MEASURING TEMASEK AGAINST 20 RED FLAGS FOR NEXT WIRECARD CRASH

"Temasek can afford to be contrarian because it has its own balance sheet and can think long term."  .... Ho Ching  

That was Ho Ching in the aftermath of the FTX fiasco and US$275m write off. But Temasek did exactly the opposite of what she said. The FTX decision was made at a time when Sam Bankman-Fried was still a hero. The contrarians were those who raised red flags. Temasek joined the rest, meaning ant-contrarians, blindly getting on what they thought was the gravy train.

I have often mentioned one should refrain from criticising investment decisions with the wisdom of hindsight. Do so on the basis of pre-fact knowledge. In the Wirecard fiasco, one analyst stood out. In early 2019 when investment houses were all still putting out buy orders, Neil Campling, a technology analyst at Swiss financial firm Mirabaud Securities, called the German fintech at 'zero'. Now that's the stuff of contrarian views. 

Wouldn't it be nice to know who is going to be the next Wirecard? After the collapse of Wirecard, Mirabaud Securities posted a check list of red flags to watch out for. Let's do a tongue-in-cheek line up of Temasek against these red flags.

1. Massively promotional CEO who actively looks for publicity and spends a lot of time courting Wall Street/investors etc and is very media savvy.

Yes and No.
Previous CEO - Checked.
Current CEO - No

2. Huge CEO/Senior Management compensation package NOT tied to cash flow or Earnings but just to Sales and/or the stock price, creating the possibility of egregious wealth creation if the stock goes up a lot. Huge pledging of collateral by the CEO in return for margin loans to fund a billionaire lifestyle.

Huge compensation package tied to asset valuation. Egregious wealth creation from unearned income computed in an opaque environment.
No assets collateralised to benefit CEO.

3. Management compensation generally way out of line with peers despite notably less profitability.

Checked.

4. Glossy future projections that have a habit over a long period of being proven to be too optimistic.

Temasek never makes glossy projections. For them the investing environment is always in difficult times. On the other hand, in years of poor performance, their default refuge is always on the 20 year long term ROI. This of course is a 20 year running average ROI which is bolstered by high ROI of earlier years when state assets were transferred to Temasek at cost thus giving it a head start in high profitability. All the benefits of those head start years have by now moved out of the rolling 20 year time frame.  Going forward we are likely to see Temasek heap self-praise on current year performance in a good year and down play a dipping 20 year ROI.

5. Questionable product quality, ie defects (boon??) or debatable technological leads over similar products.

Checked.

As an investor, the portfolio quality is what we are interested in. As investments go, you win some, you loose some. It is the opaque model of Temasek's operation that has Singaporeans capable of independent thinking greatly concerned. The concern is very real when you realise there is no exit strategy for 30% of the portfolio locked in secretive private equities.

6. Some evidence of self certifying, whether it be through strange international subsidiaries or not having an Auditor or experiencing unusual and slightly sudden end of quarter surges in revenues, up to and including the last day.

Checked.
The financial statements are retreating into summarised numbers.

7. Unusual or unverified and large Receivables in a business where the product is exchanged for cash up front.

No.

8. Evidence that the company is existing on a shoestring, not paying Suppliers, Employees, Landlords etc.

Absolutely not. 

9. Unusual margin progression, with SG +A going down over time despite a rising global footprint, or GM's staying flat despite much lower ASP's over time, for instance .

(Explainer : SG+A = Sales, General & Admin expenses, GM= Gross Margin, ASP = Average Sales Price)

Not applicable. 


10. High levels of Gross Debt. Cash balances not matched by notable Interest Income thereby suggesting they are fraudulent.

No.

11. High employee turnover, especially in the LEGAL and FINANCE areas. Co-founders or Board members leaving.

No.

12. Aggressive pursuit via paid third parties and/or “heavies” of any critics or people who have too many questions, which in any case are “boring”.

No lah, in Singapore it's POFMA or libel suits. But there is an army of Internet Brigade that engages in frivolous comments. I don't know if this is a paid and organised force.

13. Dislike of Hedge Funds.

No.

In fact Temasek has placed bets on some hedge funds and has some hedge fund-like vehicles. - 

14. Possible Narcissistic Personality Disorder on the part of the CEO. Additional points if he/she uses Twitter a lot..

Yes and No.
Previous CEO was prolific on Facebook.
Current CEO - No.

15. Large cabal of outcasts/weirdos/bloggers/Twitter groups who have been saying for years that everything is amiss but just get a lot of criticism because the stock keeps going up ergo they must be idiots.

Checked.
The Internet Brigade is well known, fawning at anything written in good light and attacking ... er, contrarian views.

16. Slowing top line growth rate despite all the hoopla and supposed “growth stock” status. Evidence of competitors rapidly eroding unsustainably high market share.

Not applicable.

17. Loss making. Ideally never made a profit but likes to pretend it did or failing that, that it will for sure in 2-3 years due to highly questionable new products. But the 2-3 years gets pushed out constantly,.

No

18. Extensive use/exclusive use of NON-GAAP Accounting and occasional bridging to get from a Net Loss to a (small) Net Profit via poorly explained one-offs/Other Items/unusually large Credits of some kind in a desperate attempt to get into an Index by illicit means.

Of the past 10 years financials I looked at, I think there is only 1 year in which this sort of window dressing happened. 

19. Weak Board, preferably also small and ideally in hock in some way to the CEO, who therefore do his/her bidding. Helps if some of them are related physically to the CEO.

