Spend a vision with me: (A)ML: is it worth it?

I worked in banks for a while, as an employee and as a consultant, and one thing the banks make sure you are aware of is Money Laundering. Money Laundering is something all banking employees are tested and reminded of.

But for what?

A little piece of interesting news, most of the people involved in the multi-million money laundering case in Singapore surrendered 95.5% of their assets and got sentences of under 2 years in Singapore jails (1), no financial penalty (assuming assets were ‘illegally obtained’), short jail term. So, it doesn’t seem it’s a big deal, right?

What actually is the problem with money laundering?

First, let’s take a step back. This blogpost was motivated by the recent multi billion money laundering case in Singapore.

A recent article entitled “the banks that hold most money in Singapore’s largest Money Laundering Scandal“ (2) shows the extent that banks in Singapore, not only the big 3 local banks (UOB, DBS, OCBC) manage bank accounts of the people found guilty of money laundering (49.6M, 29M, 22.4M), but also large international banks such as Credit Suisse, CitiGroup, (79.6M, 79.3M).

Credit Suisse is not a stranger to money laundering (3), the case of Bulgarian cocaine with the judge commenting that “the company could have prevented the infringement if it had fulfilled its organizational obligations” and yes, Credit Suisse is now owned by UBS, but UBS is not that vigilant regarding money laundering either (4). As for CitiGroup, this again would not be the first time (5).

The local banks were involved in the 1MDB and wirecard scandals (6)(7).

So, banks have been involved in Money Laundering, again and again.

Millions are spent by banks yearly to buy, maintain, upgrade their Anti Money Laundering (AML) systems. It is a very very lucrative market to be in. Free Money once you get in, since in most cases, banks are forced to show their AML capabilities to regulators, and having a shiny AML system is something most regulators would not question.

The Singapore case

The first thing that came to my mind when I read about the case was, how on earth did the great AML systems not pick these as possible money laundering cases. Do you see a pattern among the cases? And more importantly, even before knowing some of these people are involved in “interesting” activities, don’t you find it a bit weird and worth a second look? One early article focused on this aspect “”(8)

“Ten people of Cypriot, Turkish, Chinese, Cambodian and Ni-Vanuatu nationalities were charged on Wednesday (Aug 16) night after police conducted simultaneous raids across Singapore as part of a probe into money laundering and forgery offences.”

And to add to this, another piece of news from Singapore about someone also belonging to the same very specific demographic group, this time about someone who created malware that infected many computers and caused large losses (9)

“The DOJ said that Wang, who also holds a St Kitts and Nevis citizenship, allegedly received US$99 million from cyber criminals who tapped his network from 2018 to July 2022.”

Now you can say that the world is now so open, having multiple nationalities, even for Chinese citizens is not a big deal, but is it?

China does not recognise dual nationality, according to the Nationality Law of the People’s Republic of China (10) which clearly states:

Article 3: The People’s Republic of China does not recognize dual nationality for any Chinese national

Everyone in Singapore knows of rich Chinese nationals who took up Singaporean nationality such as the bosses of Hai Di Lao (11), TsingShan Holdings (12), SEA holdings (Shopee is a subsidiary) (13) and their families. However, with all due respect, having Singapore as Nationality and say Vanuatu (14) are 2 very different things.

Why don’t sophisticated AML models used by these large banks fail to flag rich Chinese nationals having multi million dollars in assets but with ‘exotic’ passports.

Even if this may be a relatively recent phenomenon, and AML models, being trained on past data may take a while to pick up this characteristic (ahum…), you would have thought humans would take a deeper look into the sources of income of these people during the Know Your Customer (KYC) that is compulsory when accepting new customers, and their transactions. But, in the case of the Singapore based money launderers, they were allowed to purchase many properties easily, avoiding all AML models and human oversight (if any).

AML Models as a shield

And that’s the second thing, do banks use AML models as a shield? so they only get into minor trouble when money laundering is discovered? “Hey, check out my shiny AML model Regulator, it cost me millions, I am doing what I can in terms of AML”. After all, these money launderers must have paid hefty fees to banks while moving their millions, and buying their properties.

As far as I have seen, the only person who got into trouble related to transactions of the Money Launderers are the property agents, with one fined $4000 (15) which is likely a minor portion of what that agent earned on these cases. But there is noise about the rot going further into private banking sector, although no action has been taken yet (16). The only agent who faced the law seriously, was found to have behaved above board in the real estate transaction although her issues were unrelated (17).

