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Thursday, August 4, 2016, 23:21

Weeding starts for HK's 'bad apples' in banking

By Luo Weiteng
Weeding starts for HK's 'bad apples' in banking
A view of Central in Hong Kong. The vetting account-opening procedures in Hong Kong is a battle calling for joint forces of banks, the banking watchdog and other government authorities. Otherwise, promising companies bruised by the difficulties of getting bank accounts may shun the city and opt for other jurisdictions. (Roy Liu / China Daily)

When Aleksey Kuznetsov traveled almost halfway across the globe to set foot on Hong Kong with suitcases and entrepreneurial ambitions, he had imagined a world of difficulties he might encounter in making his business thrive in the Eastern hemisphere’s international metropolis.

Next, however, came watching his startup business get stranded with a hurdle he had hardly ever thought of – opening a corporate bank account.

Having been rejected by HSBC “for unknown reasons” and told that Oversea-Chinese Banking Corp had no intention of conducting an interview simply because of his Russian citizenship, Kuznetsov pinned his last vestige of hope on guidelines that the city’s de facto central bank would roll out over the coming weeks to smooth the path for Hong Kong bank account applicants like him.

“There was a time roughly 10 years ago when banks in Hong Kong welcomed companies that operated on a virtual basis outside the territory,” says Andy Chen, managing director and head of China at global financial services consulting firm Chappuis Halder & Co. “Yet, those good old days are long gone.”

Under the scrutiny of the Hong Kong Monetary Authority (HKMA), branches and subsidiaries of foreign banks in the city, as well as locally incorporated banks, come under elevated pressure today from more stringent anti-fraud regulations and new compliance requirements.

Amid mounting concern over money laundering, tax evasion and terrorism financing in the past decade, regulatory initiatives around the world have tightened their grip with two major international bodies – the Organization for Economic Co-operation and Development’s (OECD) Tax Co-operation 2010 and the Financial Action Task Force (FATF) blacklist 2012 – to set the bar for an appropriate bank account application, says Chen. Any breach of the rigid regulatory regime could not only invite hefty fines, but also threaten to kick the bank out of the US-dominated banking system – something that compels banks to make the simple act of opening a bank account fraught with difficulties and mountains of paperwork.

“Typically, getting a bank account in Hong Kong nowadays turns out to be a real nightmare for foreign companies and investors,” said Dominic Wu Sze-yin, chairman of Hong Kong-based Asia Financial Risk Think Tank. “It should be pointed out, though, that Hong Kong isn’t alone. Such an issue also applies to other major jurisdictions, including the US and Europe.”

Basically, Hong Kong’s banking sector is still waiting to see whether the upcoming HKMA guidelines could shed light on what makes an appropriate level of compliance, said Wu, who is also a senior risk manager at a US-based bank in Hong Kong.

It may be a “heavy dose of reassurance” that banks are looking for, making it clear how far they should go to meet the compliance requirements. But, at least for the time being, Wu notes, he could hardly expect the banking watchdog’s move to show any sign of easing up on policies.

After all, the specter of headline-making transgression and corresponding costly penalties still haunts the global banking business.

DBS Group Holding, along with the Singapore branches of Standard Chartered and private bank UBS, have become the latest cluster of lenders to get embroiled in scandals over their “lapse and weakness” in anti-money-laundering controls. Singapore’s central bank last month seized US$179 million in assets linked to Malaysian state fund 1MDB-related fund flows for possible money laundering. Last year, France’s largest bank BNP Paribas was sentenced to a five-year probation and a record US$9 billion financial penalty, including a fine of US$140 million, for processing more than US$8 billion in banned transactions between 2002 and 2012 for clients subject to US sanctioned Sudan, Iran and Cuba. The three sanctioned jurisdictions have been or continued to be named by the FATF annual report as high-risk and non-cooperative in the global fight against money laundering and terrorism financing.

