Jake's View

Banks are in an impossible position when it comes to the war on money laundering

Making banks responsible for policing dubious money transfers hasn’t worked

PUBLISHED : Monday, 01 August, 2016, 2:02pm
UPDATED : Monday, 01 August, 2016, 11:00pm

HK banks to ease up on firms struggling to open accounts

SCMP headline, August 1

Let’s get one thing straight about money laundering. It upsets governments as much as it does not because of drug money or terrorist finance but because of tax evasion.

The laws against it have done little to restrain the illegal drug trade. The world remains awash with drugs, new easily made ones all the time, while terrorism mostly runs on small cash transactions between people related by gang or family.

It’s not even straightforward tax evasion that really bothers governments. Try to see how long you last in running away from a rates demand or refusing a routine tax bill based on an income statement from your employer.

The facts for Hong Kong are that nothing the Hong Kong Monetary Authority tells banks about going easier on account openings can have much effect

What really annoys them is tax avoidance – the legitimate use of convoluted tax codes to reduce tax assessments, or the use of a cloud of lawyers to hide your traces when skirting the grey edges of the tax code. This, for instance, was the substance of the recent Panama law office scandal. This is where the tax authorities really bang their drums.

They are under increasing pressure to do so. Around the world government finances are in an ever more perilous state. Fiscal deficits are widening and fiscal debt has ballooned. It stands at 90 per cent of gross domestic product in Europe, more than 100 per cent in the United States and more than 200 per cent in Japan.

Only artificially low interest rates keep the burden bearable. Tax collectors everywhere face the same loud cry from their elected bosses: Get those revenues up.

But it is increasingly difficult to do in a connected world. The big mistake was made more than 200 years ago when Britain was looking for money to fight Napoleon and settled on an income rather than a property tax. The rest of the world followed suit.

And now governments have discovered to their dismay that money no longer knows any borders. Technology has defeated the income tax. Property taxes might have worked as countries are defined by geographic borders. But it’s too late now. The change would be too great.

It’s a big conundrum for governments. And they have refused to deal with it. Around the world they have come up with the same solution: Make commercial banks responsible for policing dubious money transfers.

It doesn’t work. In the first place, governments have police powers while banks do not. Banks cannot arrest offenders, confiscate assets or make home searches. What we have here is an irresponsible abdication of powers.

Nor does it do for governments to tell banks that they must KYC – Know Your Client. They already do so but there are also such things as privacy codes and no-one has stipulated where the balance should lie.

In practise what it means is that junior bank employees must write complete essays, backed by a long range of documents, on new account holders of any substance or foreign connection. And compliance departments must reject a good number of these on first draft or risk being seen as not doing their job.

Bank clerks, however, are no better than government clerks at making subjective judgments about the probity of commercial transactions. Invariably they work with sheets of tick boxes.

If you know what the tick boxes say you can work your way around them on an account application. It may take some time but just cook up more paper until you get a tick box pass. That’s the way it works.

The facts for Hong Kong are that nothing the Hong Kong Monetary Authority tells banks about going easier on account openings can have much effect. It’s all about HSBC, really, as we are talking commercial accounts here and that’s the bank they want. Many of the smaller ones cannot even get a local standing instruction right.

But HSBC works to European and US government edicts, not Hong Kong ones. We are insignificant in all this. The HKMA’s talk of comments, suggestions and guidelines is just so much hot air.

“HSBC said it was mulling initiatives to streamline and improve the vetting process,” noted our report.

Yep, mull away, fellas. It’s not about Hong Kong and Hong Kong has no solutions.