How bank rules are sinking Hong Kong business attraction – Should you fear the current trend?

You may have heard that opening a bank account in Hong Kong has been quite tough recently. Since our last article written on this subject, it has become even tougher not only to open a corporate bank account but also to maintain one. Presently, this is really a serious issue for Hong Kong businesses. Many companies are scared by this situation and have contacted Orbis for advice.

In this article, Orbis will provide you with an overview of the situation, our analysis as well as our solutions and forecast.

Such changes in bank policies take their main origin in the Hong Kong Monetary Authority (HKMA) requirements. The HKMA is fighting against money laundering and terrorist financing in order to keep Hong Kong from having a tax haven reputation as they do not want to be accused of lack of transparency by the international community.

To do so, the HKMA is putting a lot of pressure on Hong Kong banks to make sure they are properly applying the Know Your Customer (KYC) process. As a result, banks have implemented new stricter procedures to fulfill HKMA requirements.

While the root cause is not the banks, their management of the issue is more than questionable . From Orbis’ analysis, current problems faced by Hong Kong companies with their bank account are explained by 2 factors, one is organizational and the other is economic.

HKMA has forced banks to keep comprehensive updated records of their customers as well as their business activities in order not to be penalized. The banks’ reactions to such obligations have manifested in the following two manners:

• First they reorganized their account opening process for new customers and the information update process for maintaining bank accounts. They now ask for more documents, set more conditions and are trying to standardize these procedures. As a result, customers were asked to answer incoherent questions not relevant to their specific case or to provide documents not applicable to their company. In order to fulfill banks needs and maximize the likelihood of a positive answer to their request, customers provided as many documents as they had on hand to support their request. As a consequence of the banks’ overreaction, deadlines and cost to open and maintain accounts have risen.

• Secondly, as banks now have to face higher costs for opening and maintaining bank accounts, they have decided to consider only well established, tangible and profitable (in the bank’s point of view) businesses and close small accounts. Well established and structured SMEs should not face this

As a global consequence, some companies have chosen to setup companies in other less demanding jurisdictions and HK is definitely experiencing a slowdown in the number of company incorporations.

At Orbis, we have been feeling the effects of the banks’ position as well as foreign companies’ opinion on the Hong Kong environment. Having such experience, we alerted InvestHK, the government agency promoting the Hong Kong business environment to foreign investors. They are aware of the issue and have already initiated a discussion with the HKMA.

In the meantime, in order to assist and reassure our clients, Orbis advises you to precisely answer bank requests in filling every document needed in a timely manner.  We have found alternative solutions in the case of companies who cannot open or maintain an account with HK banks and we have already managed to assist Hong Kong companies to get and maintain banking facilities.

Overall, we believe that HK authorities will finally understand that there is a big problem which on top of other economic issues such as the decrease of the real-estate market and the decrease of the retail business (2 key sectors for HK), will lead them to adjust their requirements. Actually, a new article from the SCMP has been posted and suggests that HK institutions are dealing with the issue. It may take some time but it is hard to believe that a place which was once the easiest location to establish a business in Asia, is now considered unattractive (even repulsive), especially in comparison with its big rival: Singapore.

In many cases, we still think that Hong Kong remains the best place in Asia to establish a business, especially on a tax and legal point of view and since some foreign banks are now seeing an opportunity in the HK market to capture accounts and money flow.

By Benjamin DELOISON, Orbis Hong Kong consultant