Junior bankers find themselves out of depth amid capitalism with Chinese characteristics
Hong Kong’s financial services industry has been infected by a host like in the film Alien - subverted for laundering assets from China.
This self-evident statement is only meaningful and nihilistic when you bear witness to the gravity of money laundering that has forced Beijing to stomp on the brakes for overseas investments. The entire know-your-client (KYC) and anti-money laundering (AML) regimes look like sieves.
“Witness a parallel financial universe where money, price and value are merely constructs in time and space for wealth transfer, ” as Rod Serling, the host of Twilight Zone might say.
Take an elevator tour of, let’s say, the International Finance Centre. Besides well known international financial institutions, you can find relatively unknown mainland funds and investment companies.
Knock on the door and ask if you can meet an investment manager to talk about a proposal. An assistant usually shows up giving you the excuse to enter the lobby and look about. They usually say they are not interested in meeting you because they stick to their own deal relationships. But, at every mainland investment fund, the offices are virtually empty except for a personal assistant or book keeper.
It confirms what lawyers, accountants and service providers have told me. By smartly decorating a shell fund in a prestigious building, it becomes a credible platform for moving assets and money from China into Hong Kong, and from here to anywhere in the world.
KYC and AML rules are easier to meet if you are a large fund rather than a personal bank account. And you don’t need to hire a real investment team, when all you are doing is moving funds.
But, when you land on the floor where HNA is located, you are hard pressed to understand how a small, regional mainland airline and investment operation owns an empire including 9 per cent of Deutsche Bank and outbids Hong Kong’s largest developers in its property deals.
A look at its debt-to-equity levels and its cryptic offshore non-profit shareholding structure -- both worthy of sci-fi novels -- only deepens the plot.
This is peak capitalism with Chinese characteristics - borne along on a crest of enthusiasm, haloed by a mist of illusion. It’s a landscape where no one except the insiders can tell the difference between government and private money, and which way the cash is flowing or whether deals will be closing. But every large mainland company and its executives have an incentive to open an office and bank accounts in Hong Kong and launch an overseas shopping spree.
The latest crackdown on mainland entities and individuals has also revealed the shortcomings with relationship managers (RM) at banks, wealth managers who need to cultivate mainland Chinese clients. RMs are under tremendous pressure to sell financial products and generate revenue. Since the global financial crisis, regulators have imposed stricter and more confusing KYC and AML standards. The conduct of each relationship manager is monitored through a vast army of compliance officers.
Banks are in the business to make profits, not compliance.
Tens of thousands of compliance and internal regulatory staff have been hired to form a byzantine structure where the senior risk managers seem to be out of touch with their front line RMs. Yet it is the RMs who are the ones interacting with clients and potentially risk committing violations in onboarding clients and running the account.
This is where fraud and money laundering can begin.
Many of RMs are young, local new hires, inexperienced in dealing with the real world of conduct risk, complicated by the vagaries of mainland business practices and ethics - especially where they intersect with Hong Kong and international banking guidelines.
Today, more sign offs are needed to sell a financial instrument than to authorise the use of a nuclear weapon.
Trying to catch mainland money laundering offences is like handing out speeding tickets at a F1 race. Perhaps innovative regulatory technology solutions are the only hope to ensure that RMs are properly informed, guided and monitored on a real time basis. That is the only way senior management can be protected from rogue RMs and the subsequent fines.
The pressure to perform and meet a mainland client’s expectations is filled with hazards. One RM told me he thought it was humorous and impressive how his Shanghai client would send a junior government official down to the Hong Kong airport with government chops to transfer state assets. Other RMs tell me they regularly forge their client’s signature (with the client’s verbal permission) to facilitate money transfers.
RMs are reluctant to press mainland clients for their source of funds and write extensive client reports. Regulators complain about one line compliance reports that give terse answers like, “family money.” Facts descend into trite vanity expressed in sophomoric attempts at sly writing as if anyone is not enlightened as to the real situation.
Peter Guy is a financial writer and former international banker.