The high-profile case made BNP Paribas the first-ever financial institution sentenced based on violating US economic sanctions. It also sounded a warning for banks worldwide to strengthen their internal due diligence requirements.

The lingering compliance concern stands as the sword of Damocles hanging over banks in Hong Kong and other parts of the world. Normally, banks tend to steer clear of companies registered in jurisdictions thought to be dubious. This includes the likes of tax havens Cayman Islands, British Virgin Islands and Panama, all of which, though, have already signed or are on the verge of signing up to OECD’s Common Reporting Standard.

Although registration poses no problem, companies would still be labeled as “unwelcomed” if foreign shareholders exist, especially those from jurisdictions known for fraudulent practices in the past.

Unlike well-known large corporations whose credit records are much more available and which enjoy greater financial power and leverage to be the sought-after revenue contributors for banks, startups and small- and medium-sized enterprises (SMEs), obscure and cash-starved, are much more likely to be given the cold shoulder, notes Charles Ma, consultant at one of the “Big Four” accounting firms.

“The point is it may not be worth risking the ire of regulators by granting accounts to startups and SMEs, many of which struggle to meet the long list of account-opening criteria. The cost of due diligence conducted and corresponding account maintenance could far exceed the money banks can earn from such prospective clients,” Wu adds. “Perhaps, the easiest way to avoid opening accounts to ‘bad apples’ is to open accounts to no one in this group.”

With the juicy business of shell companies – the most widely used vehicles for money laundering – becoming rampant in Hong Kong, asset-light startups and SMEs are reduced to a further unfavorable position. Banks may need extra work to make them go through the KYC (Know Your Customer)-AML (Anti Money-Laundering) process amid the aggravated concern on compliance risk management. “They (banks) just lack the incentive to do such business,” Wu says.

According to HKMA data, out of 166 complaints it received over the past six months, nine were lodged by corporations involved in the opening of bank accounts, compared with 59 for the whole of last year. Such complaints mainly go to one or two international banks among the city’s more than 150 licensed lenders, a HKMA spokesman told China Daily.

According to the spokesman, the authority is negotiating with the local banking industry to review and fine tune its account-opening process. Without compromising the internal compliance requirements, guidelines will be introduced for banks to effectively implement the risk-based approaches and render the basic level of services for every eligible company, regardless of their scale and size.

Wu believes HKMA’s move reflects its long-term commitment to promoting the corporate culture of “treating their consumers fairly” among banks. The banking watchdog launched the Treat Customers Fairly Chart in 2013 as a catalyst for fair treatment of customers at all levels of banks and at all stages of customer relationship.

The initiative also tallies with the buzzword “inclusive finance” – a big trend for making financial service more accessible for both individuals and micro, and small- and medium-sized firms.

As a world-renowned financial center and business-friendly startup hub, Hong Kong has what it takes to create an environment conducive to startups and SMEs, which, in particular, cannot afford to spend an unpredictable amount of time on opening bank accounts and are far more easily to be scared off, Wu notes.

As for banks, however, striking a delicate balance between meeting the compliance requirements and ensuring every customer is treated fairly comes as no easy task, Ma points out. Banking services, by and large, are streamlined and standardized, with a “one-size-fits-all” approach, albeit not encouraged by regulators, applied to most consumers.

Banks are profit-making rather than welfare organizations. It doesn’t make any sense for them to go easier with account openings without solid support from other parties to mitigate the compliance and cost concerns, says Wu.

The government, for instance, may serve as the guarantor for some of the foreign companies it introduced. The growing use of blockchain technology, which stores transaction records across a network, preventing duplication, cutting the risk of fraud and weeding out suspicious transactions, may spell more opportunities for banks to strike the far-reaching balance, Wu said.

All in all, the vetting account-opening procedures – a big drag on the city’s vibrant business scene – is a battle calling for joint forces that no one side could fight alone. Otherwise, promising companies bruised by the difficulties of getting bank accounts in Hong Kong may vote with their feet and migrate to other jurisdictions, Wu warns.
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