Balancing Customer Relationships and Legal Obligations

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1 Balancing Customer Relationships and Legal Obligations Corporate Service Providers Conference 2016 A New Era for Corporate Service Providers Navigating New Waters 31 May 2016 Gary Leonard Low Director, Litigation & Dispute Resolution

2 01 CONTEXT

3 CONTEXT Enhanced Regulatory Framework New Part VIA, Accounting and Corporate Regulatory Authority Act (Cap. 2A)( ACRA Act ) Accounting and Corporate Regulatory Authority (Filing Agents and Qualified Individuals) Regulations 2015 ( Regulations ), First Schedule Part 2 ACRA Guidelines for Registered Filing Agents ( Guidelines ) Internal obligations (establishing internal polices, procedures and controls; record keeping; audit function; compliance management; screening / training of employees) Obligations in relation to customers (customer due diligence (CDD) measures; on-going monitoring) The Accounting and Corporate Regulatory Authority Act (Cap. 2A) ( ACRA Act ) has been amended and a new part VIA 3

4 CONTEXT Examples of CSP s obligations in relation to its customers Identify the customer and agent and record their relevant information Verify the identity of a customer and agent through documents, data, or information obtained from a reliable and independent source Where an agent is involved, obtain documentary evidence of authority to act or a summary of oral instructions given to the agent by the customer Ascertain the purpose and intended nature of the business relationship Identify the beneficial owner (if any) of a customer and verify the beneficial owner s identity 4

5 CONTEXT Examples of CSP s obligations in relation to its customers If the customer is an entity, establish its ownership and control structure, including the identities of directors, controlling shareholders, individuals with ultimate control (25% threshold) Determine if the customer is a PEP and if so, carry out enhanced CDD, including establishing the source of wealth and source of funds Conduct on-going monitoring / scrutiny of transactions throughout the course of the business relationship Mitigation of increased risk when dealing with non-face-to-face customers : telephone contact at a residential / business number that can be independently verified : confirm salary details by checking recent bank statements : certification of identification documents by lawyer/notary 5

6 CONTEXT Penalties for breach Cancel registration of RFA; Suspend registration of RFA for period not exceeding 12 months; Restrict RFA s usage of the electronic transaction system to such extent as the Chief Executive thinks fit; Require the RFA to pay financial penalty not exceeding S$25,000 for each breach; or Censure the RFA. (see Section 28F(13) of the ACRA Act) 6

7 02 CHALLENGES FACED 7

8 Challenges faced New customers unwilling to engage CSP after being inundated by so many requirements Some foreign customers find the process of notarising their identification documents too expensive / burdensome / takes too long Existing customers unwilling to deal with the new requirements CSP s unwillingness to rock the boat Limitation of time for work to be done for customer vs. timetakentofollowupon required due diligence 8

9 Challenges faced Lose the customer (to another CSP willing to close one eye ) or breach your legal obligations? 9

10 03 ACCEPTING A NEW NORM

11 Accepting a New Norm Industry-wide change in mind-set on how CSPs operate with regard to its customers Do not prioritise saving business relationships with customers over adhering to the regulations This will just result in the CSP being in breach of its legal obligations and open to penalties 11

12 Accepting a New Norm If every CSP adheres to the obligations under the ACRA Act and ACRA Regulations 2015 across the board, all customers will be faced with the same CDD process anywhere they go No more CSP shopping These days, virtually all institutions dealing with monies in Singapore are expected to adhere to enhanced CDD regulations The customer will ultimately not be able to escape the processes if they intend to do business in Singapore / transfer funds to a Singaporean entity or bank account, and will have to face it at some point or the other 12

13 Accepting a New Norm As such, your customers need to understand and need to be aware that these CDD processes form a part of their business relationship with the CSP from the outset This is a new norm, not an afterthought 13

14 04 PRACTICAL CONSIDERATIONS 14

15 A. Contractual relationship with customer Your engagement letter with the customer should ideally give you the contractual right to terminate the business relationship should you not be able to complete the necessary CDD measures to your satisfaction 15

16 A. Contractual relationship with customer Mitigating risk of being sued Specify in engagement letter that your engagement and continued services are subject to the completion to your satisfaction of the required checks both prior to and on an on-going basis Appropriately worded clause to protect your position will mitigate your risk of being sued by your customer in the event you need to cease providing services to your customer due to unsatisfactory CDD checks 16

17 A. Contractual relationship with customer The missing or non-responsive customer Incorporate an appropriate clause that allows you to terminate the business relationship in the event your client goes missing or does not respond What happens if the customer owes you monies? 17

18 A. Contractual relationship with customer Recovery of debt A contract between a service provider and a customer should have clauses clearly specifying the fees payable for services rendered and when payment is due A failure to make payment would constitute a breach of contract, for which the service provider can commence legal proceedings to recover the sums due and owing Therefore, incorporate comprehensive payment terms in your contract so that if necessary, you can pursue your legal rights against your customer 18

19 A. Contractual relationship with customer Recovery of debt Small Claims Tribunals:- the sum due and owing is lower than S$10,000 (or up to S$20,000 with the written consent of both parties) Cost-effective : Lawyers not permitted before Small Claims Tribunals Court action Can you refuse to perform services for your customer if he owes you fees? 19

20 B. Adopt appropriate CDD measures You do not have to conduct the same level of CDD for all your customers be discerning Low Risks Simplified CDD, fewer measures for identification and verification of beneficial owners, lower frequency of on-going monitoring Normal Risks Normal CDD, normal measures for identification and verification of beneficial owners, normal frequency of on-going monitoring High Risks Enhanced CDD, additional measures for identification and verification of beneficial owners, higher frequency of on-going monitoring 20

21 C. Dealing with existing customers Are existing customers exempt? Decide when it is appropriate to conduct CDD Conduct risk assessment and prioritize accordingly Examples in paragraph of the Guidelines: substantial change in client s documentation standards; customer is performing a significant transaction; Existing identification information on the customer is inadequate; and change in ownership / constitution of the customer 21

22 C. Dealing with existing customers High risk customer - Complete CDD measures within one year from the implementation of the enhanced regulatory framework [see paragraph of the Guidelines] - Implementation date : 15 May

23 D. Deferment of CDD General rule verification of identity of customer, beneficial owner and agent must be completed before the establishment of a business relationship Exception where it would interrupt the normal conduct of business (for example, if there is urgency to perform a particular transaction for a customer) But must be a low risk case and must complete the CDD as soon as reasonably practicable thereafter [see Paragraph of the Guidelines] Important note ACRA has directed that deferred CDD must be completed within 2 weeks of the establishment of the business relationship and such assessment must be documented 23

24 MAIN CONTACT Gary Low Director, Dispute Resolution Tel: Drew & Napier LLC 10 Collyer Quay, #10-01 Ocean Financial Centre, Singapore D: F: Incorporated with Limited Liability ROC: E Supporting

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