Checked. 
Many non-executive board members are highly esteemed folks. But there exists the inescapable PAP entrenched network. 

20. Gullible media, gullible analysts and dozens of paid bloggers who produce Price Targets out of nowhere based on “Option Value” or put another way products that are at least 5 years away from having any material impact.

Checked.
Not in the sense of producing Price Targets, but never questioning anything.

WHAT ARE THE CHANCES OF TEMASEK BEING 

THE NEXT WIRECARD -- THE VERDICT 

Mirabaud Securities' 20 red flags are actually applicable to operating entities and not for an investment company setting. 

Although some boxes are checked, there is no question a Wirecard type crash can ever occur at Temasek. As Ho Ching said, Temasek has the balance sheet. Size matters. There will certainly be the occasional bumps of investee corporate failures. But there is no guarantee against Prince Jefri Bolkiah type of core family betrayal that caused massive losses in Brunei and Kuwaiti sovereign wealth funds. Public vigilance remains key.

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IS SIMPLYGO A CASE OF PUTTING LIPSTICKS ON A PIG?

SimplyGo has been derided as taking one-step-forward-two-steps-back or a case of fixing something that ain't broke. Some pilloried the government for the inability to come up with a one-payment-card-for-all solution. Is SimplyGo "putting lipsticks on a pig", a term that refers to making superficial or cosmetic changes to a product to make it seem like a new one.

The contentious issues are SimplyGo (a) does not immediately display card balance on MRT fare gates and bus card readers when tapping in and out; (b) cannot be used for motoring (carparks and Electronic Road Pricing gantries). 

I will deal with two areas. One, is on the system. Many have written on this but I have not been able to find one that explains comprehensively. There is much confusion. To this extent can be attributed a failure in change management - the new product have not been sold to the public. Two, and this is what readers expect of this blog - a discussion of some issues no one talks about.

Talking about systems, it is impossible not to hit you with an array of geeky acronyms. With apologies in advance.

Before SimplyGo :

NFC : Near Field Communication - this is a technology that allows an NFC scanner to read data from another NFC device at a very short distance of about 4 inches. New smart mobile phones, smart wearables, EMV cards and other smart cards are NFC enabled. NFC does not require pairing like Bluetooth or passwords like Wifi. Simply hold the device near reader and end-to-end transaction is completed in micro seconds.

RFID : Radio Frequency Identification - this is a technology more or less similar to NFC but the scanner is capable of reading smart cards at much greater distances. This is used in motoring (carparks and ERP.)

TransitLink : Entity owned by train and bus operators SBS, TIBS and SMRT to integrate ticketing of the public transport system and manage ticket sales.

CEPAS : Contactless e-Purse Application - this is a Singapore specification standard owned by Enterprise Singapore. It is adopted in Nets FlashPay and EZlink cards to enable interoperability of transit ticketing and motoring. 

Nets FlashPay : It is a protocol that enables contactless direct debit-credit payments at point of sales Owned by DBS, OCBC and UOB. Nets FlashPay cards are stored-value cards used for motoring and retail stores. By incorporating CEPAS, Nets FlashPay cards can also be used for transit ticketing.

EZlink : It is a protocol that enables contactless direct debit-credit payments at point of sales. Owned by LTA. EZlink cards are stored-value cards used for transit ticketing and retail stores. However, it has very limited merchants. By incorporating CEPAS, EZlink cards can also be used for motoring. 

Concession cards : These are contactless stored-value cards for use on trains and buses.

Tourist Cards : These are contactless time-based cards for free travel on trains and buses for limited number of days.

Standard Tickets : These are single trip cards. High physical infra cost are required and usage had fallen drastically. These tickets were no longer issued by 2021.

Closed Loop : This means the cards are proprietary and cannot be used elsewhere. All the cards in use are closed loop.

Prior to SimplyGo, the Singapore transit ticketing system was legacy card-based system. This is a system that uses stored-value cards. We have long gone past magnetic stripe technology and moved to smart cards. The use of smart cards that hold a microchip allows for NFC contactless technology. It also allows for frontend debit/credit computations, enabling for card value balances to be displayed almost immediately on the train fare gates and bus readers upon entry and exit.

Card-based systems are proprietary systems which are monolithic, with high investments in infra, technical HR, and maintenance. It is also difficult to scale and costly to make changes. The system does not capture data of travel patterns of the public.

After SimplyGo (2019)

SimplyGo : This is an account-based transit ticketing system for train and bus services. It is an SaaS developed and managed by Acclivis Technologies and Solutions for LTA. It is the back-end ICT (information communication technology) infrastructure which uses IBM technologies that cut across IoT, AI, big data, cyber-security and predictive analytics.

SaaS : Software as a Service - it is a software distribution model in which a cloud provider hosts applications and makes them available to end-users over the internet.

Cloud computing : It offers on-demand availability of computer system resources, especially data storage and computing power, without direct active management by the user. Deployment is not location constrained as long as internet is available. Development is modular in contrast to monolithic proprietary systems.

Open Loop : SimplyGo is an "open loop" system which means that it leverages existing open tokens and processes that are not proprietary to the transport network, allowing for the use of credit cards, mobile phones and wearables as contactless devices. 

SimplyGo-EZlink card : This is the EZlink card upgraded for use on SimplyGo. It no longer adopts CEPAS standards.

EMV : This is a technical standard used in payment cards of Europay, Mastercard and Visa. EMV cards are contactless credit cards.

e-Wallets : This is basically an app that contains a file holding your information such as bank account number, pay card number, password, name, etc that allows you to make payments from an account hosted somewhere.

