OFAC Highlights Potential Gap in Singapore’s Sanctions Regime

Singapore can do more to prevent sanctions violations by domestic firms playing out on the international stage, says Eric A. Sohn at Dow Jones Risk & Compliance.

For the third time in less than 18 months, Singaporean firms have run afoul of US sanctions regulations. The first two sets of violations, which resulted in the companies paying settlements to the Office of Foreign Assets Control (OFAC) in July and August 2017, were not contraventions of sanctions restrictions adhered to by the Singaporean government. However, the latest OFAC action, culminating in a Singaporean citizen, a pair of companies and two cargo vessels being sanctioned themselves, resulted from violations of the trade embargoes enacted by the United Nations, which Singapore follows.

There are three actions that regulators in countries such as Singapore could follow in order to reduce the chances of further high profile regulatory incidents.

Greater bank vigilance and oversight

Case Study 1: CSE Global and CSE TransTel maintained US dollar-denominated accounts at a non-US bank located in Singapore. In April 2012, members of CSE’s senior management issued a Letter of Undertaking stating that it would not route Iran-related banking transactions through the bank, yet started doing so starting in June of that year. Over 100 funds transfers for Iranian energy projects were initiated over the next 9 months, with no apparent detection by the bank’s staff.

Case Study 2: Since at least 2011, Wee Tiong (S) Pte Ltd, a Singaporean commodities trading company, fulfilled millions of dollars in contracts for North Korea. The US Treasury Department notes that, on at least one occasion, when a funds transfer was rejected, payment was made in cash to a North Korean individual. However, there is no evidence that the banks that Wee Tiong utilised identified any of the payments as contravening the Monetary Authority of Singapore (Sanctions – Democratic People’s Republic of Korea) Regulations 2009 froze the assets or notified the Monetary Authority (MAS).

There are sound business reasons for financial institutions to be more vigilant about sanctions regulations. In cases which contravene local regulations, such as the Wee Tiong case, there is always a risk of enforcement action by local authorities. While the Financial Action Task Force (FATF) noted in its 2016 Mutual Evaluation Report on Singapore’s anti-money laundering/counter-terrorist financing (AML/CTF) programme that potential monetary penalties are meager, MAS took decisive action against BSI AG and Falcon Private Bank in the wake of the 1MDB scandal. If MAS were to extend these more forceful measures and proactive oversight to the sanctions arena, it will cause firms to give higher priority to their compliance policies, procedures and operations.

Even when there is no legal jurisdiction from a foreign regulator, banks are still at risk of significant restrictions on their business due to lack of awareness (or willful blindness) of regulatory requirements. OFAC, for example, could have also placed the local banks on its sanctions list, as it did the companies, persons and cargo vessels in the Wee Tiong case. Additionally, the Financial Crimes Enforcement Network (FinCEN), part of the U.S. Treasury Department, can designate a financial firm as being a Primary Money-Laundering Concern (PMLC) for its lack of ability or willingness to combat financial crime or comply with sanctions. One of the possible restrictions imposed on PMLCs is a prohibition against opening or maintaining a correspondent banking account with a financial services firm organised or located in the United States. The possibility of losing access to the world’s largest economy should be reason enough to oversee compliance operations more carefully.

Expanded regulatory scope

None of the three sets of companies named in the US actions are financial institutions, yet all were ensnared by regulatory actions. In Singapore, only financial institutions have sanctions compliance requirements, under the MAS regulations. In contrast, all “US persons” (including all citizens, persons resident in the US, US corporate and non-corporate organisations, and all US offices and operations of foreign organisations) are responsible for sanctions compliance.

In the community of compliance professionals, much time is spent extolling the virtues of a “culture of compliance” where all staff is regularly trained in, and is aware of, the compliance requirements specific to their roles. That metaphor is logically extended to an entire nation, any of whose citizens or organisations can be exposed to potential sanctions violations whether or not a local financial institution is also involved.

It can be argued that the more parties that are on alert for such breaches, the less likely they are to occur. It would therefore make sense for the government of Singapore to pass legislation that would impose sanctions requirements on a broader set of parties. In that case, it could punish violating firms like Wee Tiong (which, technically, was not breaking Singaporean law) without the spectacle of other regulators imposing restrictions on its citizens and organisations.

Regulatory outreach and education

Case Study 3: COSL Singapore made at least 55 purchases of supplies from US vendors intended for shipment to oil rigs operating in Iranian territorial waters, despite language in the vendor price quotations explicitly calling attention to the prohibition against shipment of their goods to countries sanctioned by the US government. In its enforcement action, OFAC noted that, due to its operation of 14 oil rigs across the globe, COSL was a large, commercially-sophisticated business that should have been aware of the regulatory implications of its actions.

It is very easy to be unaware of, if not actively ignore, the regulations of other countries that actually apply to your firm and its actions. This is true even in countries where the domestic requirements extended beyond the financial services sector. All the largest monetary penalties imposed by OFAC were imposed on European firms and operations that were blinded by the revenue that prohibited business could bring in.

In addition to extending sanctions compliance requirements beyond the financial sector, the chances of a recurrence of cases such as COSL Singapore’s could be minimised with proactive outreach by the Singaporean government to the wider community, focusing on the global scope and implications of sanctions requirements.

An ounce of prevention

The important question arising from the recent regulatory actions taken against Singaporean firms is: what responses will be forthcoming to prevent the occurrence of future actions that could impact the country’s desired position as a trusted financial centre?

And are these added costs – of greater vigilance by banks, of passing laws and regulations to extend the scope of regulatory requirements, and of proactive outreach and education to the broader community to enlighten them as to the scope and consequences of sanctions regulations compliance – worth the benefit of a spotless reputation?

Eric A. Sohn, CAMS is global market strategist and product director at Dow Jones Risk & Compliance in New York.

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