The Hong Kong Monetary Authority is to seek help from overseas counterparts to tighten controls over offshore banks that use the Internet to attract deposits in the SAR. The authority would issue a consultation paper in the next few weeks seeking industry views on how to address the issue, HKMA deputy chief executive David Carse said yesterday. The move reflects growing regulatory anxiety about the risks to Hong Kong depositors from potential fly-by-night operators as use of the Internet spreads. In Hong Kong's closely supervised banking industry, it is an offence for any person or company without a banking licence to solicit deposits from the public. The Banking Ordinance covers advertisements in newspapers, magazines and other media. However, the ordinance was written long before the Internet's appearance as a commercial phenomenon and does not cover online advertising. Regulators fear local depositors' money could be at risk if overseas banks which are not properly regulated exploit the regulatory loophole to seek deposits in Hong Kong. Mr Carse said overseas banks using the Internet to attract deposits from Hong Kong were not yet a problem but could become one with the rapid development of Internet banking. 'One of the features of the Internet is that it removes physical boundaries, which will make it easier for overseas banks to use the Internet to attract offshore deposits from Hong Kong residents,' Mr Carse said. 'Offshore Internet banks should comply with rules on advertisements directed at persons in Hong Kong,' he said. 'New companies wishing to take deposits in Hong Kong, including virtual banks, require authorisation under the Banking Ordinance.' The soon-to-be released consultation paper would focus on how to enforce the advertisement rule on overseas banks. It would also look at the legal position of Internet service providers that transmit the advertisements. In addition, he said the HKMA would need to work with overseas regulators because offshore banks might be outside the Hong Kong authorities' jurisdiction. Mr Carse also urged local depositors to be cautious and to research the background of offshore banks before they placed deposits with them. The HKMA's move to tighten control of offshore deposit advertisements is one of numerous initiatives to regulate Internet banking. Last month, the HKMA issued guidelines for virtual banks which offer services via the Internet without physical branches. According to the guidelines, virtual banks must be at least 50 per cent owned by a well-established bank. Mr Carse believed online banking would succeed in Hong Kong because local Internet usage was high. Thirty per cent of the population use the Internet and 50 per cent of households have personal computers. He said about 14 local banks had introduced Internet banking services - and more would follow soon. Some banks were also planning to launch online stockbroking and business-to-business services, such as payment services and trade finance, he said. The Internet would allow banks to cut operating costs and increase revenue through more effective marketing and online cross-selling, Mr Carse said. However, Internet banking would add pressure to banks' profit margins, as they would need to spend huge sums of money to develop the technology, he said. Also, greater price competition in Internet banking would force banks to charge lower prices.