Digital wallets : These are e-wallets that enables you to access your payment account to pay for transactions online.

Mobile wallets : These are e-wallets that enables you to access your payment account to pay for transactions in the physical world.

The Pays : A collective reference to Google Pay, Apple Pay, and Samsung Pay. Some smart phones come with built-in apps that allow you to set up mobile wallets where you set your bank account and/or credit card details. Your mobile phone is the contactless device that you simply hold near the vendor's scanner to make payment. There is no need to key in account numbers, PIN, passwords, etc. The Pays allow you to make payment directly from bank accounts or credit cards.

Concession cards & Tourist Cards : These remain in use.

SimplyGo went live in 2019. It is account-based cards built on cloud computing which also allows contactless credit cards and smart devices like mobile phones and wearables. Currently it runs parallel with card-based NETs Flashpay and EZlink (which includes concession and tourist cards) until these are withdrawn. According to Transport Minister Chee Hong Tat, about 30% of riders have already switched to SimplyGo. (No details are provided, but I suspect majority are those who like to use mobile phones and wearables as their contactless devices.)

Account-based transit ticketing is like a new era for transit operators. We have been told London and Singapore are the only two countries having this. Too bad London beat us to the coveted first spot. Masabi, a US-based SaaS vendor, did a survey with transport agencies which showed 22% of respondents have already deployed account-based transit ticketing systems, 24% will deploy and 24% are at the research stage. I cannot get behind the paywall so I do not know who the respondents are, what are the numbers, and what countries. Is Singapore really number 2 and does it matter?

SimplyGo Back Office at Acclivis

Who developed SimplyGo? Some report name LTA, others say TransitLink. Acclivis Technologies was contracted by LTA to develop and manage SimplyGo. Acclivis is a local company which started out as a software house owned by Singaporeans and has now grown into a formidable SaaS vendor. In 2015 it was acquired by CITIC Telecom, a company listed on the Hongkong Stock Exchange. So now a foreign-owned Singapore company has a product that is most sought after in transit services all over the world. SimplyGo is a cutting edge tech project that will put Singapore on the forefront as a smart city. It's no secret that technology companies receive significant grants and soft loans from Enterprise Singapore, a government agency. Here's to guessing if Acclivis availed of such financial support and how much. 

LTA announced this month the EZlink cards will cease to be used by 1 June 2024. This drew public outcry mainly on the point card balances are no longer displayed on MRT fare turnstiles and bus readers immediately on entry and exit. Official explanation is debit/credit computations are no longer done at frontend equipment but at the back end where the accounts are kept. Technically it can still be displayed but will take a few seconds. This is unacceptable in a heavy traffic and fast moving environment. That is why it was designed not to display. 
 
Mr Chee pointed out the London system too does not have immediate display of card balance. This is a non-sequitur and it's amazing the defensive Minister would attempt to pull this one out.

In light of unexpected public outcry, Mr Chee recently announced a policy flip flop. The 1 June 2024 dateline is off. To accommodate the public's demand for immediate display of card balances, the government will pump in S$40m to be used for hardware replacements and systems maintenance required to extend the use of EZlink and Nets FlashPay cards. There is a pinch of petulance methinks. Much clarification is needed :

(1) What additional hardware is required when existing train fare gates and bus readers are currently used for both card-based (EZlink and NETs FlashPlay cards) and account-based (SimplyGo-EZlink cards). In fact, in it's initial plan, concession and tourist cards would continue after 1 June 2024. These cards display value balances. It means the same hardware will still be in place. It's a discombobulation. 

(2)  The modularity of cloud computing has a huge cost advantage in maintenance. It seems to me to tweak the system to display balance immediately for SimplyGo-EZlink cards is a matter of adding the debit/credit computations at only the frontend module, the way it is currently doing for EZlink cards. This doesn't seem like a S$40m job.

(3) Netizens ask if S$40m is for maintenance and hardware, what is the cost for the whole SimplyGo project? Here I am speculating. There is no investment cost for LTA or transit operators. Acclivis is the SaaS vendor contracted to design and manage SimplyGo. Vendor earns on a pay-as-you-go fee basis, using some formulae such as number of trips, registered riders, etc. It is similar to toll charges where where the government pays nothing for road construction and contractors earn from toll collection. (Singaporeans are not familiar with this as we have no PPP projects).

(4) If project development is free, why the S$40m maintenance cost? The reason is frontend debit/credit computation for SimplyGo-EZlink cards was not in original specifications. You want new functionality, you pay for it. That's basically Mr. Chee's innuendo, as if it's the public's fault. 

(5) So why was the frontend debit/credit computation for SimplyGo-EZlink cards left out in the first place? I suggest 2 reasons. (a) No survey of riders' preferences. (b) Frontend computation was unilaterally considered redundant since same is done at the backend for the accounts. They had London as precedent.

One of the advantage of SaaS account-based system over proprietary card-based system is cost. This is very true of new entrant transit operators. For systems already in operation, the Masabi survey showed ticketing takes up to 10%-20% of operating cost. At this level any significant cost savings on ticketing does not seem to be able to translate to high savings in total operating cost. Cost does not seem to be the driver for change. 

As SimplyGo allows riders to pay fares by credit cards and direct debit to bank accounts, the nature of transit operators has changed to that of merchants. They are now involved in millions of mircro payments per day either through the ACH (automated clearing house) or credit card companies. How much merchants' transactional cost has been passed down to riders in the last few fare increases?  

