No stone left unturned: the burden of compliance in fighting money laundering

MARILYN Monroe may have sung that diamonds are a girl's best friend, but when it comes to sparklers, regulators here are keeping their friends close - and their enemies closer. Precious stones and metals dealers (PSMDs) must register with the Ministry of Law (MinLaw)to keep plying their trade, under legislation passed in February. Close to 1,600 dealers signed up by the deadline of Oct 9.

In the biggest shake-up under the brand-new Precious Stones and Precious Metals (Prevention of Money Laundering and Terrorism Financing) Act, dealers must keep records, carry out due diligence on customers, and report certain trades in eight precious metals and alloys, as well as six precious stones: diamonds, sapphires, rubies, emeralds, jades and pearls.

Dealers previously had to take these steps only for cash transactions of more than S$20,000, in a reporting regime that was rolled out in 2014. Now, the new law mandates customer due diligence not just for transactions that bust that budget, but also if the dealer suspects money laundering or has doubts about other information that was given by the customer.

There's also a set of enhanced due diligence rules for customers who are deemed "politically exposed persons" or have been assessed as higher-risk, such as through ties to sanctioned jurisdictions - for example, Iran and North Korea.

With such customers, a salesman won't just need to verify personal particulars and check a list of known terrorists, as in standard due diligence. The salesman must also establish these customers' income and source of wealth, and have a senior manager sign off on the transaction.

Norton Rose Fulbright partner Wilson Ang, a dispute resolution lawyer, explains that staff must lodge reports "if there is any suspicion that there are proceeds associated with criminal conduct; and it's just a suspicion, it doesn't even have to be actual knowledge" of criminal goings-on.

But Stefanie Yuen Thio, joint managing director of TSMP Law Corp, says that "I struggle with how retailers are to make such assessments and I wonder how effective these rules will be in truly weeding out criminals".

Taking her husband - whose sister used to sit in Parliament - as an example, she laments: "When he goes to buy me that 10-carat diamond to celebrate our 25th wedding anniversary this year, he will need to be vetted up and down by some hapless salesperson trying to close a sale."

Nearly 383,800 cash transaction reports were filed with Suspicious Transaction Reporting Office last year, up by 1 per cent year on year, according to the police. The Commercial Affairs Department, which compiles the statistics, declined to share how many of these reports were from PSMDs; cash transaction reports are also filed by casino operators.

To be sure, PSMDs say that money laundering and terrorism financing are rare in the industry in Singapore: a spokesperson for Hong Kong's Chow Tai Fook Jewellery Group, which has three branches here, tells The Business Times that the chain has not seen large cash transactions or suspicious transactions that need reporting.

But, erring on the side of caution, it has appointed staff members - including one in Singapore - as anti-money laundering reporting officers.

PSMDs have also been tasked with making sure that their own suppliers have clean hands. For example, MinLaw considers it a red flag if rough diamonds are not accompanied by a valid Kimberley Process certificate, or if the suppliers route precious stones or metals through countries linked to money laundering or terrorism "for no apparent economic reason".

Regulators may be focusing on retailers with the new Act because, "on the origination side, I think companies are already well aware of those risks involved" in some markets, and "there already are bribery and anti-corruption laws" for mining and other business activities, Mr Ang adds.

Hagen Rooke, a lawyer who handles financial regulations and technology at law firm Reed Smith, remarks that the new Act must be taken as part of a bigger anti-money laundering campaign.

"Singapore wants to very much prevent itself from being used as a hub for laundering of money or as a hub for channelling of terrorist finance. Similarly, it doesn't want to be used as a hub for drug trafficking... So I see this additional regime, really, as just a logical extension of that policy focus."

Widening the net

Retailers acknowledge that compliance has become tougher under the new law, as they ring up costs from upgrading systems and processes.

Aspial Corp, which operates pawnbroker Maxi-Cash and the Niessing and Lee Hwa jewellery brands, also hired a vendor to carry out screening and due diligence for politically exposed people and their associates.

But, beyond the outlay for due diligence, vendors fear that customers may bristle at being probed over their source of funds.

"There are certain subtle cues that can be taken: 'Oh, what do you do for a living? Do you work around here?'" Pamela Seow, assistant general manager at family business Poh Heng Jewellery, says. "But actually asking your customers where their money comes from is a very sensitive question."

Both Ms Seow and Casey Lai, a partner at diamond boutique JannPaul, note that taking down customers' details could rope in the long arm of the Personal Data Protection Act as well, so retailers must take extra care to safeguard the information or risk fresh penalties under a different law.

Still, Senior Minister of State for Law Edwin Tong, when pushing for the new law in February, explained that more comprehensive rules were already unveiled in 2015 for pawnbrokers, a sub-set of the PSMD sector.

"Given the inherent risks in the PSMD sector however, there is a need to take additional and further steps," he told Parliament at the time.

Indeed, some firms have gleaned insight into suspicious transaction reporting from their experience operating in these adjacent industries. "For our second-hand goods operations, we already have standard operating procedures in place, due to our second-hand goods licence," says Aspial corporate marketing manager Ginger Soon.

Similarly, Yeah Lee Ching, executive director of ValueMax Group, says she does not expect "huge operational changes" to how transaction reports for precious goods will be filed, based on the one to three a year that the pawnshop business turns in. Besides pawnbroking and moneylending services, ValueMax also deals in secondhand jewellery and gold.

Still, retailers have lingering questions.

For instance, the new law covers products that derive at least half of their value from precious stone or precious metal components - which could affect, say, luxury watches.

