In the last three articles in the “Financial Inclusion” series, I mentioned the concern about difficulties faced by some enterprises when opening bank accounts in Hong Kong. In early September, a circular entitled “De-risking and Financial Inclusion” was issued to all banks in Hong Kong reiterating the principles of the risk-based approach. Many may think that the risk-based approach only applies to account opening, but in fact it is also applicable to the ongoing customer due diligence (CDD) process for existing customers.
Some members of the public may have received letters from banks requiring them to fill in questionnaires and provide detailed personal information. The questionnaires can be as long as some 10 pages and contain a long list of questions seeking information on various aspects ranging from the proof of current residential address to information on income since the first job a few decades ago and all sale and purchase transactions of assets. The wording used in some of the letters is not too friendly. Customers are required to reply within a short period of time and it is stated in the letters that if customers fail to do so, their accounts may be frozen or closed. For those long-term customers, this is quite a nuisance and they just cannot understand why they have to undergo such stringent scrutiny all of a sudden after maintaining their accounts for years and some of the accounts even do not have a large balance.
According to international standards in anti-money laundering and counter-terrorist financing (hereafter referred to as “AML” ), in addition to undertaking CDD process when handling account opening applications, banks are required to review and update information on existing customers on a regular basis. The frequency and extent of the reviews will depend on the risk profile of the customers concerned. More frequent reviews should be conducted in respect of high risk customers, including those customers whose job nature entails a higher risk of money laundering, such as senior government officials, senior politicians and senior executives of international organisations. Some banks in Hong Kong may also undertake more stringent CDD process according to the requirements of their head offices or relevant overseas supervisory authorities. For example, banks will require customers who may have association with the US to fill in certain forms and provide certain information according to the requirements of the US Foreign Account Tax Compliance Act.
It will be impossible for fishermen to catch fish without fishing nets. Similarly, in order to identify suspicious accounts, it is understandable that banks will need to require additional information from certain classes of customers. However, we expect banks to design their “nets” in a more targeted manner with “mesh” size determined according to the size of the “fish” they want to catch, instead of just using trawls sweeping up fish of all sizes non-selectively. We note that when conducting CDD, some banks have used “nets” with too small the mesh size so that fish of all sizes got caught up in their “nets”. Let’s take a look at some of the complaints we have received. During a regular review as part of the bank’s CDD process, a Hong Kong company engaging in trading business on the Mainland for over 30 years was asked to explain the source of its start-up capital, despite the fact that the bank account had been in operation for more than two decades. In another example, a retired public officer, who had been classified as a high risk customer, applied for a supplementary credit card for his elderly family member, and the bank required that family member to fill in a 10-page CDD form and even provide a copy of the spouse’s will as a proof of the source of wealth. In another case, a political figure was asked to provide a huge amount of age-old information and documents, again as proofs of his source of wealth, even though he only maintained an account for his mandatory provident fund contributions, at just some $1,000 each month.
These may be just individual cases, but they do show that some banks have rigidly applied a single yardstick and approach for all customers in conducting ongoing CDD, without differentiating the risk levels of their customers and implementing proportionate measures. Sending out the same set of questionnaires indiscriminately to all customers who fall within certain segments or groupings is obviously not consistent with the risk-based approach required by the HKMA. Nor is it in line with the spirit of financial inclusion. In the circular issued in September, I have requested banks to review their existing processes and practices to ensure they are consistent with the principles of risk-based approach. They are required to strike a balance between “de-risking” and financial inclusion, and refrain from adopting extreme practices that would result in financial exclusion. The HKMA will follow up on this issue closely and expect the local banking industry to fully implement the principles of risk-based approach in handling account opening applications of new customers and CDD on existing customers.
We appreciate the need of some banks in Hong Kong to comply with the requirements and standards mandated by their head offices and relevant overseas supervisory authorities. The HKMA stands ready to work with, and indeed has embarked on discussions with, those head offices and overseas authorities to review any inconsistencies between their requirements and the practices of the local banks with a view to identifying any “over-screening” and achieving an appropriate balance between AML and financial inclusion.
In fact, the review of account opening practices and ongoing CDD processes should not be solely taken care by the senior management of banks. The board of directors of banks should also take a proactive role in ensuring the implementation of the principles of risk-based approach by the senior management upon receiving the said circular on “De-risking and Financial Inclusion”. Banks should also provide adequate training to frontline staff on how to implement the principles in actual practices. It is important to ensure that the CDD process for existing customers is effective while being reasonable so that the public can continue to benefit from financial inclusion. This is also in line with Hong Kong’s status as an international financial centre.
Hong Kong Monetary Authority
31 October 2016
Financial inclusion series – sixth article
To review other articles in the series:
 Mobile Banking, Customer-Centrism, Financial Inclusion
 Video Teller Machines – Fostering “Financial Inclusion” with Technology
 From piggy bank to financial inclusion
 Follow-up work on issues concerning difficulties in opening bank accounts and obtaining bank loans by small and medium-sized enterprises
 Pursuing financial inclusion despite challenges