As mentioned, SimplyGo is a SaaS project, so the financials work as in 'toll gate'. Vendor gets paid on some formula of usage such as number of  trips. The first few years normally carry a higher rate for vendor to recoup development costs. The rate subsequently tapers off. Again, if I am correct here, how much has this been reflected in recent fare increases?

There are several other minor benefits for transit operators and riders which I do not cover here. For example, by using SaaS, transit operators leave ticketing systems to market specialists and focus on running  trains and buses. The major driver for operators seems to be accounts-based system captures vast amount of data of the public's travel patterns. Big data analytics may provide useful information that can assist in policy making.

One casualty of migrating to SimplyGo is NETs whose Flashpay cards will no longer be used as SimplyGo has abandoned CEPAS. There is thus no interoperability between motoring, trains and buses. The reason for this may well be commercial. Everybody wants a slice of the merchants pie. NETs has basically cornered the market. It is possible transit operators see SimplyGo cards an opportunity for a new market to earn some fee income.

Is SimplyGo a step in the right direction? One thing is for sure, businesses must never get left too far behind in technology. As a matter of fact, SaaS is no longer nouveau, and account-based system is gaining ground. The next frontier in transit ticketing systems is MaaS.

MaaS : This stands for Mobility as a Service. It integrates various forms of transport and transport-related services into a single, comprehensive, and on-demand mobility service which offers end-users the added value of accessing mobility through a single application and a single payment channel.

Think of trains, buses, taxis, ride-hailing services, electronic road pricing, carparking, bike-hailing services, all coming under one single platform. That would be a heck of many notches up as a smart city for Singapore - one orgasmic dream for techno-bureaucrats.

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1% GST INCREASE IS A DOUBLE SALAMI ATTACK ON SINGAPOREANS

At a recent Xmas gathering of some old school chums, a friend reminisced about some pranks he did. He told of a certain teacher who used to have him order her fishball noodle from the tuck shop, an old local term for school canteen. The dish came with six fishballs. Enroute with dish to the Teachers' Room, he would pick two fishballs for himself. The teacher was none the wiser. It was an act of sheer teenage fun for a glutton he was not. Do rest assured he is currently not with Grab or other food delivery services.

I am reminded of a story I read in primary school days. A group of rats stole a cake and hid it offsite, intending to keep it for the coming winter. Till then, no one was allowed to touch it. One of the rats could not keep his mind off the cake. He thought to himself he just wanted to see and smell it. So he cooked up a story of wanting to visit a cousin in another part of town. Off he went to visit the cake instead. Over-powered by temptation, he thought a small bite would surely go unnoticed. And so he nibbled. One bite followed another, before he realised it, he had eaten a quarter of the cake. On returning home, folks enquired about his cousin. When asked what's his name, the rat mumbled "Quarter Gone". The next day, the urge was too strong, so the rat went to visit cousin number two. This time the cousin's name was "Half Gone". The third cousin's name was "Three-Quarters Gone". Finally, the fourth cousin's name was "All Gone".

In Godfather III, Michael Corleone wanted to transform the family mafia empire to legitimate business. First order of the day was to buy out a Las Vegas casino from Moe Greene. Michael's reason was Moe was making losses. An incensed Moe asked :"Do you think I'm skimming off the top, Mike?".

To "skim" is to take away something, a little at the time so that it is not noticed. It could be fishballs, a bite of a cake, casino takings, etc. The term "Salami Slicing" was used for acts like these. The term is credited to Hungarian dictator Matyas Rakosi in 1940s, who boasted how his Hungarian Communist Party destroyed opposition Smallholders' Party in a step by step manner he called "szalamitaktika", Hungarian for cutting the salami one thin slice at a time. The term "Salami Slicing" expends the idea of stealing assets stealthily in small amounts to non-assets such as personal information, or inconspicuous actions taken one step at a time towards a major objective. 

In the monetary world, salami slicing is as old as when metal coins appeared in the first millenium. When metals like gold, silver or nickel were used, people clipped tiny bits off the coins. Over time, coins are debased as they lost weight and intrinsic value of the metal became lower than the face value. To counter this, coins were minted with stripe etchings at the rims, which is still practiced today. 

In the nascent stage of computing some 50 years ago, I learnt about the problem of approximation errors. This goes into deep engineering science covering floating rates, differentiation, mantissa and other exotic terms. These topics drove me nuts and I am none the wiser after all these years.

As I understood it in layman terms, the problem is like this. In computing, data needs to be stored in certain field lengths. So sufficient size is allocated for each specific field. Where monetary value is concerned, it had to deal with 2 decimal places to account for the cents. The integers to the left is not a problem since adequate length size can be allowed. But the fractions to the right is set at 2 decimal places with 2 byte lengths to account for the cents. This becomes a problem with certain financial applications like interest and foreign exchange computations which deal with strings of decimal places of undefined lengths. The system has to truncate to 2 decimal places after rounding. But the truncated numbers to the right cannot simply disappear. They are placed in a holding account which statistically move towards levelling out because they can be positive or negative.

Technically, a programmer can code by rounding down the decimals. In a round down the bank looses and customers profit. The programmer routes the credits of the truncated parts to an account he controls. Each is a fraction of a cent, but over thousands of transactions and over time, the balance builds up.

While I have read about this decades ago, I have yet to see a real case event of this quintessential salami attack. Trust Hollywood to present art for real life to follow. "Superman III" has a sub-plot of a quite similar salami attack. Several films carried slight variations of salami attacks, such as in "Hacker" and "Office Space".

