Hong Kong Warns Banks on Heavy-Handed Customer Due Diligence

  • HKMA urges differentiated risk-based approach to accounts
  • Banks stepping up compliance to meet regulatory requirements

The Hong Kong Monetary Authority has warned banks that applying disproportionately stringent due diligence on customer accounts risks excluding legitimate businesses from basic financial services.

The city’s de facto central bank urged lenders to adopt an approach that differentiates the risk of individual customers through factors such as country, business or product risk, rather than take a “one-size-fits-all” approach, it said in a statement on Thursday. The HKMA said it will work with banks to implement consistent anti-money laundering and counter-terrorist financing requirements to ensure legitimate businesses aren’t excluded.

Still, “financial exclusion isn’t common in Hong Kong,” HKMA Deputy Chief Executive Arthur Yuen said at a media briefing. “There are only one or two individual banks that have a lower than average success rate in opening accounts.”

The HKMA’s comments come amid increasing debate over difficulties individual and corporate customers are facing opening and retaining accounts, at a time when banks are stepping up compliance efforts to meet regulatory requirements. Billions of dollars of fines handed down by regulators around the world have put lenders under pressure to monitor customer accounts more closely for possible financial crimes such as money laundering and terrorist financing.

High Cost

“Part of the problem is that the new regulatory environment coming from the U.S. and Europe has made it very costly for banks to do due diligence with customers,” Richard Vuylsteke, president of the American Chamber of Commerce in Hong Kong, said by phone. “Some of the banks don’t want to do that as the cost of risk assessment is now very high.”

Banks have been closing customer accounts for about a year, with the hardest-hit segments being small and medium-sized enterprises and startups, Vuylsteke said. His organization was among 29 international chambers of commerce that raised the issue at a mid-year meeting with the HKMA, he said.

The authority is working with the banking industry and international standard setting bodies to reduce some of the burden of complying with anti-money laundering and counter-terrorist financing requirements through innovation and technology, the HKMA said in its statement. It didn’t provide specifics.

No Explanation

Gareth Hewett, a Hong Kong-based spokesman for HSBC Holdings Plc, said the bank welcomed the HKMA’s guidelines and will study them further. “We share the Authority’s commitment to ensuring that SMEs in Hong Kong have ready access to banking services,” Hewett said.

In one example of a recent account closure, a global trust company that had been a long-time client of HSBC was suddenly notified by the bank last year that all its main operational accounts held with the lender had been shut, the SCMP reported, without naming the firm.

No explanation was given, the newspaper said. The SCMP cited the trust company’s head, which it also didn’t name, as saying that the closure may have been related to HSBC’s desire to break from any offshore businesses to avoid being accused of assisting tax evasion.

HSBC was unable to comment on individual cases, Hewett said in a separate e-mail before the HKMA statement was released, citing customer confidentiality.

“We take each case seriously and we rigorously review complaints,” he said. “For all account opening applications, it is important for us to understand the business’s purpose in establishing an account in Hong Kong.”

HSBC, which gets most of its profit in Asia, said in its interim report total expenditure on regulatory programs and compliance increased 14 percent to $1.5 billion from a year earlier. The lender has been striving to bring misconduct costs and litigation to an end by boosting its compliance work after it agreed to pay $1.9 billion to U.S. authorities as part of a deferred prosecution agreement over money laundering allegations in 2012.

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