Dirty Money: Will Singapore Clean Up Its Act?

By Martin Hesse

Photo Gallery: Singapore Banks Under Pressure Photos

Singapore has become an increasingly popular haven for money laundering and tax evasion. But now it faces calls for reform and a difficult dilemma: Can it be both a home for fortune hunters and a bastion of integrity?

A yellowish-brown fog has settled in the urban canyons of Singapore's financial district. From a skyscraper high above the harbor, you can hardly make out the endless rows of containers in the port terminals. A cloud of smog locally referred to as the "haze" -- caused by the slash-and-burn farming methods of the palm oil barons in neighboring Indonesia -- regularly darkens the skies of the wealthy city-state of Singapore, at the southern tip of the Malaysian Peninsula. But the air has never been as bad as it is now.

Local critics see the haze as a symbol of how nearby filth has dirtied the city-state's business model. The city-state has made itself dependent on global trade, the growth of Asia's rising economies and on the patronage of wealthy people from around the world, who use the discreet financial center as a hub and storage site for their riches.

And now Singapore faces a delicate conundrum: There have been recent signs of crisis in emerging economies like India and Indonesia, and Singapore is under growing pressure from Europe and the United States not to create unfair advantages for itself in the competition among tax havens.

Critical voices are rare in this country accustomed to success, which has almost no unemployment. It has grown steadily for many years in its role as a platform for global companies seeking to do business in Asia while paying little in taxes. The companies produce their goods in the surrounding countries, where production costs are lower.

Singapore's Ambitious Plan

"Singapore's strategic plan to secure its own future is extremely impressive," says German Ambassador Angelika Viets. The cityscape has changed dramatically, with skyscrapers now packed together tightly where there was nothing but mud a few years ago. The government plans to bring large numbers of immigrants into the country by 2030, to prevent the over-aging of the population. It is even reclaiming land from the sea to create space for new buildings and more people than the current population of 5.4 million.

In Singapore, everything revolves around growth and consumption. When the haze arrived, so many Singaporeans logged onto the online shopping giant Amazon to order respirator masks the server crashed. "It shows how much purchasing power is developing here," says Jimmy Koh of United Overseas Bank (UOB), a major Singaporean bank.

UOB is an example of what drives Singapore. It has geared its entire strategy toward growth in the Association of Southeast Asian Nations (ASEAN), an organization made up of ten countries in the region, and the prosperous middle class taking shape there. Koh, who runs the bank's investor relations department, is a strong proponent of this strategy.

The domestic market for Singaporean banks is very limited. "But by serving the ASEAN market, we expand our potential customer base from 5 to 500 million," says Koh. Five years ago, UOB had 40 billion Singapore dollars (about €20 billion, or $27 billion) in assets under management. Today it has S$ 60 billion and in five years it is expected to grow to S$ 100 billion SGD.

Sketchy Money

The bruising recently sustained by established financial centers, like London, New York and Zurich, has benefitted Singapore and its banks. After major banks on Wall Street and the Thames were shaken by the financial crisis, many investors turned their attention to Asia. "We benefit from the flight to safety," says Elbert Pattijn, the chief risk officer of DBS, the country's largest bank. "Singapore has one of the most stable financial systems in the world," Pattijn notes. And one of the most discreet.

When authorities in the United States and Europe began hunting down tax evaders in recent years and chipping away at Switzerland's banking secrecy, many of the super-rich moved their assets to Singapore.

Whenever bankers like Pattijn are asked about possible illicit money from Europe, their answers are quick and mechanical. "We don't want that kind of money," Pattijn says. "We have no appetite for that." But the revelations the emerged from Offshore Leaks -- an April report by the International Consortium of Investigative Journalists which revealed the details of 130,000 offshore accounts -- put Singapore in a tight spot. The data trails of the report led directly to Singapore or, more specifically, to Temasek Boulevard.

The Fountain of Wealth, the world's largest fountain, is a bronze monstrosity located on the boulevard and surrounded by five gray office buildings, the Suntec Towers. The firm Portcullis Trustnet has its headquarters there. Portcullis builds what amount to virtual catch basins for fountains of wealth, establishes trust companies and moves assets to tax shelters.

Portcullis Chairman David Chong sharply rejected the indirect accusation by the journalists behind the Offshore Leaks investigation that Portcullis helps tax evaders hide their money. In the spring, Chong declared that Portcullis strictly adheres to laws and regulations against money laundering and tax evasion, and that it doesn't do business with people who may engage in those activities. He has been silent since then.

Cleaning Up Singapore's Image

Now the Singapore government and the Monetary Authority of Singapore (MAS) are taking a more aggressive approach to improving the city-state's poor image. "There is nothing inherently wrong with opening a trust account," says MAS Managing Director Ravi Menon, when asked about Portcullis. So far, he says, the examination of the Offshore Leaks data has not revealed any wrongdoing. "Our anti-money laundering rules apply to the trust companies as well as to the banks."

Menon likes to portray himself as someone who hunts down tax evaders and those who help them. "It is a serious misperception that there is a large flow of European funds to Asian centers like Singapore," says Menon. Tax attorneys tell a different story, but no one is willing to be quoted. The prestigious consulting firm BCG estimates that 14 percent of the roughly $1 trillion (€740 billion) in offshore assets under management in Singapore and Hong Kong comes from Europe.

In 2009, Singapore endorsed the Organization for Economic Co-operation and Development (OECD) tax standard on the automatic exchange of information and integrated it into all double taxation treaties. Since July 1 of this year, willful tax evasion and tax fraud have been designated predicate offenses for money laundering. In October 2011, the MAS instructed banks to ensure that existing customers were in compliance with the future standards. And last but not least, Singapore is about to conclude an inter-governmental agreement that will facilitate Singapore financial institutions' compliance with the American FATCA law. FATCA would require banks in Singapore to automatically transmit the account data of American citizens to US authorities.

"In principle, we are prepared to enter into a discussion with the European Union over the automatic exchange of information as well," says Menon. "In the long run, this could become the new standard." For Manon, a level playing field and a strict implementation in all major jurisdictions are preconditions for enhanced information exchange. "Singapore is extremely anxious not to come under suspicion, because it depends on its good reputation as a financial center," says Ambassador Viets.

Loopholes for Foreigners

But the new, stricter laws only apply to taxes the city-state collects. Singapore has neither inheritance nor capital gains taxes. This means that someone who manages to evade taxes by moving his or her German inheritance to Singapore will not necessarily be penalized.

The Singaporeans defend their system, always tenaciously and often from behind a charming smile. Take, for example, Yah Fang Chiam, who is responsible for tax policy in the Singapore Ministry of Finance. "We are not a tax shelter," she says. "We have competitive tax rates, because we promote entrepreneurship and want to attract companies to invest here and continue to develop our economy."

The country's effective tax rates are lower than almost anywhere else in the world. The maximum tax rate is a mere 20 percent, and businesses pay a top rate of 17 percent, but there are quite a few exceptions.

And therein lays the contradiction: Singapore wants to be an attractive financial center while preserving its reputation as a corruption-free zone and remaining a level above pure tax shelters, like Nauru. The government under the ruling People's Action Party is relentless when it comes to keeping streets, subways and parks spotlessly clean, but some question whether it is equally diligent about implementing the new laws on money laundering and tax evasion.

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