Almost all who have written of salami attacks describes one form where small amounts are transferred from many customers to a perpetrators accounts. The amounts are so small customers do not bother or notice. But none can refer to any actual case. They can't. because it cannot be done. These writers have no understanding of accounting processes. Accountants and auditors will tell you entries originate from transactions that come with reference or control numbers. The programmer may code-force the entries through but he has no transaction control numbers. All these entries absent control references will be easily exposed.

Many have written on the topic, from bloggers, serious writers, researchers, to academia, etc. I googled for examples of digital salami attacks and found four commonly quoted ones. But these all came from one single source, Thomas Whiteside in his 1978 book Computer Capers. Not to distract from the blog proper, these cases are described below for those who like to know more. My opinion on these is they are most likely concocted. Firstly, they lack specifics of name, time and place. Secondly, in those days, software development was using lower level generation languages, many were assembly driven, using huge libraries. Development is seldom a one-man show but a big team effort. Thirdly, to install a new or modified corporate system is no simple job. It requires machine shut down, code compilation, testing, authorisation process, before it can be put in live environment. It is difficult to contemplate such a complicated process can byass various operating and control levels.

The only authentic case I know of an insider who redesigned programs to embezzle small amounts at a time was at Taco Bell, Libertytown, Marryland in 1997. Willis Robertson was able to reprogramme his Taco Bell driveup-window cash register - causing it to ring up each $2.99 item internally as a 1-cent item, so that he could pocket $2.98 each time. He amassed $3,600 before he was caught when he bragged about his crime to co-workers. This is a limited scale, relatively simple technically, and all within the control of one man. Absolutely possible.

Many experts have written about the possibility of salami attacks in the Fintech sphere, especially in the ACH (automated clearing house) network. One such opportunity is in the practice of "micro deposits". When you open an online banking account, or wallet, such as Paypal, FX-crypto-stock exchange brokerages, etc, there are links to your banking account for onboarding or withdrawing into fiat money. Or use of some platforms with backend links to ACH, like Simplygo. All these online accounts or platforms may initiate a micro deposit of a few cents up to a couple of $ to your bank account. The purpose is to authenticate your account and test the complicated routing codes are working.

There is a celebrated micro deposit case of USA vs Michael Largent who was indicted in 2008. He opened 58,000 trading accounts with E*Trade and Charles Schwab under various fictitious names. The two brokerage houses sent him a total of US$50,000 in micro deposits. If you are wondering did he break his fingers opening 58,000 online accounts, well it seems he wrote a software to automate account creation. My question is why did the brokerage houses accept trading account names with different bank account names.

I tend to think salami attacks probably occur more outside computer domains. One that I was  personally acquainted was in 1970s. I was part of a team conducting an audit at Far Eastern Bank. When I was working on cheque books and stamp duties, it was narrated to me how an old messenger had embezzled funds. He was tasked to make payments for stamp duties on cheque books. I think at the time it was $15 per book. He would collect from petty cash, pay for lesser number of books each time and pocket the balance. It went undetected for decades. But he was very fortunate the bank was family run and the folks sympathetic to old employees. No police report, just a reprimand. I often wondered, would I have been able to detect that embezzlement.

By now, most readers would have gotten ahead of the blog and understand what GST is all about. In the preceding blog "What the fuss about a mere 1% increase in GST" I showed the math how it translates to a much higher tax revenue than the 1% suggests and how the rounding up profiteering tactic prospers vendors tremendously. So whilst gulping down fishballs may be schoolboy mischief, and quintessential salami attacks in computerised settings are not as prevalent as experts write about, the 1% increase in GST is true blue salami attack, with both IRAS and vendors slicing Singaporeans in broad daylight one purchase at a time. For IRAS it is fiscally legal, for vendors it is just capitalism in progress.

*************************

Extracts from Computer Capers (Thomas Whiteside 1978) :

(a)"The embezzler was evidently using the bank's computer to transfer twenty or thirty cents at a time, at random, from 300 checking accounts at the bank and diverting the money to a dummy account for his own use. The computer criminal was careful never to divert sums from any particular account more often than three times a year. Because a customer was unlikely to notice such a small discrepancy in his monthly bank statement — or, if he did notice it, to find it worth his while to go to the bank and argue over it — the embezzlement was likely to go on and on."

(b)"Two programmers who were employed by a big New York garment firm instructed the company's computer to increase by two cents the amount withheld from their fellow-employees' paychecks each week for federal taxes. They further programmed the computer to direct the two cents per employee per week to their own federal withholding accounts. The result was that at the end of the year they received the money in the form of refund checks from the Internal Revenue Service, which had been acting as an unwitting bagman for the embezzled sums."

(c)"One way in which the computer criminals might employ the salami technique is to round down any sums ending in fractions to the nearest whole number — for example, fractions of pennies as these are computed in interest-bearing accounts. In the meantime, the criminal has established a dummy account at the same bank, and he programs the computer to divert the surplus from the round-downs to this account. Quietly accumulating year in and year out, these fractional sums can mount handsomely, and usually neither the bank nor the depositors know what is going on."

(d)"A programmer working at a mail-order sales company had its computer round down odd cents in the company's sales-commission accounts and channel the round-downs into a dummy sales-commission account he had established under the name of Zwana. He had invented the name Zwana because he knew that the computer processed the company's accounts in alphabetical order, and he could easily program the computer to transfer all the round-downs into the last account in the computing sequence. The system worked perfectly for three years, and then it failed — not because of a logical error on the culprit's part, but because the company, as a public-relations exercise, decided to single out the holders of the first and last sales-commission accounts on its alphabetical list for ceremonial treatment. Thus Zwana was unmasked, and his creator fired."