To reiterate, getting involved in Money Laundering is no biggie, jail terms and financial wise

So, not only do the perpetrators of money laundering get minor jail sentences, for reference, 4 Vietnamese nationals who shoplifted items of 60,000 times less value, including a pregnant woman, were jailed more than 20 months each (more than the longest jail term for the money laundering) (18), and I am pretty sure the clothes shoplifted were restituted since these foreigners were caught while still in Singapore.

Should you be surprised?

No. Actually I didn’t think about it before, but money laundering is not something that serious, as the sentences showed.

I will go further… My brother told me “you think like a criminal” when I told him this, but, it is a risk worth taking. Imagine, even 1pct of SGD3b is still SGD30m... if I have this stashed somewhere, I will go there and enjoy cold sakes in summer and warm sakes in winter until my sunset.

To add to this, please note that at least 1 of the men sentenced went to Japan after release from jail in Singapore(19), it is highly unlikely they are wanted for anything in Japan.

Think about it.

Who were the victims of the money laundering?

- The previous owners of the properties/assets purchased got to keep their funds from laundered money

- Real estate and other agents who facilitated transactions usually got small fines (for reference a real estate agent may be charges 2% commission; for a SGD4,000 fine that would break even at a property worth SGD200,000.

- Banks get to sell the assets mortgaged and recoup their loans and do not have to return their transaction fees

- Bankers keep their bonuses

- Even the government made via duties, fees, and taxes (whether directly or indirectly)

I don’t see anyone in Singapore worse off.

So we are back full circle.

What is the problem with money laundering?

Referring to the Singapore multi billion dollar case, presumably, the issue is the source of the funds these people brought into Singapore. The people somehow made Singaporean entities believe (ahum…) these were from legitimate means, but they were not.

Money Laundering is a possible symptom of non legal activities having taken place. A possible tail-end part of a chain of transactions, one of which was possibly illegal.

The real problem is the presumably illegal transaction that generated the money to be laundered. Money laundering basically means taking money that is not registered in the legal economy and making it legally registered so that it can be used. The trick is that the amounts are huge; we could easily launder a few thousand dollars by living our normal life in a year, but if it was a million it would be harder, hence the need for large transactions, property, investments…

But the fact is, the laundering itself, doesn’t seem to harm many. It is the failure to detect and stop the illegal transaction themselves (that possibly cause harm such as adulterated drug dealing, scamming( Around 45,000 Singapore scam victims lost $600m last year(20)), gun and weapons dealing (ahum…interestingly Singapore has managed to cut trade of weapons to Myanmar (banned) by 90% recently (21))) that are the issue. The failure to stop these demonises money laundry, it is an easy way out.

What to do regarding money laundering then?

Radically, allow all transactions 😊, then there will be no need to launder, all transactions can be taxed appropriately (ahum… there really seems to be something lodged in my throat…) and nobody worse off. However, this is quite impractical.

The key is to first decide whether money laundering is really such a big deal.

From the example above, it seems that money laundering is not as bad as shoplifting. If that is the case, then there should be less focus in banks and financial institutions around money laundering, and money should be spent elsewhere. Since many banks getting involved in money laundering, and even more than once and/or over a period of time, and their business does not seem to suffer much, there is no incentive for them to do something about it, and spending on ‘state of the art’ AML systems is just a waste of money, especially when humans are kept out of the loop, whether willfully or not.

If money laundering is seen as worse than shoplifting, then the whole penalty set should be increased accordingly for people who actively launder money, and people and organisations that enable them such as real estate companies, private banks… A slap on the wrist of the people on the ground is obviously not sufficient.

A few days ago, the Monetary Authority of Singapore updated AML guidelines (22). Personally, sorry for being cynical, I do not think that this incentivises financial institutions to really do something, it is more of an advisory nature, neither carrot, and especially not a stick to change behaviour. At most there are more areas for AML software companies to sell their wares.

As a rough guide, in 12 months of 2022-23, Singapore financial institutions spent more than SGD7.5B 'to fight crime and meet regulatory obligations' (23)

Update:

The people found guilty of the SGD3B money laundering case used Family Offices (Offices that basically only manage a family's financial affairs, these do not fall under financial regulator (MAS) purview), and they even got tax breaks. (24) These tax breaks will not be clawed back.

Spend a vision with me

Sunday 30 June 2024

(A)ML: is it worth it?

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