By Saeed Azhar and Anshuman Daga

SINGAPORE (Reuters) - Private banks in Singapore are sharing with local police the names of clients embracing an Indonesian tax amnesty, three banking sources told Reuters, a move that could undermine the amnesty and damage the banks' business with their biggest client pool.

Singapore's Commercial Affairs Department (CAD), a police unit that deals with financial crime, told banks last year they must file a suspicious transaction report (STR) whenever a client took part in a tax amnesty scheme, the sources told Reuters.

After initial resistance from the banks, worried they might lose clients, that message was reinforced this year by the Monetary Authority of Singapore (MAS), the country's central bank, when Indonesia launched a tax amnesty aimed at wooing back some of the cash its wealthy citizens have stashed in Singapore, the sources said.

"We are filing the STR and hope others are doing it, too," said one senior private banker when asked about clients responding to the Indonesian amnesty.

"Banks have filed STRs," said another banking source, adding that clients should not be informed about the filing.

After the Reuters story was published, the MAS confirmed in a statement that it has advised banks in Singapore to encourage their clients to use tax amnesty programs to regularize their tax affairs.

"Banks are required to adhere to the Financial Action Task Force (FATF) standard of filing a suspicious transaction report (STR) when handling tax amnesty cases, similar to the practice in other jurisdictions," it said late on Thursday.

The FATF is a global body that conducts regular evaluations of countries' anti-money laundering standards.

The MAS said that participation in a tax amnesty program, in and of itself, would not attract criminal investigation in Singapore. "The expectation for an STR to be filed on account of a client participating in a tax amnesty program should therefore not discourage clients from participation."

Police in Singapore declined to comment.

Singapore, where Indonesians hold an estimated $200 billion in private banking assets - 40 percent of the island's total private banking assets - made tax evasion a money-laundering offence in 2013.

It is toughening up the implementation of the law after an investigation into state-backed fund 1MDB in neighboring Malaysia exposed how some of its banks failed to impose robust controls on suspicious money flows.

The STR requirement on suspected tax crimes is part of that process.

"The moment the client tells you he's participating in the amnesty, you have a suspicion that the assets with you are not compliant, and so you have to report to the authorities," said a senior executive at a Singapore-based wealth manager.

"In light of the toughening regulatory environment, banks need to conduct more proactive checks on the effectiveness of their internal controls and procedures," said Wilson Ang, a partner in the Singapore office of law firm Norton Rose Fulbright.

Reuters spoke to several other senior private bank officials who confirmed the STR filing requirement, but declined to comment further.

Ken Dwijugiasteadi, the head of Indonesia's tax office, said: "I haven't heard of such information, but if true, it is the Singapore's government's matter. It becomes my matter when someone joins the tax amnesty."

EXTRA SCRUTINY

The Singapore police website says it has used STR filings to detect financial crime. That means if there is any evidence of wrongdoing from these filings, authorities can further probe clients or banks.

The fear of such scrutiny could deter Indonesians from considering the amnesty, which runs to March 2017 and has so far had a tepid uptake. The Indonesian tax office said 393 trillion rupiah ($30 billion) of assets had been declared as of Sept. 13, of which at least 30 trillion rupiah were in Singapore.

"I don't think Indonesians there are afraid," said Dwijugiasteadi. "A lot of Indonesians in Singapore have already joined the amnesty."

Bank Indonesia Governor Agus Martowardojo said late on Wednesday the central bank's modeling suggested the amnesty would secure just 11 percent of its targeted revenue this year.

Indonesians are among the biggest investors in Singapore's property market and use banks there to invest in currencies or regional stocks, encouraged by the strong legal framework and security of the Asian financial center.

Many moved money to Singapore after attacks against ethnic Chinese businesses in Indonesia in 1998, when economic problems triggered riots and the fall of the Suharto government.

The increased tax scrutiny in Singapore comes just ahead of the publication of a report on the island nation by the FATF.

One of the FATF guidelines states that a financial institution needs to report suspicious transactions when it suspects or has reasonable grounds to suspect that a client's funds are proceeds of a criminal activity such as tax evasion.

Ong–Ang Ai Boon, director of the Association of Banks in Singapore, said the lobby group had told banks that amnesty programs were a useful tool for individuals to regularize their tax affairs with their local tax authorities.

The association did not comment on the new filing requirements.

"If there's a red flag and we ignore it, that's our problem," the second banking source said. ($1 = 13,190.0000 rupiah)

(Additional reporting by Gayatri Suroyo in JAKARTA and Michelle Price in HONG KONG; Editing by Lisa Jucca, Will Waterman and Alex Richardson)