Singapore is set to overtake Switzerland as the world's wealth management center. (Photo credit: Wikipedia)On July 1, 2013 a new law came into force in Singapore, without much fuss or fanfare. All financial institutions are now criminally liable and risk hefty penalties or even closure if they shelter tax cheats.
Singapore wants its private bankers to screen their customers, ensure their money is tax-paid, alert suspicious accounts and send clients packing if guilty.
Clearly, it wants to protect its banks from the kind of fate that brought Switzerland's oldest bank Wegelin & Co to its knees for tax evasion, forcing it to close early this year or UBS that was fined $750 million for tax evasion.
But the question on everyone's mind is how do these new rules tie in with Singapore's ambition to be the wealth management centre of the world?
Everyone knows the basic timber of the rich. They are loaded and they hate paying taxes. It's a 'legitimate' desire. Why would any multi-millionaire or billionaire who made money with his own blood, sweat and tears or even plain good luck, want to give away 50 to 70% of his income to governments and relinquish control on its use? Even the venerable businessman Ingvar Kampard of Ikea, as respectable as they come, fled his home country Sweden 40 years ago for Switzerland to avoid high taxes!
The rich also seek secrecy and hate public glare. In fact, when Singapore embarked on its journey to be the world's wealth management hub, post the Asian financial crisis, it beefed up its account secrecy protections, changed trust laws and opened up its land and residency controls so that the uber rich could come here to 'live, work and play.' So long as there was no drugs or terrorist money involved, Singapore asked few questions. It was much like the doctor-patient or attorney-client confidentiality.
That's how money flowed in from China, India, America, France, Russia and even Switzerland, so much so that Singapore is now the fastest growing wealth centre with $550 billion assets under management, with 75% being from overseas. It is set to outpace Switzerland as the world foremost wealth management center by 2020.
The new rules, however, may change some of that. Sure, money has acquired a dirty color with ponzi schemes, billionaire swindlers, inside traders and governments beset with ballooning deficits are thirsting for the blood of tax evaders.
But bankers are not bandits. The new rules by putting the onus on banks for tax evasion by clients, are putting bankers in the dock. They fear spending more time looking over their shoulders than servicing their clients. Many fear they will spend more time learning compliance and risk management instead of developing new products or services for their clients.
Detecting and deterring illicit activities is also not an easy affair. The rich have always held their wealth in complicated and layered structures with the help of smart accountants, attorneys and counsels for slashing tax bills. Looking for tax-risk indicators, sufficient to set alarm bells or probe into wrongdoing, requires expertise that bankers do not have.
Tax evasion also calls for judgement calls into the intent of the corporate entity or client, reputational risk, the extent of client or his family's involvement and other such qualitative aspects that most bankers say they are not equipped to handle.
Besides, the new rules means an actual increase in operational costs that could affect profitability and erode the already thin margins of private banks here, say the experts.
Not to say, clients would welcome the new rules that put them under the scanner. After all, clients coming from another country to Singapore are doing so to escape the spectre of being haunted and harassed or penalized for their riches in their home country. If they face the same scrutiny, rigmarole of rules and time-consuming procedures with high costs of operation, they would much rather find simpler alternatives elsewhere.
In the world of borderless international banking and technology, the reality is that money flow can shift as quickly out from Singapore as it came from Switzerland, Luxemburg, Bermuda or Jersey in the English Channel. From the Cayman Islands to Virgin Islands to Cooks Island, it is estimated that there are 50 to 60 offshore financial centers between $8 trillion to $ 32 in private global wealth.
Clearly, the line between tax avoidance and tax evasion is very thin and in preaching the morality of money, Singapore is walking a very tight rope.
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