The Panama Papers leak could hurt S’pore banks. Here’s how

by Ryan Ong

MOST Singaporeans react to the Panama Papers by asking “Oh really, Sherlock? Rich people hide their money?” while mentally classifying you as a new type of idiot, if you attempt to break this news to them.

We have one of the highest income inequality rates in the world, and we can see right into Joe multi-millionaire’s backyard from our two-room flats. We know rich people are held to different standards, because when we walk into a premiere banking branch the teller laughs and explains the toilets are only for customers.

So we can be forgiven for responding to the Panama Papers with a snorting sound at best. But what we should consider is the impact on our finance sector.

Singapore as the soon-to-be world leader in wealth management

Singapore is set to overtake Switzerland in wealth management, by the year 2020. We had $2.3 trillion in Assets Under Management (AUM) in 2014, and our wealth management industry alone holds around $550 billion in AUM. This is about twice as much as Hong Kong’s wealth management industry.

We have over 600 Financial Institutions (FIs), local and foreign, and around 38 offshore banks. Wealth managers in Singapore earn more than their Swiss counterparts: $215,000 to around $550,000 per year, as opposed to the $204,000 to around $500,000 range common in Switzerland. Huh, that might explain the shortage of engineers.

The point: Singapore makes a lot of money from affluent foreigners looking to park their cash here. In some neighbouring countries – which I won’t name for the sake of politeness – the unstable political climate drives them to keep their money here. This could even be considered part of the long-time Singapore plan; it’s one of the main benefits of being a “first world oasis” in a zone of developing countries.

Meanwhile, in Europe, China, and the United States, affluent individuals are growing tired of high taxes and government scrutiny. The current world economy is likely to aggravate this situation: tax hungry governments could press down even harder on the necks of the rich, and grow more stringent in closing tax loopholes. This is also to Singapore’s benefit, as it encourages them to put their assets here.

Maybe you think of the rich as a form of salvation and a pillar of our economy. Maybe you think they’re disgusting Anton Casey types who ought to be doused in Clorox. Either way, one fact remains: they contribute a lot of money to Singapore’s economy.

 

The Panama Papers could slow down our wealth management dreams

In July 2013, Singapore passed laws that hold FIs criminally liable if they shelter tax evaders. Monetary Authority of Singapore (MAS) managing director Ravi Menon has said that:

“Our message to tax criminals is loud and clear: their money is not welcome in Singapore… and our message to our financial institutions is also loud and clear: If you suspect the money is not clean, don’t take it.”

Without delving into the exact laws, which is a topic every bit as fascinating as tracking the growth of individual nose hairs, I’ll summarise the problem:

Our wealth managers now have to become experts at detecting if their clients are lying. Previously, their job was just to dispense advice and facilitate the movement of the money. Now, they’re liable if the money is dirty.

That’s a little like allowing someone to sue the pizza delivery man, if the pizza company used expired ingredients. (Although granted, the delivery guy in this analogy doesn’t earn enough to embarrass a drug dealer.)

This makes wealth management a much more expensive process. Even if a wealth manager is skilled enough to see through the army of accountants and lawyers that rich clients come with (I’d remind you they’re wealth managers, not detectives), the process is time intensive. It will probably also involve several expensive consultations with experts. This takes time away from developing new financial products, or servicing clients.

In addition, the whole point of moving money to a country like Singapore might be to avoid this kind of hassle back home. If Singapore overreacts to the Panama Papers, by imposing a slew of new restrictions, there’s real potential that the money will go elsewhere.

For those of you busy explaining in the comments box that I’m an evil capitalist swine, I’d remind you another pillar of our economy – the oil and gas industry – is already faltering right now. It is not a good time for our finance industry to go down.

 

But it may not be up to us

Will other countries be compelled, by both citizen outrage and a weak global economy, to demand Singapore release banking information?

This has happened before, with the most recent case being the United States demanding that UBS turn over the Singaporean bank records of Mr Ching-Ye Hsiaw. In Singapore, section 47 of the Banking Act provides “that customer information shall not, in any way, be disclosed by a bank (holding a valid banking licence in Singapore or the branches and offices located within Singapore of such a bank incorporated outside Singapore) or its officers to any other person except as expressly provided in the Act”.

If citizens in other countries are infuriated with the Panama Papers, we could see more of such cases as they lean on authorities to chase down tax-dodgers.

This would leave Singapore in a precarious position: We’d be torn between disclosing the information and potentially losing our prominence among the wealthy, or souring political ties.

I should point out that it just takes Singapore giving in to one country for things to roll downhill: If we surrender banking information to the US, for example, it’s just a matter of time before the UK, India, China, Indonesia, etc, start banging on our door, insisting our banks turn over records to them as well.

I’m not taking an ethical stand here – you can decide yourself whether it’s right or wrong for us to conceal banking information, or whether our measures to prevent criminal activity are enough. But outside of those issues, one thing is clear: an overreaction to the Panama Papers could see Singapore banks taking the brunt of the fallout.

 

Featured Image by Sean Chong.

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The post The Panama Papers leak could hurt S’pore banks. Here’s how appeared first on The Middle Ground.

- Ryan Ong