March 26th, 2024 | Sterling

The Critical Role of Due Diligence Checks

In the dynamic landscape of financial markets, due diligence is an important safeguard to ensure economic stability and security.    

This article delves into the crucial aspects of due diligence in financial institutions, exploring its significance, associated costs, the specific context of Singaporean regulations, and how these regulations were applied (or not) in a recent money laundering case. We’ll also explore the cascading changes that extend beyond the banking realm, impacting sectors such as real estate. 

What is due diligence?

Due diligence is a multifaceted investigative process that contributes to responsible and ethical business practices. In a financial context, it refers to the verification of customers, financial transactions, business relationships, and counterparties to assess potential risks and ensure regulatory compliance.  

Why are due diligence checks important?

Financial institutions are entrusted with vast sums of capital, and due diligence is the mechanism that ensures this trust is well-placed. Due diligence checks help to avert a myriad of risks, including:

1. Preventing fraud and other financial crimes

Due diligence safeguards financial institutions from fraudulent activities being conducted through the institution. By scrutinising transactions and counterparties, financial institutions can identify and prevent suspicious activities, such as money laundering or terrorist financing, protecting both the institution and its clients.

2. Regulatory compliance

In an era of heightened regulations, due diligence is instrumental in ensuring compliance with local and international laws. Failure to adhere to these regulations not only exposes financial institutions to legal repercussions but also jeopardises their reputation in an industry where trust is paramount.

3. Risk mitigation

By conducting thorough due diligence, financial institutions can assess and mitigate risks associated with various transactions and business relationships. This risk-centric approach is crucial in maintaining financial stability and protecting the interests of all stakeholders.

What are the costs involved in conducting due diligence?

The costs of due diligence include upfront expenses on technology and personnel as well as increased time spent verifying customers and transactions.    

However, while these initial costs may seem burdensome, they help to avert more significant intangible costs such as reputational damage and loss of trust. The monetary investment in due diligence processes is therefore a mere fraction of the potential losses and damages that can result from inadequate scrutiny.   

Viewed as a long-term investment in financial stability, due diligence is an integral part of a proactive risk management strategy. The upfront costs are overshadowed by the enduring protection it provides against financial crimes, regulatory penalties, and reputational harm.  

Due diligence rules and regulations in Singapore

Singapore places significant emphasis on due diligence to maintain the integrity of its financial system. The Monetary Authority of Singapore (MAS) plays a pivotal role in establishing and enforcing regulations to detect and combat financial crimes. 

The MAS sets particularly high expectations for financial institutions operating in Singapore. As stated by Alvin Tan, Minister and Board Member of the MAS, “financial institutions play a critical gatekeeper role to keep criminals out of our financial system.” 

Mr Tan also described the importance of holding Singaporean financial institutions to strict due diligence requirements – this includes conducting robust due diligence checks on customers to verify their identity and monitoring customer accounts to detect suspicious transactions or activities, especially for higher risk customers.  

Due diligence obligations also extend to Single Family Offices (SFOs) applying for tax incentives. SFOs must open an account with a MAS-regulated financial institution, and prior to onboarding any SFOs, the MAS expects financial institutions to conduct comprehensive due diligence checks. The MAS then further screens all individuals and entities involved in the SFO against databases and other information sources relating to money laundering, terrorism financing, and other adverse news.  

Case study: Unravelling the $1 billion money laundering case   

As a reminder of the critical importance of due diligence, Singapore found itself at the centre of a massive money laundering case in August 2023. The case, which now amounts to over S$2.8 billion worth of assets, has exposed lapses in due diligence procedures, both on the part of financial institutions and regulatory oversight.   

The individuals involved in the case utilised a complex web of financial transactions to launder illicit funds. Inadequate scrutiny allowed the funds to flow through the Singaporean financial system, underscoring the need for enhanced due diligence practices.   

In the aftermath of the scandal, the MAS has tightened regulations and issued guidelines to reinforce due diligence protocols, particularly for SFOs as one or more of the accused persons have been linked to an SFO. The incident has served as a catalyst for a renewed commitment to vigilance and collaboration to prevent similar occurrences. 

Expanding due diligence beyond banking   

The benefit of due diligence extends beyond the traditional boundaries of financial institutions. In Singapore, property agents are also expected to conduct due diligence checks to guard against suspicious deals.   

Due to the interconnectedness of financial transactions, property agents are required to conduct due diligence on clients involved in property transactions. This includes investigating the sources of funds, verifying the identities of buyers and sellers and assessing them against a list of ‘suspicious indicators’ to prevent the real estate sector from becoming a conduit for illicit financial activities. 

As the recent $1 billion money laundering case involved a total of 105 properties valued at S$831 million, there has been further impetus for real estate agents to complete their due diligence obligations with accuracy and thoroughness. 

In the intricate web of financial operations, due diligence has become indispensable. The rigorous checks and balances it imposes are not only a regulatory necessity but a strategic investment in the long-term health of an economy and its stakeholders.   

How can Sterling help your business with due diligence?    

Sterling specialises in conducting due diligence for organisations. Our investigative arm, Sterling Diligence, is a leading corporate due diligence, executive screening, and global investigations firm trusted by Fortune Global 500 companies for over 125 years. We conduct in-depth investigations to help organisations manage risk, protect business interests, and safeguard their reputation.    

Learn more about due diligence or by contacting us here.

This publication is for informational purposes only and nothing contained in it should be construed as legal advice. We expressly disclaim any warranty or responsibility for damages arising out this information. We encourage you to consult with legal counsel regarding your specific needs. We do not undertake any duty to update previously posted materials.