It is not a question that the global financial system has been subjected to strengthened banking supervision and standards since the financial crisis in 2008, in addition to “strenuous” efforts made to combat money laundering and terrorist financing. At the same time, banks have also become “overly cautious” taking their duty of due diligence and compliance to the extreme following a series of government sanctions and heavy fines.
Here is the bad news: it has become almost impossible to seek such basic banking service as opening an account. Some potential customers are asked “cumbersome questions” while others are made to submit “hard-to-trace old documents.” And Hong Kong is no exception. It is somewhat ironic given the city’s tradition of financial inclusion and ease of doing business as one of the world’s leading financial centers with a large concentration of international as well as local banks.
The business community, mostly chambers of commerce, overseas companies and start-ups, has been very vocal in voicing the concern of difficulties in opening bank accounts in Hong Kong.
Even existing bank account holders have been asked to provide a lot of information and supporting documents, and are facing the risk of having their accounts closed. Unquestionably, there are cases where it is necessary. But there is absolutely no need to do so excessively with a “one-size-fits-all” approach.
What are we talking about here? We are talking about stringent measures like asking for the physical presence of all the directors and shareholders of overseas corporates in Hong Kong as a pre-requisite for handling their account-opening applications. We are talking about bank requirements like asking their customers to provide a large volume of old information in detail on sources of assets when handling relatively low-risk accounts such as Hong Kong’s very own Mandatory Provident Fund (MPF) and other small-balance accounts.
What’s more worrisome is the impact – a very large impact – on small- and medium-sized enterprises (SMEs) looking to do business in Hong Kong. It doesn’t matter if you are a long-time local resident or an expat because you are still subject to some very stringent requirements which may harm legal and legitimate business establishments. In fact, Hong Kong Monetary Authority (HKMA) has found “the approach adopted by banks to be disproportionate to the risk level of the customers and not in line with the spirit of financial inclusion.”
There is some good news: HKMA has approached banks to understand their processes of account opening and customer due diligence (CDD), and has issued a circular to all banks in Hong Kong noting how the HKMA’s “risk-based” supervisory principle should be applied to account-opening applications and CDD measures for existing customers. And banks are expected to “review their existing measures and adjust them where appropriate for achieving financial inclusion.”
HKMA emphasizes that “when conducting risk assessment, banks should differentiate the risk levels of individual customers in accordance with their backgrounds and circumstances, and apply risk-mitigating and CDD measures proportionately, rather than simply adopting a one-size-fits-all approach by applying a single standard of requirements and procedures to all customers.” And it has been made clear that the “risk-based” approach does not require a “zero failure” outcome.
The key here is, as noted by HKMA, that Hong Kong as one of the world’s most important financial centers is able to implement effectively essential measures for the purpose of anti-money laundering and counter-terrorist financing in the banking system while maintaining a sufficient level of banking services that is critically important to international business and commerce. Another is to make sure that there are no material failings in those systems.
Indeed, banking services are very much “a part of daily life as the basic necessities of food, clothing, housing and transport.” While banks are business entities and have to answer to shareholders on profitability, there is also the issue of sustainability and social responsibility. Without a flow of new and existing customers, business is bound to shrink. Banks are also entrusted with the duty of providing a place for savings, facilitating market liquidity and so forth. It is the only way an economy can move forward.
This is not so much about having to strike a delicate balance of any sort; it is about being very strategic and smart about a screening process which can prioritize different risk levels. Yes, it will require more work, and it will cost more over the short term. But it will pay for itself over the long term because it is good for business and because the regulatory environment isn’t going to change any time soon. Financial exclusion should not be synonymous with the world’s freest economy that is Hong Kong.