MAS Thematic Review: Adapting to New Governance and AML Realities for VCCs

The Variable Capital Company (VCC) framework cemented Singapore’s position as a premier asset management hub. By March 2025, the city-state saw roughly 1,200 VCCs incorporated, managed by around 600 MAS-regulated financial institutions [1]. But rapid adoption brings regulatory scrutiny. On 26 June 2025, MAS issued Circular IID 04/2025, detailing findings from its 2024 thematic review on VCC governance. The message is blunt. The days of using a VCC as a passive holding vehicle are over.

Mandating Substantive Fund Management

A glaring issue flagged in the review was the rise of 'letterbox' entities. MAS found managers holding illiquid assets for a single investor or related parties with virtually no active management taking place [3]. Repackaging an investor's existing assets into a VCC does not equal fund management. To meet MAS fund governance expectations, managers must show their work—active portfolio construction, ongoing due diligence, and hard risk oversight. VCCs must operate strictly as Collective Investment Schemes (CIS), which means the MAS-regulated manager has to actually operate the property comprising the scheme [16].

For family offices and private funds, this requires a paper trail. Investment committees need minuted records of their decisions to prove substantive activity. MAS also takes a dim view of inactive entities. Dormant or asset-less VCCs are a governance headache; strike them off promptly rather than leaving them to languish on the ACRA registers [17].

Licensing Requirements for VCC Directors

The review also caught critical gaps in director licensing. Statutorily, a VCC must have at least one director who is either a director or a qualified representative of the VCC's manager [14]. Yet, MAS spotted VCCs appointing extra directors to perform regulated activities without the required licensing.

Heading into the MAS thematic review 2026 supervisory cycle, the rule is strict. Any VCC director handling regulated activities must be formally appointed as a licensed representative of the VCC manager [4]. What counts as a regulated activity? Deal-sourcing, investment research, active portfolio management, and trade execution.

Fund managers need to audit their VCC board compositions immediately. If a director steers investment decisions but lacks representative status under the Securities and Futures Act (SFA), the VCC is breaching regulatory expectations. Fixing these board-level gaps is your first line of defense.

Circular IID 04/2025 drops another heavy mandate: asset safeguarding. Following a string of global financial irregularities, MAS has zeroed in on asset commingling and weak independent oversight. The default expectation now is that all assets under management must be subject to independent custody [2].

The Private Equity and Venture Capital Exemption

For liquid and publicly traded assets, the independent custody rule is absolute. But MAS did carve out a narrow exemption. You can bypass independent custody only if the assets are private equity (PE) or venture capital (VC) investments, and only if the fund is offered exclusively to accredited or institutional investors [2].

This carve-out makes sense. Appointing traditional custodians for highly illiquid private market assets—like startup equity or physical infrastructure—is prohibitively expensive and practically difficult. But managers relying on this exemption cannot just default to self-custody and call it a day. You must build internal controls. Think independent valuation committees and tight audit trails to verify asset ownership and prevent misappropriation. For managers of hedge funds, mutual funds, or family offices trading public equities, an independent custodian is non-negotiable.

Maximizing VCC Structural Protections

While independent custody adds operational drag, VCCs offer unique statutory protections that justify the compliance spend. The biggest draw is the legal ring-fencing of sub-funds. Based on the MAS 2024 survey, over 2,695 VCC sub-funds are currently active. Under Section 29 of the Variable Capital Companies Act 2018, assets and liabilities of one sub-fund are strictly isolated from another [19].

If Sub-Fund A takes a massive hit or gets sued, creditors cannot touch the assets safely custodied in Sub-Fund B. This segregation is exactly why institutional investors and multi-family offices feel comfortable pooling capital across distinct risk strategies here.

VCCs also beat traditional private limited companies on capital management flexibility. Standard corporate entities can only pay dividends out of accrued profits. VCCs are legally permitted to pay dividends out of capital [20]. This allows managers to meet regular distribution mandates even during temporary market downturns, assuming the independent custodian and fund administrator have accurately reconciled the net asset value (NAV). Airtight custody isn't just a regulatory box to tick; it's what allows you to actually use the VCC's best financial features.

