APAC regulators are looking to FIs and their technology to guard against increasingly sophisticated criminal activity as wealth migration accelerates, says Joseph Quiazon at Exiger.
Ongoing political demonstrations in Hong Kong are impacting APAC financial markets by accelerating wealth migration trends and increasing financial crime risk. As the risk profile in the region evolves, regulators increasingly expect financial institutions to leverage technology to meet compliance demands.
This unexpected upheaval and changing regulatory landscape should serve as a reminder to financial compliance professionals of the importance of tracking ongoing developments in a diverse region that’s home to more than 40 regulators who have collectively issued nearly USD 610 million in financial crime related fines over the past decade.
The trends compliance professionals should be watching
Belt and Road Initiative connects more than 68 countries
There is global talk around the state of infrastructure and its role as an engine for growth, particularly in developing economies. Debt financing is the fuel for that engine and China’s Belt and Road Initiative (BRI) provides just that. The initiative was passed by the National People’s Congress in 2017 to achieve “shared growth through discussion and collaboration.” The BRI spans roughly 70 countries with projected investment as high as USD 8 trillion across a vast network of transportation, energy and telecommunications infrastructure linking financial markets and capital flows in Europe, Africa and Asia.
Greater Bay Area is on the rise
The Greater Bay Area (GBA) represents the second major Chinese initiative in regional development. The GBA is home to about 70 million people, and it produces 37 percent of the country’s exports – along with 12 percent of GDP, according to HSBC. The regional plan links Hong Kong, Macau and nine other cities in southern China, seeking to foster growth through more coordination among the GBA cities by developing technology and innovation, boosting infrastructure and increasing financial links.
Hong Kong: a decline in regional dominance?
As China’s focus remains firmly entrenched on both major global economic initiatives, it would appear that Hong Kong, once viewed as the primary wealth management centre in APAC, has slowly begun to cede its place. This has led to the potential migration of capital particularly from High Net Worth Individuals (c) in Hong Kong to Singapore – typically perceived as a ‘safer haven’. Especially in light of recent political tensions in Hong Kong, Singapore has unintentionally become a more attractive location for investment capital.
How these trends raise risks for financial institutions
Trends in wealth migration should serve as a cautionary tale for financial compliance professionals, as inevitably within this movement of funds there are bound to be some bad actors, particularly against the backdrop of global corruption scandals in the APAC region. On e such example was the scandal at Malaysia’s state-owned investment fund, 1MDB, which highlighted the money laundering risks involved with financial deal-making, election spending and political patronage.
It is generally agreed that relationships with politically exposed persons (PEPs) can open financial institutions up to increased money laundering and reputational risk due to the possibility that the PEP may abuse their position for personal gain, through bribery, corruption or embezzlement of state funds and assets. They may also use relationships with family members and close associates to launder such funds.
Whether it’s regime change, the flight of capital from one jurisdiction to the next, or the next breaking scandal, financial institutions should evaluate their private bank book of business, to look for any nexus between existing HNWI clients and emerging criminal parties or activities and respond appropriately.
How APAC regulators are responding
The potential migration of wealth has been received with caution by the Monetary Authority of Singapore (MAS). In July, the central bank issued a notice to wealth managers in Singapore, warning them not to take advantage of the current political unrest in Hong Kong by designing new campaigns to accelerate wealth migration. Money laundering threats are likely to rise as Hong Kong’s decline takes hold, and new capital flows into Singapore can raise the associated risks of tax evasion, corruption and other criminal offences.
Goldman Sachs Group estimated as much as USD 4 billion has moved from Hong Kong dollar deposits to Singapore since August. According to MAS managing director Ravi Menon, “Singapore has seen an uptick in those inquiring how to relocate-allocate assets which is reasonable to expect.” But he went further to explain, “in terms of actual flows, although there are some signs…we don’t think it’s significant or substantial…the smart money will stay put and watch…make contingency plans but they wouldn’t be in a big rush to move.”
To better assess and address financial crime risks born out of these wealth migration trends and other developments in the economic and political landscape, regulators expect financial institutions to adopt and deploy regulatory technology.
During the International Compliance Association Annual APAC Conference, MAS Assistant Managing Director Loo Siew Yee said, the agency “encourage[s] and expect[s] financial institutions to adopt new methods and technology to improve their anti-money laundering (AML)/counter terrorist financing (CFT) detection and risk mitigation capabilities.”
APAC regulators are looking to financial institutions as partners in building and supporting a robust compliance infrastructure to meet the challenge of increasingly sophisticated criminal activity.
At a regulatory conference last year, Carmen Chu, Executive Director of Enforcement and AML for the Hong Kong Monetary Authority (HKMA) said, “Banks and financial institutions are not law enforcement and can never replace the police and other agencies, but they are nevertheless playing a frontline role in our anti-money laundering regime since their data, technology and know-how has the opportunity like never before to detect and disrupt criminal activity.”
As the role of modern day compliance continues to evolve, compliance professionals should balance their obligations as trusted strategic business advisers and independent guardians.
To accomplish both functions, compliance professionals should not only stay on top of regional trends, but also look ahead to anticipate how today’s movements could impact financial crime compliance tomorrow.
The adoption of technology in compliance programmes is quickly becoming a central tenet of regulatory compliance for global financial institutions and will help businesses in the region better identify and respond to financial crime risk in the midst of unexpected wealth migration.
Joseph M Quiazon is Managing Director and Head of Financial Crime Compliance for APAC at Exiger. Source: RegulationAsia