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WHAT THE FUSS ABOUT A MERE 1% INCREASE IN GST

I am a heavy drinker of coffee. I used to down about 10 to 15 cups a day. The most important routine to kick start my day used to be a cuppa and the morning papers. It was the 30 minute window that I really hate to be disturbed. I am never a coffee connoisseur to talk of Arabica and other fancy names. All I wanted is just the good old kopitiam coffee. It all started for me with the black brew from beans roasted by some local kopitiams. When this disappeared from the market by the 70's, I continued with whatever the kopitiam served. To make up for a deterioration in flavour, I switched from Kopi-O to Kopi with milk. Another lifestyle change was the morning papers which lost relevance in a digital world and disappeared from my breakfast table. Now with another round of price increase, the Kopitiam cuppa may be priced out of my life.

Here's to looking at an anatomy of GST through my favourite cuppa.

WHERE COFFEE SHOP IS GST-REGISTERED

(A) Before increase in GST (Assume supply chain is GST-registered)

	S$
1.	1.000	Cost Price
2.	0.080	Input tax @ 8%
3.	1.080	Gross Purchase
4.	1.296	Sales Price
5.	0.104	Output tax @ 8%
6.	1.400	Gross Sales
7.	1.296	Sales Price
8.	1.000	Cost of Sales
9.	0.296	Value Added
10.	0.024	GST @ 8%
11.	0.104	Output tax
12.	0.080	Input tax
13.	0.024	GST payable

Suppose the cost for a cup of coffee is $1.00. The coffee shop would have paid GST of $0.08. As it is not the final consumer, the $0.08 is recoverable as input tax.

Suppose a cuppa is priced at $1.296, add GST of $0.104 and end consumer pays at gross of $1.40. Consumer bears  the full GST.

GST is a value added tax. The coffee shop has added value of $0.296 (gross profit).  It is responsible for the tax on the value added --  $0.296 x 8% =  $0.24. 

The coffee shop collects $0.104 sales tax from consumer on behalf of government but recovers $0.08  output tax it has paid. The net GST payable is only $0.024. ( The balance of $0.08 of GST is paid to the government by the coffee shop's supply chain).

(B) Increase in GST (Assume supply chain is GST-registered)

	S$
1.	1.000	Cost Price
2.	0.090	Input tax @ 9%
3.	1.090	Gross Purchase
4.	1.296	Sales Price
5.	0.117	Output tax @ 9%
6.	1.413	Gross Sales
7.	1.296	Sales Price
8.	1.000	Cost of sales
9.	0.296	Value Added
10.	0.027	GST @ 9%
11.	0.117	Output tax
12.	0.090	Input tax
13.	0.027	GST payable

GST has now increased  by 1% to 9%. Suppose the entire supply chain adds 1% increase accordingly. A cupa now costs $1.413 (net sales $1.296 + 9%). 

For the coffee shop, its value added (profit) remains unchanged. But it now collects 9% tax of $0.27 from consumer on behalf of government.

For the government, a 1% increase in GST from 8% to 9% means an additional 12.5% ($0.117-$0.104) tax revenue. 

For consumers, it means an increase of about 1% ($1.413-$1.40) 


(C) Impact of rounding up prices in an increase in GST

	S$
1.	1.000	Cost Price
2.	0.090	Input tax @ 9%
3.	1.090	Gross Purchase
4.	1.376	Sales Price
5.	0.124	Output tax @ 9%
6.	1.500	Gross Sales
7.	1.376	Sales Price
8.	1.000	Cost of Sales
9.	0.376	Value Added
10.	0.034	GST @ 9%
11.	0.124	Output tax
12.	0.090	Input tax
13.	0.034	GST payable

For products priced by the unit, it is cumbersome to deal in small fractions. 1 and 5 cent denominations have fallen out of use. Vendors simply fix prices rounded up to nearest 10 cents inclusive of GST.

In this example, the cuppa would not be priced at $1.413 (gross) but rounded up to $1.50.

At this new price, Coffee shop's gross margin, or value added, increased by $0.08 ($1.376 - $1.296). This is a profiteering of 6.2% on the back of a 1% increase in GST.

For the government, a 1% increase in GST from 8% to 9% and vendor price rounding up means a whooping additional 19.2% ($0.124-$0.104) tax revenue. 

For consumers, a 1% increase in GST means an additional cost of  $0.10 ($1.50-$1.40) or 7%.


WHERE COFFEE SHOP IS NOT GST-REGISTERED

(D) Before increase in GST (Assume supply chain is GST-registered)

	S$
1.	1.000	Cost Price
2.	0.080	Input tax @ 8%
3.	1.080	Gross Purchase
4.	1.400	Sales Price
5.	1.080	Cost of Sales
6.	0.320	Value Added

When coffee shop is not GST-registered, then it is the end consumer of whatever it purchases. The input tax becomes a cost of their business. It does not collect any GST on behalf of the government.

Overall the government collects less revenue because  the last leg of the supply chain does not attract GST.

Consumers do not pay GST. But it makes no difference. Consumers simply pay whatever the coffee shop charges. Just a point to note. When a non GST-registered vendor advertises that it absorbs the GST for you, it is a fallacy. There is no such thing.

