Written by Thomas Wan, Course Director (APAC) on Thursday 16 September, 2021
Proper due diligence work is very important; so important, that it is vital it isn’t undermined in practice by banking and finance professionals, nor by the firms in which they work.
Strict legal and regulatory obligations and requirements exist to ensure thorough due diligence. These include:
- the Monetary Authority of Singapore Act (Cap. 186) (‘MAS Act’) section 27B,
- the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap. 65A),
- the Terrorism (Suppression of Financing) Act (Cap. 325),
- the Banking Act (Cap. 19) and the Securities and Futures Act (SFA), etc, and their other sectoral equivalents,
- the various legal directives for the above regulated activities, such as under paragraph 6 of the MAS Notice SFA04-N02 for capital markets intermediaries and the equivalent for other sectors, and
- the SGX Listing Manual and Rulebook and their listing requirements.
A recent milestone case in Singapore vividly illustrates the importance of adhering to such due diligence stipulations.
UOBKH: A milestone case
On 2 September 2021 two former representatives of UOB Kay Hian Private Limited (UOBKH), Mr Lan Kang Ming and Mr Wee Toon Lee – both of whom provided corporate financial advisory services for IPOs – were served with four and three-year Prohibition Orders (POs) respectively by MAS for failing to perform KYC/CDD and for dishonestly submitting false statements.[1]
The duo had lied to MAS inspectors during a supervisory inspection between June and August 2018 about the contents of a due diligence report prepared by a UOBKH-appointed private investigation firm for the IPO of a company listed on the Singapore Exchange's Catalist board.
During the inspection, Mr Lan told MAS that background checks on individuals and entities related to the company had been conducted; in reality, he did not actually know whether the checks had been done. Mr Lan then told a private investigation firm to amend its original report to include further information regarding the supposed background checks. Mr Wee then submitted the amended report to MAS in July 2018.
MAS investigated the matter as there were suspicions that the report had been amended post-IPO and that Mr Lan and Mr Wee had provided false information to MAS. During investigations, Mr Lan and Mr Wee made several false statements, including affirming repeatedly that they had received the amended version of the report before the IPO.[2]
Charges and verdict
On 1 July 2020, Mr Lan and Mr Wee were charged individually with three counts of furnishing false information to MAS investigators under section 162(3) of the SFA. In March 2021, both pleaded guilty and were each convicted of one charge; two remaining charges were taken into consideration during their sentencing and both were handed a S$3,000 fine.
The POs took effect from 1 September 2021. Both of the individuals charged ‘are prohibited from performing any regulated activity and from taking part in the management, acting as a director, or becoming a substantial shareholder of any capital market services firm under the [SFA]’.[3]
Compliance takeaways
On top of the guilty charges above under the SFA, it should be noted that the dishonesty of Mr Lan and Mr Wee, including the lying and giving of false information to the authorities, are also potential chargeable offences under the Penal Code of Singapore, section 177 (a fine of up to S$5,000, a jail term of up to 6 months or both). They can also attract potential civil tort liabilities as a result of losses by the firm or investors, as well as administrative penalties for the firm and individuals involved.
Regarding IPOs, issue managers (or ‘sponsors’) will have to carry out IPO-related due diligence on listing applicants according to S225 of the SGX Rulebook:
(1) A full sponsor, in preparing a listing applicant for admission or advising an issuer in a very substantial acquisition or reverse takeover, must be satisfied that, having made reasonable due diligence enquiries and having considered all relevant matters, the listing applicant, or in the case of a very substantial acquisition or reverse takeover, the enlarged group, is suitable to be listed.[4]
Furthermore, under paragraph 6.35 of the MAS Notice SFA 04-N02, it is stipulated that:
Where the Capital Market Intermediary (CMI) is unable to complete the measures as required under paragraphs 6, 7 and 8, it shall not commence or continue business relations with any customer, or undertake any transaction for any customer. The CMI shall consider if the circumstances are suspicious so as to warrant the filing of a Suspicious Transaction Report (STR).[5]
(Note that a failure to report STRs subsequently for suspicious cases post KYC/CDD can also be an offence under the CDSA and TSOFA, and MAS AML/CFT Notices).
KYC and CDD are among the most vital requirements in AML/CFT regulations to protect investors and all stakeholders within the industry, and to preserve the integrity of the banking and financial system to avoid it being used as a conduit for illicit activities. More importantly, KYC/CDD are also critical fundamental practices in a financial crime compliance programme to protect the organisation from fraud and losses resulting from illegal funds and transactions.
The UOBHK case and the subsequent penalties reveal the profound consequences of failing to adhere to regulatory and legislative requirements in Singapore, and underline the ongoing importance of ensuring you are compliant.
_________________________________________________________________
References:
[1] Monetary Authority of Singapore, ‘Two individuals banned following convictions for providing false information to MAS’, 2 September 2021: https://www.mas.gov.sg/regulation/enforcement/enforcement-actions/2021/two-individuals-banned-following-convictions-for-providing-false-information-to-mas – accessed September 2021
[2] Monetary Authority of Singapore, ‘Two individuals banned following convictions for providing false information to MAS’
[3] Monetary Authority of Singapore, ‘Two individuals banned following convictions for providing false information to MAS’
[4] Rules on due diligence by the Singapore Exchange (SGX) and its Catalist Board, as well as guidelines by the Association of Banks in Singapore (ABS), can be found here:
https://abs.org.sg/docs/library/abs_listings_due_diligence_guidelines.pdf -- both accessed September 2021
[5] Monetary Authority of Singapore Notice, ‘Notice To Capital Markets Intermediaries
Monetary Authority Of Singapore Act, CAP. 186’, 24 April 2015: https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance-and-Licensing/Securities-Futures-and-Fund-Management/Regulations-Guidance-and-Licensing/Notices/MAS-Notice-SFA-04-N02-June-2021.pdf – accessed September 2021