New tax checks to stretch Hong Kong bank compliance teams

As part of a push to control money laundering in the global banking system, the HKMA has called on lenders to peek into customers’ filings, reports the South China Morning Post.

Banks in Hong Kong are calculating just how much tax expertise they will need to add over the coming year as the regulator puts them on the hook for the tax infringements of their clients.

As part of a push to control money laundering in the global banking system, the Hong Kong Monetary Authority has called on banks to peek into customers’ tax filings to make sure they have paid their dues.

A new guidance paper from the HKMA, a signal on hard regulation to come, says banks will need to heighten the now-standard money laundering checks they run on new customers to check for irregularities in tax reporting.

Banks will also have to launch reviews into the businesses and transactions of current clients. That means opening their books to suss out past infringements that will help them appraise the level of risk associated with the customer. It even puts pressure on banks to flag any tax fraud suspected of local clients in other jurisdictions.

The new rules are a pricey proposition for banks already overwhelmed by the rising cost of compliance globally. Along with similar regulation issued last year by Singapore, experts say Hong Kong is leading the way for financial compliance rules that have in the past been formulated largely in the West.

“Lots of banks have already had to do this in Singapore but Hong Kong has taken it further,” said Chrisol Correia, a director of global anti-money laundering at LexisNexis Risk Solutions. “I think it’s fair to say that Asia is taking the lead on mixing tax and compliance.”

Regulators in the United States kick-started money-laundering controls at banks as long ago as the 1970s, with a significant push in counter-terrorism financing following the September 11 terror attacks. Jurisdictions such as Hong Kong and Singapore began formulating strong policy after the global financial crisis.

However, specific rules to make sure client money has not come from tax evasion have come from Hong Kong and Singapore, according to Correia. Last year, the Monetary Authority of Singapore asked compliance teams at banks to confirm the legitimacy of tax histories for new customers.

Hong Kong had taken the merger of tax and money-laundering checks to the next level by asking banks to delve into records of current clients and flag the risks, Correia said.

“It’s going to be an effort – a significant build on what they already have,” he said.

Banks are already dealing with surging compliance costs, particularly in Asia. About 39 per cent of regional bank respondents to a KPMG survey last year predicted a 50 per cent increase in compliance spending over the next three years. Notably, HSBC Holdings said this year it had doubled its compliance staff since 2011 to about 7,000 people.

But even as banks add to their compliance budget, they may not get the expertise they are looking for.

“There is a practical challenge to recruit professionals with knowledge and experience in both anti-money-laundering and tax-related matters,” said Manhim Yu, a fraud investigation and dispute services partner at EY.

Many banks in Hong Kong have already kicked off a major push to train compliance staff on tax evasion. Others are taking a wait-and-see approach.

“Some banks are doing nothing right now,” said Mary Wong, a forensic consultant at PwC. “We all know that banks are not tax advisers. They really want to see what will eventually be required of them. Many are watching to see how this plays out in Singapore.”