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Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) is still the top supervisory priority for MAS. Regulators are squeezing illicit financial flows hard, and VCCs are right in the crosshairs. The framework tightened further when amendments to MAS Notice VCC-N01 took effect on 1 July 2025 [7]. These changes force VCC boards to rethink how they handle compliance.

The EFI Mandate and Ultimate Accountability

Under Notice VCC-N01, VCCs must legally appoint an Eligible Financial Institution (EFI)—usually the regulated fund manager—to run AML/CFT checks and customer due diligence (CDD) on investors [5]. Since VCCs rarely have their own employees, outsourcing this is a structural necessity.

Here is the catch that is currently blinding many directors: outsourcing the operational execution of AML checks does not outsource the legal liability. The VCC's board of directors retains ultimate accountability for VCC AML requirements [6]. If your EFI misses a sanctioned individual or fails to unpeel a beneficial ownership layer, MAS holds the VCC board responsible.

To prove active oversight, boards have to drop the 'fire and forget' mindset. Directors must proactively review the EFI’s AML/CFT framework, demand hard compliance reports, and confirm the EFI is actually resourced to handle the VCC's specific investor risk profile.

Operationalizing the Annual Risk Assessment

This accountability centers on the mandatory annual risk assessment. MAS requires VCCs to conduct and document an AML/CFT risk assessment at least once a year, and update it immediately whenever material changes occur [15]. Material changes include onboarding investors from high-risk jurisdictions, pivoting into new asset classes like digital assets, or swapping out key service providers.

The stakes are massive. Under the Financial Services and Markets Act 2022 (FSMA), penalties for severe AML/CFT breaches can hit a staggering S$1 million per offence [18]. For a VCC board, failing to document an annual risk assessment or blindly trusting the EFI's screening protocols is not an administrative slip. It is an existential risk to the fund and a personal liability for the directors. In our experience, commissioning regular, independent audits of the EFI’s screening procedures is the safest way for VCC boards to insulate themselves.

Beyond governance and AML, the economic substance rules for VCCs saw major shifts in early 2025. Fund managers need to quickly realign their operating models to protect their tax-exempt status, making strict Singapore VCC compliance critical.

Tighter Economic Substance for 13O and 13U

Effective 1 January 2025, the Inland Revenue Authority of Singapore (IRAS) and MAS tightened the screws on the popular Section 13O and 13U tax incentive schemes. The Section 13O scheme used to have no minimum Asset Under Management (AUM) at inception. Now, it imposes a strict S$5 million AUM floor in designated investments, tested at the end of each financial year [9].

Headcount and spending rules also jumped. Section 13O now requires a minimum of two investment professionals, and at least one must be a non-family member. This brings it closer to the substance logic of Section 13U, which demands three professionals [10]. Local business spending requirements have moved away from a flat rate, shifting to a tiered system that scales with the fund's AUM [11].

Compounding these hurdles, the VCC Grant Scheme officially closed to new applications on 15 January 2025 [8]. It used to co-fund up to 30% of qualifying incorporation expenses, capped at S$30,000. With over 1,200 VCCs established, MAS decided the framework no longer needs seeding. Fund managers must now absorb the full structuring costs, putting a premium on operational efficiency.

The Strategic Role of the Corporate Secretary

To handle this mix of licensing, AML accountability, and tax substance, VCC boards are leaning heavily on specialized outsourced corporate secretaries. Legally, a qualifying Singapore resident individual must be appointed as the VCC’s corporate secretary within 6 months of incorporation [12].

But in the current regulatory climate, the corporate secretary is no longer just a statutory figurehead. They are the frontline defense. A qualified corporate secretary maintains the VCC's statutory registers—including the critical Register of Registrable Controllers for AML purposes. They ensure timely annual returns are filed with ACRA and track all principal particular changes within the strict statutory timeframes [13].

For international fund managers and family offices setting up in Southeast Asia, partnering with an experienced corporate service provider like NovaLink Advisory ensures governance structures and AML/CFT controls are hardwired from day one. Outsourcing this function lets managers focus on generating portfolio alpha, knowing their VCC structure is clean, compliant, and optimized for Singapore's tax incentives.