On September 8 the Hong Kong Monetary Authority (“HKMA”) issued a guideline on De-risking and Financial Inclusion (“Guidelines”) addressed to Authorized Institutions, which are defined as banks, restricted license banks or deposit-taking companies.
Over the past few years there has been a tightening of Hong Kong based banks when opening new corporate bank accounts, especially if the companies had foreign shareholders. We were at a stage where most banks would avoid completely opening accounts to newly incorporated companies with foreign shareholders, regardless of their underlying structure and risk.
This issue, which may seem minor at first, was seriously putting at risk Hong Kong’s position as a prime destination for structuring of businesses in Asia, as well as providing holding structures to take advantage of Mainland China’s market.
The incentives on the banks were created by the much needed enhancement to anti-money laundering and terrorist financing regulations taken on the past few years to clearly position Hong Kong as not included as a part of offshore destinations for money laundering, but some unintended consequences were created by such regulations.
The Guidelines targets banks engaged in the process of “de-risking” (which currently is the majority, if not all banks in Hong Kong), defined as the phenomenon of banks declining or discontinuing business relationships with customers or categories of customers to avoid, rather than manage, the risk involved. In other words, to have a strategy of denying a category of new customers (i.e. newly incorporated companies with foreign shareholders) in order to avoid risks instead of managing it.
HKMA’s Guidelines intend to stop practices in Hong Kong that results in financial exclusion, and welcomingly so. Banks should have a risk-based approach (“RBA”) when undertaking its customer due diligence. Banks are thus subject to an extensive body of guidelines and regulations by reference to RBA, which in simple terms may be defined as having proper controls in place to understand the risks to which they may be exposed and take adequate measures to mitigate them (which may include in some cases denying opening of the bank account, but certainly not in all cases).
In annex to the Guidelines, HKMA have added a list of disproportionate reactions to the likely risk presented by a potential customer, all of which have become standard practice in the past few years for newly incorporated companies with foreign shareholders. These include (i) requiring all directors and beneficial owners of an overseas corporate structure to be present at account opening; (ii) requesting a start-up to provide the same degree of detail of its track record as a long established business; (iii) requiring very detailed information on source of wealth irrespective of the risks presented, which may be difficult or impossible to produce; among others.
It has been clear for some time that Hong Kong position as one of the main hubs for business in Asia was being threatened from within due to unforeseen consequences of certain regulations that were not being addressed. A balance must be struck between anti-money laundering regulations and financial inclusion, now it has, and Hong Kong is open for business.