This is the third of a three-part series of articles by training and advisory organisation Temaswiss, based in Singapore, about AML and other challenges for Asia's private banks.

For many reasons, the average high-net-worth (HNW) "prospect" for business at an Asian bank generally does not wish to be serviced as a private banking customer. Perfectly respectable banks in Asia are anxious to service such people, according to Suvendu Ganguli, COO of Temaswiss, Asia’s new domain expertise training, advisory and data sciences think-tank organisation, who answers our questions. This is the third in a series from the author; to view parts one and two, see here and here.

The bank in question has an innocent incentive for accepting a customer who says that he wants to open up an internet garment company for his wife, because the business begins with a large deposit. Banks want to accept deposits because without them they cannot lend.

When a private banking unit does “know your customer” control at the account-opening stage it calls for evidence of the customer's source of wealth; in small-to-medium enterprise banking, no such thing occurs. It is very easy for a savvy HNW tax-evader or money-launderer to demonstrate that the initial funding of the account (a one-off payment, perhaps) comes from his “operating” company or business which really exists. There will not, however, be any serious check on the resources of that company.

There is no regulatory requirement anywhere in Asia for the bank to look at its balance sheet – such a thing would be regarded as extra due diligence or EDD. If it were to be routine in all cases, the cost of it would be ruinous to the banking sector. To make such checks de rigeur would therefore be an impossible task. Taking a risk-based approach to money-laundering, then, the average bank would not even look at the resources of the old company that stood behind the new company.

Is time of the essence in this type of money-laundering?
It can be. Even when monitored transactions or untoward events betray the criminal nature of the account and the entity, and even when the bank sends off a suspicious transaction report or STR, the suspect monies have usually flown. If you have $5 million going to London, it is a good idea to set up eight accounts and wait three or four months to do the first transactions, although you must not wait 6 months, as the account will be designated as “dormant”. When it is time to release the proceeds of crime from the account in a wire transfer, it is probably a good idea not to do so in one massive payment but in stages, over two or three days. A lot of boiler-room transactions are done in this way. Boiler-room money-laundering is the most common subject for STRs in jurisdictions such as Hong Kong, Singapore, Dubai, Jakarta, Mumbai and Manila.

It is small wonder, then, that specialist advisory firms such as the Promontory Group believe that SME banking poses a very high money-laundering risk indeed.

What, then, do banks in the offshore hubs of Asia do to ensure that business sticks to its stated purpose?
The answer is going to take your breath away! Almost no banks have any meaningful processes, let alone software, to detect that an account belonging to a new legal entity (the customer, either an individual or company) has just had a transaction that has nothing to do either with its declared industry, declared nature of business or originally stated reason for the business account. (Transaction monitoring software is a different thing entirely because it it is not designed to do that.)

Against that background, it is worthwhile for a criminal organisation to open the account even if it only wants to perform one middle-sized money-laundering transaction with it, leaving it derelict thereafter.

Would the money-launderer set up different accounts at the same bank?
Probably not. It is possible that the criminal might set up several accounts at the same bank, but then he would have to find a fresh beneficial owner for each one so as to make them appear unconnected. Typically, a mass-market cash management account does not deserve the full attention of a dedicated banker. I have long recommended that, for at least the first few transactions, banks should monitor new legal entity customer accounts (i.e. either small company or a rich human) far more closely than usual. They should question the beneficial owners about any transactions that do not make sense or appear reasonable for their stated purpose and freeze the accounts when plausible answers are not forthcoming.

Illegal money-flows are sometimes planned months, if not years, in advance. Business counterparties and “politically exposed persons” favour the established banking hubs of Asia as secure conduits for “facilitation payments”, kick-backs, bribes and the proceeds of insider-dealing.

Can hidden legal structures help laundrymen bamboozle a bank?
Yes. Let us imagine that I am an Indian PEP and I received $20 in an account in Singapore from a helicopter builder in Italy that is owned by a company in the UK. There is an informal “gentlemen's agreement” between the PEP and the Italian company (perhaps somebody in that company has 'gone rogue' and is bribing the PEP without the knowledge of the top management).

Once the deal goes through, the PEP can touch the money. However, if it does not, the money goes back. This is a common method of illicit payment, done with an escrow account under the control of a lawyer in Labuan or a notary in some village in Malaysia but at the behest of (in this case) the rogue businessman at the Italian firm.

Are any legal entities used apart from bank accounts?
Possibly. It is ironic that the very stability of the offshore jurisdiction's legal system allows such legal structures to act as successful money-laundering conduits. In this instance, even the bank might not know that the account is an escrow account. The lawyer has power of attorney over the account and therefore his signature is required to release the money. The bank (or, at least, its money-laundering reporting officer) would only care if it could see the big picture, but it cannot.

What do you suggest should be done?
Perhaps we should send an open letter to the Financial Action Task Force, the world's anti-money-laundering standard-setter, asking it to compel jurisdictions to regulate company registries, corporate secretariat firms and other 'facilitators' and make them take on their fair share of the compliance burden.

If you sit in the compliance department at the average bank in one of the Asian hubs, you often see the type of laundering we have just described. It might happen two or three times a month, but you can only see it from the perspective of one bank.