But the dollar value of high-end timepieces is also based on factors such as craftmanship, notes Jeremy Lim, president of the Singapore Clock and Watch Trade Association, who has seen uncertainty among the trade group's 120-odd members over whether they must register as PSMDs.

"I can't just put a blanket advisory," the industry veteran adds. "We understand that, for the smaller retailers, it is a cost for them. We can only advise based on the number of gold or precious metal pieces that they sell."

Poh Heng's Ms Seow also flags ambiguity over how the reporting rules cover both cash and "cash equivalents". She asks if credit cards should be deemed cash equivalents, "because our understanding is that it should be money that still cannot be traced... whereas with credit cards, you can trace certain funds".

And, even though unregistered dealers risk penalties of up to a fine of S$75,000 and three years' jail, Mr Lai from JannPaul is wary of fly-by-night dealers - especially small, online-based gem merchants - who may skirt the rules and tarnish the profession's lustre.

But, despite the handwringing, Mr Rooke of Reed Smith believes that one-size-fits-all rules can't work for regulators.

He explains to BT: "That absence of prescribed clarity and granular guidance is something that you find throughout the AML world... Every type of transaction and every customer is different, and there is also supposed to be some flexibility in how you apply your risk assessment."

Brave new world

Dealers have turned to MinLaw for more clarity on the law, by attending workshops and consulting a 50-page document - issued by the Anti-Money Laundering/Countering the Financing of Terrorism Division in late August - that greatly expands on guidelines released in end-April.

As the industry matures, however, parts of the document point at the ever-expanding landscape that the authorities must regulate.

It recommends that dealers mull risks related to, for instance, transaction mode - cash, in-kind payments, bank transfers, credit cards, or even virtual currencies and digital payment tokens.

The inclusion of newfangled payment methods brings to mind Catalist-listed SK Jewellery Group's memorandum of understanding in January to accept cryptocurrency in stores.

Citing its experience during a trial and "the risks associated with the acceptance of cryptocurrencies", the board said two months later that it had opted not to proceed with integrating cryptocurrencies across the cashiers at all its outlets.

The initial decision had prompted a bourse query on how cryptocurrency payments would affect auditors' accounting, while MinLaw said at the time that "businesses should perform their due diligence... as cryptocurrencies are not legal tender". SK Jewellery declined to comment for this story.

In another show of how the authorities keep abreast of technology, the Act also governs asset-backed tokens, or financial instruments that holders can redeem with precious goods.

Some kinds of digital tokens may constitute shares or securities-based derivatives contracts, and are governed by the Securities and Futures Act. But Mr Rooke thinks that the new Act goes further, as it could govern cryptocurrencies with an underlying commodity, like a so-called "stablecoin" pegged to the value of gold.

Dealers also expect MinLaw to eventually tighten even its latest rules, such as by lowering the S$20,000 threshold for a cash transaction report, which Ms Seow suggests may happen after the regulators have gotten more data from reports.

The burden of due diligence

GOLD and gems are easy to hide, move and turn into hard cash.

That's part of the reason that regulators here have introduced tighter rules on the buying and selling of precious stones and metals - to nip a possible means of money laundering and terrorism financing in the bud.

Such incidents have by no means gone unheard of: The false-claim scam that sucked S$39.9 million out of statutory board SkillsFuture Singapore saw some loot converted into 11kg of gold bars, worth S$626,500.

But the most sensational episode may be the case of rogue lawyer David Rasif, who fled the country in 2006, after allegedly taking S$11.3 million in clients' funds.

Before his vanishing act, Rasif had dropped a cool S$2.08 million on gems in a four-day shopping spree.

American couple George and Kaori Zage, who had entrusted S$10.7 million to Rasif, turned to a civil suit to recover their lost money. Their lawyers argued that retailer Jewels Defred and its boss, Ho Chi Kwong, should have found the circumstances of Rasif's purchases to be "highly suspicious".

Rasif had bought some of the stones, such as a 16.26-carat blue sapphire and a 10.89-carat yellow diamond, sight unseen. The lawyers also argued that Rasif's modest practice, car and home were red flags for where the money was coming from.

The Zages eventually recovered S$270,000, as the jewellers were held liable for accepting a cash cheque that was marked "Client's Account".

But the three-judge Court of Appeal upheld an earlier judgment by Justice Woo Bih Li that most "honest retailers" would not probe customers' backgrounds or funding sources.

Lawyer and MP Murali Pillai (Bukit Batok) alluded to the Rasif case when the new precious stones and metals law was in its second reading as a Bill, and called the appeals court's decision in 2010 an example of "the gap in our present regulatory scheme".

"If the jeweller in question had been required to conduct due diligence checks on the source of funds, perhaps this unfortunate matter might have been prevented," he said.

Jewels Defred, now known as DeFred Jewellers, did not return a request for comment. Its lawyers and the Zages' also declined to comment.

Yet other legal eagles tell The Business Times that a similar situation might have panned out differently, had the Act been in force at the time.

"It would have made things easier for the investigators to look into the movement of jewellery and gold bars," says Withers KhattarWong partner Shashi Nathan, as retailers would have had to keep sales records and "also be under a stricter regime of due diligence in their sales practices".

Rajah & Tann partner Danny Ong, who specialises in fraud, adds that "at that time, there was no expectation that jewellers should conduct due diligence... and hence it could not be established that their failure to ask questions amounted to dishonesty".

But, under the new law, a dealer who accepts payments without asking enough questions could be found liable for "assisting with the perpetration of a fraud or dissipation of the proceeds of fraud", Mr Ong believes.