By Rachel Armstrong, Saeed Azhar and John O'Callaghan
SINGAPORE (Reuters) - Banks in Singapore are urgently scrutinizing their account holders as an imminent deadline on stricter tax evasion measures forces them to decide whether to send some of their wealthiest clients packing.
The Southeast Asian city-state has grown into the world's fourth-biggest offshore financial center but, with U.S. and European regulators on the hunt for tax cheats, the government is clamping down to forestall the kind of onslaught from foreign authorities that is now hitting Switzerland's banks.
Before July 1, all financial institutions in Singapore must identify accounts they strongly suspect hold proceeds of fraudulent or wilful tax evasion and, where necessary, close them. After that, handling the proceeds of tax crimes will be a criminal offence under changes to the city-state's anti-money laundering law.
"Because of banking secrecy, Singapore used to be an attractive place to put money if you didn't want the authorities back home to know about it," said Erik Wilgenhof Plante, head of compliance at Germany's DZ Privatbank in Singapore.
"That has left legacy problems for some banks."
Singapore officials have said the city-state's secrecy rules were aimed at safeguarding investors' legitimate interest in privacy and did not mean it was a haven for illicit funds. The tighter rules are intended to fall in line with new global standards announced last year that treat tax crimes as a money-laundering offence.
Bankers may now feel compelled to give up some of the lucrative accounts that have fuelled a boom in Singapore's assets under management to more than $1 trillion, with 50 percent growth in the five years to 2011, according to the latest government data.
But as the center for managing wealth in fast-growing Asia, and with more millionaires per capita than any other country, Singapore's pain from the purge is likely to be short-lived and the gains long-lasting.
"Having a more robust framework against illicit money flows is a fillip for Singapore," said Deepak Sharma, chairman of Citi Private Bank Singapore and co-chair of the Private Banking Industry Group. "I think Singapore's size and reputation as a clean and efficient global financial hub will grow."
While banks do not have to check that their clients are fully compliant with all their tax obligations, they must check if there are reasons to suspect the accounts contain the proceeds of serious tax offences such as fraudulent or wilful tax evasion.
Identifying high-risk accounts will be a challenge, although most banks have a red-flag system to help guide them. Examples of red flags include clients who use complex corporate structures to hold their wealth and those who bank almost all of their assets in Singapore when they have no other business or personal interests in the city-state.
Singapore has already faced accusations from politicians in Europe that, as the veil of secrecy over Switzerland is lifted, wealthy tax evaders are shifting their money to Southeast Asia.
It has gone some way to countering that perception by signing close to 40 agreements with other countries about the exchange of tax information in the past three years. In 2009, it moved off the anti-tax avoidance "grey list" of countries kept by the Organisation for Economic Cooperation and Development.
But Singapore's image as an alternative to Switzerland for hiding money was not helped by the case this year of France's former budget minister Jerome Cahuzac, who admitted to having an undeclared foreign bank account last month.
French media reports said Cahuzac transferred a million euros ($1.3 million) from a UBS account to another Swiss bank, Reyl & Cie. That account was then closed in 2010 and its contents sent to a Reyl & Cie account in Singapore where half a million euros still sat.
Clients like Cahuzac will soon become less welcome.
"Many of these accounts have been giving us loads of money over the years," said one European banker, who asked not to be named due to the sensitivity of the topic. "Now we have to decide if we need to terminate that relationship."
Banks in Singapore already have strict controls to guard against handling money from crimes such as drug trafficking and corruption but have never had a legal obligation to report on tax evaders - unlike rival financial centre Hong Kong.
From July 1, banks suspected of abetting tax evasion or having insufficient controls to prevent it can face hefty fines, criminal charges and even the loss of their licences.
The Monetary Authority of Singapore (MAS) has issued guidelines saying banks must identify and review all existing "high-risk" accounts before the deadline and "discontinue the relationship" where appropriate. Banks will have until June 30, 2014, to review their remaining accounts.
Even if banks cannot determine for sure that a client is wilfully trying to flout tax rules, they may opt to close accounts they feel "may potentially bring about reputational risk," said Kwok Wui San, a partner at PriceWaterhouseCoopers.
Many of the major private banks, including UBS AG
OASIS FOR THE RICH
The new measures are part of a delicate balancing act by Singapore, which by 2020 could overtake world leader Switzerland in the volume of offshore assets it manages, research firm WealthInsight forecast last month.
The authorities are keen to ensure the city-state is not seen as a tax haven for the wealthy from Europe, China, Indonesia, Malaysia and elsewhere without dulling its allure as an oasis for the rich, replete with casinos, luxury properties and high-end boutiques and restaurants.
More than 70 percent of Singapore's S$1.34 trillion ($1.08 trillion) in assets under management at the end of 2011 came from overseas, an MAS survey showed.
Singapore sees a cautionary tale in Switzerland, where an image as catering to tax evaders and a zealous drive by cash-strapped Western governments to track down unpaid taxes set the stage for a witch hunt against its banks.
"Because of the exponential growth of the number of private banks in Singapore, the MAS is stepping up and making sure it is ahead of the curve and does not become a haven for illicit money," said Andrew Chow, a partner at local law firm Wong Partnership.
Industry professionals expect the banks to take the effort at ferreting out tax dodgers seriously and to start flagging them to the authorities from July 1.
"As banks trawl through their existing client base, I suspect there will initially be a spike in the number of suspicious transaction reports being filed," said Eric Chan, a partner at law firm Drew and Napier.
New foreign clients may find that banks become far more picky and inquisitive as the change in mindset takes hold.
"The good old times in Singapore are over," said the European banker. "We don't need that dirty money anymore."
($1 = 1.2364 Singapore dollars, 0.7624 euros)
(Additional reporting by Sinead Cruise in LONDON and Martin De Sa'Pinto in ZURICH; Editing by Edmund Klamann)