(E) Increase in GST (Assume supply chain is GST-registered)

	S$
1.	1.000	Cost Price
2.	0.090	Input tax @ 9%
3.	1.090	Gross Purchase
4.	1.400	Sales Price
5.	1.090	Cost of Sales
6.	0.310	Value Added

If coffee shop does not respond to GST increase, its value added or gross profit decreases because the increase in GST by its suppliers has increased the cost of sales.

It makes no difference to government since the coffee shop does not collect GST.

It makes no difference to consumers since they do not pay GST.

(F) Impact of rounding up prices (Assume supply chain is GST-registered)0.

	S$
1.	1.000	Cost Price
2.	0.090	Input tax @ 9%
3.	1.090	Gross Purchase
4.	1.500	Sales Price
5.	1.090	Cost of Sales
6.	0.410	Value Added

Coffee shop increases sales price by a rounded up $0.10 and profit improves by $0.090 ($0.410 - $0.320) or profiteering by a hefty 28.2%.


Conclusion:

An increase of GST from 7% to 8% in 2023 and from 8% to 9% this year provides IRAS substantial revenue upticks from numerous goods and services of 14.3 % and 12.5% respectively making a total of 26.8%. Computation (C) shows that price rounding up by vendors can increase GST revenue by a much higher rate. For the 2% increase in GST over 2023/24 revenue could be as high as 30% - 40% in many cases.

A 1% increase in GST on essential goods is not a very big problem for consumers, see Computation (B). It is the price rounding that presents a serious challenge. This is practically the situation for all lower priced goods. Computation (C) shows price rounding up for a cup of coffee increases the cost to consumers by a significant 7%.

Vendors may not be wilfully profiteering from hefty price increases. However, the rounding up of prices for low cost items in response to a small 1% adjustment for GST results in very high margins. These works out extremely well for supermarket and retail store chains as well as F&B operators including hawker stalls.

The rounding up of prices is extremely profitable for non GST-registered vendors as shown in Computation (E). Many retail stores and hawkers are in this category.

GST is a regressive tax. The lower income earners suffer a higher burden relative to income. 

The government narrative is increased GST revenue is necessarily in order to meet rising health care cost for an ageing population. This is understandable. But the demographic situation did not happen overnight. Where we are now, and in the short term future, has been projected, studied and planned for, decades ago. What happened? Why did we run out of resources?

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WHAT HAPPENS WHEN A SINGAPORE BANK'S HEAD OFFICE COUNTRY IS INVADED

2 Aug 1990 Iraqi Army invaded Kuwait

Back in mid 1990 I was at a training course for Civil Defence reservist manpower officers. It coincided with a dinner the Civil Defence hosted for foreign defence attaches who had attended some displays put up by the camp. That event had nothing to do with my group but the organisers decided to volunteer us not as escorts, but simply to fill up the seats at the dinner table  amongst the guests. The reason as explained to us was their reluctance to use the camp's junior officer cohort of mostly 19 or 20 year old kids who would be totally out of place with these extremely senior defence attaches. We were actually a group of pathetic low ranking reservist lieutenants but a motley crew of C-suites and business owners.  Egos aside, we were there simply to help 'save face' for Singapore Inc..

On that Tuesday evening, we were spread out over various dining tables. I had an Admiral from the Indian Navy on my right. In the course of the evening's conversation he learnt I worked for the local branch of a Kuwaiti bank. Whereupon he inquired of my opinion on  the million dollar question of Middle East geopolitics at the time - whether Saddam Hussein would invade Kuwait. Working for a Kuwaiti bank didn't make me an expert on the Middle East, but as opinions are free, I told him I thought no, on grounds that Kuwait was a benefactor to Iraq during their war with Iran. Kuwait had extended US$13b to Iraq in their war effort. Well as everybody knows, the next day Wednesday 2 Aug 1990, Iraq invaded Kuwait.

What happens to a branch office of a bank when its Head Office country has fallen? All commercial entities will try to operate as going concerns until the occupation is resolved. In this, banks face tremendous unique challenges.  

First, all counterparty trading lines will no longer be available as everyone in the market pulls the rug. This means the front office cannot manage the market risks.

Second,  the bank's accounts in countries all over the world will be frozen, which means it looses the ability to receive or move money either for itself, customers or depositors. Fortunately, war is a 'force majeure' event that frustrates contracts so there is no issue of the bank being sued for non-performance.

Third, the bank's books contain thousands of transactions with various value or maturity dates. While the bank cannot make any settlement as each value date arrives, the system continues to churn out transactions that matured each day. An analogy of the situation is a massive pile up at an escalator.

Each day, hundreds of foreign exchange deals, options, futures, repos, money market deposits, etc, mature. Since they cannot be settled, what needs to be done and how are the maturing entries to be?

This is an insider story of what happened to a Singapore branch when Kuwait was over run by Iraq, a story you never hear anywhere else..

The first few days went relatively well as the markets have not yet reacted to the situation. As soon as central banks worldwide started shutting us down and banks cancelled counterparty lines, the escalator started piling up and chaos ensued. Our correspondent bank accounts all over the world were suspended and it became impossible for us to pay or receive in any currency.  The bank's computerised system continued to auto-route all maturing transaction settlement entries to pre-coded correspondent bank accounts and the back office, which was one of my responsibilities, had to amend all instructions to divert to suspend accounts pending resolution.

