singapore banks may face outflows of billions of dollars if indonesia floats a tax amnesty 106342201

Singapore’s banks may see a huge outflow of funds to Indonesia if the latter offers a tax amnesty to its citizens to repatriate undisclosed wealth held abroad, says a Reuters report.

According to estimates by the Indonesian government, about $225 billion of such hot money is held with Singapore banks alone, with depositors attracted by the island republic’s low taxes, stable political environment and banks’ strict client privacy.

A large proportion of these funds are alleged to have been transferred out of Indonesia in the aftermath of the Suharto government, and the Indonesian government has been reportedly inspired by a similar amnesty scheme implemented by Italy that successfully recouped billions of euros illegally stashed away in Switzerland. The controversial Italian scheme allowed the repatriation of these monies against the payment of a small penalty.

Though the Indonesian government has not indicated when it would float the amnesty scheme, its authorities are apparently preoccupied with first setting up the legal framework for its implementation. Nevertheless, the mere prospect of the move is alarming enough for Singapore’s banks, with Indonesia said to account for 30 – 50% of their business.

Already, the Singapore government’s pressure on banks to effect stricter checks on their clients has created operational difficulties. Required to examine the origin of their clients' money, the tax status of those funds, any political ramifications, and the reasons behind fund transfers, Singapore banks complain that it takes as much as three months to open a bank account, when previously it would be done in a week.

With secrecy laws in Switzerland under pressure, more and more money is said to be looking for refuge in Southeast Asia.

Last month, the Monetary Authority of Singapore said it had issued nine warnings and reprimands in 2014 to financial entities for failing to properly implement anti-money laundering or counter-financing terrorism measures, according to Asia One. Six banks were slapped with penalties ranging from SG$1,000 to SG$700,000.

The situation is likely to get tighter once the global arrangements for automatic sharing of information between tax authorities takes effect from 2018.

However, according to Reuters, the Singapore finance ministry would insist on signing bilateral agreements with the concerned countries before sharing data provided the countries had a suitably robust legal framework to secure the confidentiality of the information and restrictions for its use strictly for tax purposes only.