Hong Kong is needlessly inviting trouble – and dirty money. That would be the most obvious interpretation of the recent tweaks in the financial center’s anti-money-laundering guidelines.
Banks, insurers and other institutions are being told by the Hong Kong Monetary Authority, the Securities and Futures Commission and other regulators that they don’t need to collect documentary evidence of customers’ addresses and make efforts to verify them: Pinning down the beneficial owners of a shell corporation to a permanent address somewhere won’t be necessary.
The existing guidelines, laid out as part of “customer due diligence,” will be formally amended next year, though if HSBC Holdings Plc wants, it can go ahead and shred the tenancy agreement it took from me while opening my bank account: it won’t be breaking any rules.
It’s definitely costly for banks to verify addresses – or to be on the regulatory hook for doing so. In September 2016, Hong Kong wrote to banks saying it didn’t expect a “zero failure” regime in which institutions tightened the screws so much that they turned away legitimate businesses. The thinking goes, perhaps, that it’s more sensible for banks to expend efforts on catching and reporting suspicious transactions than worrying about who might actually be the ultimate beneficiary of the money parked with them. That philosophy is probably the motivation behind the changes announced Wednesday.
Still, an eyebrow or two is bound to be raised. For one thing, the rules are being relaxed embarrassingly soon after the discovery of a major transnational crime in which billions of dollars were allegedly stolen from a Malaysian sovereign wealth fund and laundered around the world.
The 1MDB saga wasn’t only about suspicious transactions, though there was a shocking number of them. The scandal was also about banks’ willingness to take on board dubious customers. After all, Standard Chartered Plc did allow a Malaysian customer to open an account in Singapore in the name of Blackstone Asia Real Estate Partners, when this shell firm had nothing to do with Blackstone Group LP or its affiliate Blackstone Real Estate.
The timing of the move is off in another respect. Capital outflows from China may have abated for now, but the threat of mainland money swamping Hong Kong’s asset markets and financial system is ever-present. Meanwhile, an equity trading link between the Hong Kong bourse and exchanges in Shanghai and Shenzhen has made illegal round-tripping of mainland Chinese money easier.
By the middle of next year, Hong Kong will put in place an investor ID system to get a better grip on who’s trading stocks in the People’s Republic from the former British colony. Given those priorities, it makes little sense to relax “know your customer” – or KYC – rules in the city’s banking system.
If the idea is to boost competitiveness, Hong Kong need only draw a leaf from its arch-rival’s playbook. Singapore, badly bruised by the 1MDB episode, is building a common KYC platform. Banks and fintech players can share it to cut down the cost of customer due diligence. That’s probably a better route to go down than scrapping address verification. Andy Mukherjee, Bloomberg
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