A good fortune was shortly after the invasion, some executives managed to escape Iraq-occupied Kuwait and smuggled out the Head Office's database files to our London branch. I was not privy to the details so I'm guessing it was either some smart spur of the moment act or a Plan B put in place months earlier when Saddam Hussein was postering his offensive moves. This incident serves to illustrate it is critical to maintain cloud-based back-up, or off-site contingency files. The government of Kuwait had a citizenship database back-up in a foreign location which greatly facilitated their reconstruction after they regained sovereignty. 

Another fortunate coincidence was our Singapore Treasury Manager was on home leave in Ireland at the time. He made his way to our London branch office from where he coordinated with Singapore front office to unravel the jam. We sent over whatever data that was necessary to him on a daily basis. I cannot recall whether we had prior clearance from Monetary Authority of Singapore to release information to London. The Banking Secrecy Act is touchy on the release of deanonymised data to outside parties. Although not specified in the Act, the MAS takes a very restrictive view of such matters even in information sharing between branch and head offices. A practice had evolved that deanonymised data of depositors is strictly forbidden, and this includes interbank deposits received. The situation required of us to submit all data to London. I like to think we did obtain MAS clearance. . 

Our London office was thus able to function as sort of Head Office in exile. This was a crucial factor in  our favour. In banking, all branches operate as independent entities within specified parameters. With London as de facto Head Office, the bank was able to work with various counter-parties on a consolidated basis making it easier to resolve the entanglements under the circumstances, and more opportunities for netting off transactions. 

We were also fortunate to have UBS taking a long term credit view on the bank and continued to extend us some trading lines. The fact our bank was one of the best run banks in the Middle East must have weighed heavily in UBS' assessment.

Just like the escalator pile up, our unsettled deals caused receipts and payments to pile up. The solution was for all receipts and payments, whether from foreign exchange trades, money market, and others, that fell due and could not be delivered, to be taken up in the books as term deposits with or from each other.  This was a temporary arrangement till the conflict is resolved. In the meantime, pretty much all counter-parties must have found their trading and credit limits with us breached many times over, as we of them.  Forward deals afforded more leeway, so where it suits our books, a position could be squared off with a matching deal in the opposite direction. Basically, it was more or less an exercise in restructuring, netting, squaring positions and rollover. New transactions had to be written but it in no way represented any new trading activities or commitment. However, technically, our books reflected a transactional volume increase.

Very surprisingly, of all parties, we faced some difficulties with the MAS. We were called up for some meetings with the central bank, as were other banks from the UAE. Quite rightly so as the supervising authority, MAS needed to be in front of the curve. Myself, my American branch General Manager, and another senior expat manager, attended those meetings. Seating across the table were a young female executive who apparently had our bank under her portfolio of reporting responsibility, and chief of the International Dept, someone known in the market as the Dragon Lady. And yes, the lady breathes out fire. 

In the previous administration of Wong Park Shiong and Elizabeth Sam, I am certain we would have met with a more sympathetic reception, one that would have wanted to know how we were faring, what our difficulties were, how do we resolve them and was there anything the central bank can assist with. Instead, we entered the dragon's lair and got interrogated much like we were criminals with potential to unleash some financial fireworks in Singapore. We could not comprehend the Dragon Lady vetting a collection of our cleared cheques on the table. Basically, we operate only in the ACU (Asian Currency Unit). Not being a member of the Singapore Clearing House, we maintained a S$ current account with UOB. The S$ cheques we drew on this account was for purely administrative purposes to pay for overheads like electricity bills, stationeries, rent, coffee, etc. Whilst our wholesale banking transactions were in tens of millions of US$ each, she was scrutinising our S$50 cheque to a friendly stationery shop. What started off by the Federal Reserve, and soon followed by other central banks, to disallow payments by our bank, turned out to have the effect of a sanction on us. The purpose of it was actually to protect Kuwaitis, our depositors and our bank from unauthorised disbursement of funds as the country had been overrun. This was a danger that did not exist in the Singapore jurisdiction. It was very clear to us the Dragon Lady had no idea of her role in the meeting.

The regulator's naivete of banking operations became all apparent when she pointed out our foreign exchange volume had in fact increased. It was exasperating since there was no order nor regulation that barred us from writing any new deals. I withheld my urge to challenge her the legality. She had no idea of the escalator chaos effect nor the resolution necessitated writing new transactions. Instead I explained that increased FX transactions was a way to square out forward positions. The Dragon Lady's reaction was one for history books. She turned to her young executive and addressed us, her words still fresh in my memory. "Our Miss Tan here is a qualified accountant. She can tell you if you squared a deal the transactions cancel out.  The outstanding  foreign exchange balances should be reduced, not increased". This is typical impasse of administrators who think they know better than practitioners. She had no understanding interbank foreign exchange is an OTC (over the counter) market with deliveries. In any case, gains and losses will be realised on the forward date. A squared position may be canceled out (subject to a difference being FX gains or loss) but the two transactions remain in the system till value date. Her comment was a call out on my professionalism and I was about to blast out my response when I received a kick under the table. My relationship manager sitting next to me must have felt the temperature rising. The kick was his way of telling me not to bother with a supercilious regulator.

We had three meaningless meetings with the Dragon Lady. As a Singaporean, I was terribly embarrassed in the company of my foreign managers at the disgusting display of ineptitude from MAS senior representative. In the minds of my foreign managers, MAS must have suffered a huge reputational damage. I can imagine how these two gentlemen will laugh at cocktail rounds when they narrate their personal experience with the MAS.

The nightmare ended when the US led coalition forces drove the Iraqis out of Kuwait in Gulf War I by February 1991. Our bank came out of the war relatively unscathed with reputation intact.

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