asked that his bank not be identified.
“Our advice to clients about CRS is that it is a train coming, and there is nowhere to hide. If you have something that you shouldn’t, now is the time to come out of the closet and declare it,” Niels Nielsen, group CEO of trust and fiduciary services provider ZEDRA, which recently acquired the trust business of Barclays, told Asiamoney in an interview.
“CRS ultimately is a good thing; it will take away another layer of stigmatisation that exists in the industry.”
TIMELINE - PRIVATE BANKS, PUBLIC SCANDALS
2004: Japan’s Financial Services Agency revoked Citibank Japan’s private-banking licence for lax anti-money laundering compliance and for aggressive selling of complex and risky derivative products to customers who did not need or could not understand them. Three senior Citigroup executives in New York, and 12 executives of Citibank in Japan, lost their jobs in the scandal. The following month, Citigroup CEO Charles “Chuck” Prince came to Japan to publicly apologise.
2007: Bradley Birkenfeld, an American banker working for UBS in Switzerland, provided US prosecutors with detailed descriptions of the bank’s efforts to help rich clients evade taxes, including sneaking diamonds into the US inside a toothpaste tube. The Swiss parliament voted to allow UBS to hand over names of more than 4,000 account holders who were US taxpayers and pay $780m to the US government to defer prosecution.
Hervé Falciani, an IT employee at HSBC’s Private Bank in Geneva, leaked details of 30,412 accounts he had secretly downloaded between 2006 and 2007. Total assets held by the clients, who were resident in more than 150 countries, was $118.4bn. The French government seized the list and finance minister Christine Lagarde – later head of the IMF – shared it with several foreign tax authorities, prompting other criminal investigations in the United States, Belgium and Argentina.
2008: Germany’s BND secret service paid around €4m ($4.47m) to computer technician Heinrich Kieber for a CD-ROM containing account details of about 1,400 clients of Liechtenstein’s biggest bank LGT, owned by the principality’s royal family. Many of the 1,400 clients were hiding money in Liechtenstein to dodge taxes; among them was the head of Deutsche Post, Klaus Zumwinkel, who was forced to resign when his name was outed in the resulting scandal. Germany passed on the LGT file to other governments, including the United States.
2014: Credit Suisse pleads guilty to helping thousands of US clients open undeclared accounts and concealing their offshore wealth from the IRS. Faced with possible loss of its US banking licence, Credit Suisse agrees to pay $2.6bn, the highest ever amount in a criminal tax case.
2016, April: A consortium of journalists begins publishing the ‘Panama Papers’: revelations from a trove of 11.5 million leaked documents concerning 214,488 offshore entities created by Mossack Fonseca, a Panamanian law firm and corporate service provider. Private banks employed Mossack Fonseca to set up offshore shell companies to conceal client wealth. Mossack Fonseca’s offices in Hong Kong, Singapore and China accounted for more than half of the firm’s global business; 51,295 offshore entities and 25,982 individuals named in the leaked data were reportedly linked to Hong Kong, and 4,188 entities and 33,290 individuals had ties to China.
May: The Monetary Authority of Singapore (MAS) strips Swiss-based private bank BSI of its licence in the city state, in “the worst case of control lapses and gross misconduct that we have seen in the Singapore financial sector.” The case involved BSI’s dealings with Malaysia’s scandal-plagued 1MDB sovereign wealth fund.
July: Indonesia implements a tax amnesty for citizens estimated to be holding between $250bn and $800bn in undeclared assets offshore. Much of Indonesia’s offshore wealth is believed to be held by private banks in Singapore.
As US prosecutors moved to confiscate more than $1bn in assets tied to the 1MDB money-laundering scandal, the MAS said it had found “lapses and weaknesses” in the Singapore operations of DBS, UBS and Standard Chartered related to 1MDB. There were also “substantial breaches” of money-laundering regulations at Falcon Private Bank’s Singapore branch. Based in Switzerland, Falcon is owned by Abu Dhabi’s sovereign wealth fund.
INDONESIA’S TAX AMNESTY
Singapore bankers call it the ‘Briefcase Run’, the 90-minute flight to Jakarta to schmooze rich Indonesians who squirrel away their wealth in the island city state, away from the prying gaze of their own government.
If all goes according to plan in Jakarta, there will be fewer private bankers arriving on Singapore Airlines after a sweeping tax amnesty, launched in July, tempts billions of dollars back to Indonesia. Before the amnesty closes in March 2017, Indonesians who declare and repatriate overseas assets will only have to pay a one-time fee of between 2% and 5% of the asset value and there will no questions asked about how the wealth originated. In order to stop the declared funds then revolving out of Indonesia there will a lock-up period of three years. Assets declared but not repatriated will be charged at a higher rate of 4%-10%.
According to an oft-quoted estimate by Bank Mandiri, Indonesia’s largest financial institution and 60% owned by the government, Indonesians have $250bn stashed offshore, of which $200bn is in neighbouring Singapore, in both liquid assets and property. That would be equivalent to almost half the estimated total of private banking assets in Singapore.
The government needs the extra tax revenue the amnesty will bring to help plug a yawning revenue hole and fund an ambitious programme of public infrastructure development that Joko Widodo – known as Jokowi to his followers – has made a cornerstone of his reformist presidency.
One reason the country needs more airports, seaports, expressways and power plants is because of its unique and challenging topography, with 258 million people spread over some 18,000 islands. In June this year, an Ariane rocket blasted into space to put the world’s first satellite owned and operated by a bank into orbit. Bank Rakyat Indonesia will use the satellite to connect all of its far-flung and isolated island branches.
A collapse in oil, gas and commodity prices has made the need for $80bn economic stimulus for infrastructure spending each year even more pressing. The problem is that even in a buoyant economy very few Indonesians pay any tax that could fund it. Out of 185 million Indonesian adults, only 27 million are registered for tax, and last year about 10 million paid any. Rampant tax evasion is made easier by a chronic shortage of inspectors, who are notoriously corrupt.
Sri Mulyani, who returned from a job at the World Bank at the end of July to take over as finance minister, has a reputation as a tough reformer and scourge of corrupt bureaucrats. She is determined to widen the tax net.
Extra staff have been posted to Indonesian embassies and consulates in Singapore, Hong Kong and London to cope with enquiries about repatriating assets, and there have been rallies in the provinces to spread the word
Indonesian banks are in high gear; the anticipated influx of funds could be of huge difference to the local investment industry which currently manages only about $20bn in assets, a mere barnacle on the underbelly of Singapore, which last year boasted an estimated $1.9tr of assets under management.
Singapore’s largest bank gives an outward appearance of being unruffled. Asked how DBS would be affected by a drain of Indonesian wealth, a DBS official referred Asiamoney to a statement by the co-chair of the Monetary Authority of Singapore who called tax amnesties “a useful tool for individuals to regularise their tax affairs with their respective tax authorities.”
BANK MANDIRI READIES FOR A WINDFALL
Hery Gunardi, head of distribution, and Elina Wirjakusuma, head of wealth management at Bank Mandiri tell Asiamoney how Indonesia’s biggest bank has been preparing for the tax amnesty.
What is the key incentive to repatriate offshore wealth?
Wirjakusuma: “It relates to the implementation plan of the automatic exchange of information in 2018. Most of the clients understand they cannot hide their money anymore.”
How is Bank Mandiri positioned to attract wealth declared under the amnesty?
Gunardi: “Right now, Mandiri has around 40,000 wealth management customers, and around 1,200 private banking customers that we consider to be potential clients of the tax amnesty as well. We also serve corporate clients, and more than 100 of the biggest corporations in Indonesia borrow from us. I believe most of the owners will have need of our tax amnesty services. We know the owners, the boards of directors, we know the commissioners, so I think it is much easier for us to approach them.”
What are the options for Indonesians affected by the tax amnesty?
Gunardi: “Their choice of investment vehicle will depend on their risk appetite. A few already are experienced private banking customers in Indonesia, but most of the investment will be in bank deposits rather than investment assets. In terms of risk appetite, money market funds and fixed income will be favoured over equity funds.”
Wirjakusuma: “For mutual funds only a limited proportion is allowed to be invested offshore – normally it is only 15% - and mostly we are talking about fixed income.”
Gunardi: “It depends on the customer. They can put their money not only in rupiah, but also in US dollar or Singapore dollar investments.”
Wirjakusuma: “There are lots of rupiah-denominated products in Indonesia that can offer a high yield. I am sure customers will convert part of their offshore holdings into rupiah and the rupiah will strengthen.”
THE VIEW FROM THE MINISTRY
Luky Alfirman is head of policy analysis and harmonisation at the Ministry of Finance, Indonesia. He talked to Asiamoney about the tax amnesty.
In persuading Indonesians to declare offshore assets, how much help is the prospect of Indonesia automatically exchanging tax information with countries such as Singapore?
“I would call it a blessing in disguise, because it will strengthen our programme. We can tell our taxpayers that from 2018, or at the latest 2019, we are going to have very good access to their offshore account data.”
The government has authorised 18 local and foreign banks, 18 asset management companies and 19 brokerages to handle the repatriated funds. You must be hoping the windfall will stimulate Indonesia’s financial industry.
“I totally agree. We foresee that the money will strengthen our financial industry. However, we don’t want that money all going on stocks or financial instruments. That’s why we have this three year holding period. Maybe at first people will still try to learn what kind of instruments or investment can be offered by the Indonesian economy. But we are pretty confident that next year people will start diversifying their investment, with more going into the real economy.”
Will you take in enough revenue from the amnesty to make a real difference?
“We have just finished discussing the 2016 budget. We target revenue this year from the tax amnesty of Rph165tr ($12.6bn). Of course, that can be used to fund infrastructure. On the other hand, we are encouraging investment in our infrastructure bonds issued by our SOEs [state-owned enterprises] in charge of infrastructure development. So financing infrastructure is a very attractive prospective investment in Indonesia. These bonds could offer very attractive returns.”
Is the Singapore government pleased by your tax amnesty?
“We don’t know, but here is a very simple question. Were they concerned about our economy before, when our money left the country to stay in Singapore? We are talking about Indonesian people’s money here. We tried to attract them, to come back home, because now the country needs the money for our development agenda. We have offered a very good incentive.”