Confidentiality under attack by bank compliance, is this justified?

bank compliance

Because of Anti-Money Laundering laws and regulations, the confidentiality is under attack by bank compliance departments, onboarding clients with privacy shields is becoming difficult.

Guidelines of OECD and FATF as well as regulators in many countries are prompt to consider business confidentiality practices as UNUSUAL, the services providers are therefore hesitating before providing such services, often to decrease difficulties for bank account opening and maintenance.

In fact, financial institutions should consider clients using privacy tools as more attractive than fully transparent clients, the concept could be surprising but is quite logical.

The services provider’s compliance process will be more stringent for clients using nominee services (and/or more complex business and privacy confidentiality systems), their responsibilities as gatekeepers being engaged.

The client’s onboarding

The services providers will obviously question the reasons behind the needs for privacy and business confidentiality, the risk of seeing their services misused for various reasons is high. The providers will also automatically question the status of the ultimate beneficial owners, making sure that they are the real ones.

The level of scrutiny will be higher, the process longer, the questioning pretty intensive and a compliance report with documents and proofs demonstrating the effectiveness of the controls will definitively engage the responsibility of the services provider.

Monitoring, maintenance and client’s activities

A nominee director has very important responsibilities, a lack of attention and improper monitoring could easily be interpreted as wilful blindness.

A nominee director will not be able to retrench behind a letter of indemnify, he will stand in front of the potential issues and will have to deal with it, one way or another.

In consequences, the individual and entities protecting privacy and business confidentiality are erected as SUPER compliance officers, they will work along the bank compliance department for the onboarding and monitoring of their client.

Clients using privacy and confidentiality tools are the best prospects for financial institutions.

As anyway the bank is fully informed about the ultimate beneficial owners, as register of controllers are accessible to law enforcements and tax authorities, as onboarding and monitoring has been conducted twice by separate and unbiased compliance teams, risks are well mitigated.

Behind privacy shield are standing clients with a fear to lose something, usually a nice wealth position, and so whom have something to protect … as a result such clients are very often more successful than “transparent” clients.

Criminals are facing difficulties with nominee services

  1. Multiplication of KYC procedures and enhanced compliance render the misuse of services difficult and costly.
  2. Follow the money systematic approach by law enforcement will track the funds to the individual criminal, except if a compensation with a cross border operation is performed.
  3. It’s a long process to raise the company turnover slowly in order to avoid detection by monitoring software and compliance team.
  4. Punishments are high for the nominee directors and shareholders wrongly implicated, renting a name only is a thing from the past.

But the professional training of compliance officers on the topic of criminals using nominee services is misleading, the same when the Counter-Financing of terrorism is explained, saying that terrorists are using banks is at best misinformation.

Privacy and confidentiality, legitimate needs?

  1. The (young?) compliance officers are sharing their life events on Facebook and Instagram, understanding the simple fact that someone is uneasy to share publicly about his private and professional activities is difficult, nevertheless not wanting to share with the public should be respected as this was the norm for decades.
  2. Security concerns are legitimate, especially with the COVID situation and the fact that business owners are more captive than ever, a busy travelling schedule was it itself a protection.
  3. Banks are monitoring their clients, business owners are monitoring their competition and in an era of transparency being discreet, being secret could be a definitive competitive advantage.
  4. Bloggers and badly informed (or corrupted) journalists are destroying careers and companies on the first page of a publication, to often retract themselves few months ago in 3 lines on the fifth page.
  5. Governments and businesses are not all benevolent and pro-business, some are using publicly obtainable information to target opponents.
  6. Ultimate beneficial owners are known from the banks and law enforcement agencies, the right of the PUBLIC to access information is questionable, why should we know about the activities of our neighbor?   

Where to obtain nominee services and other services to protect privacy and confidentiality?

Basically, everywhere but not in Europe, with the notable exception of Switzerland. The services should be provided by professionals with a long and costly compliance process. The harder the better as this will guarantee that the services are not provided lightly and that your service provider is not hosting criminals. You don’t want to be client in a company servicing criminals.

Hong Kong is a good location as the absence of public register of controllers and a long practice of nominee directors, nominee shareholders, trust and other structures is part of its history and surely still part of its future.

Why Hong Kong is a perfect location for TECH Companies?

Hong Kong TECH companies

What are the best options?

Tech companies are often fast growing, so their legal and business environment should facilitate their development. Hong Kong’s economy was rated the freest in the world from 1995 through 2019.

The overall tax burden equals 14.1 percent of total domestic income. Government spending has amounted to 18.0 percent of the country’s output (GDP) over the past three years, and budget surpluses have averaged 4.0 percent of GDP. Public debt is equivalent to 0.1 percent of GDP.

So, your Hong Kong Company will benefit from a steady environment with little to no changes in taxation when in the same time other countries will surely have to raise taxes after months “printing money” to support their economies.

No sales tax or VAT -No withholding tax -No capital gains tax-No tax on dividends-No estate tax

If your Tech Company should enter into a merger, an acquisition, being sold or combine forces with other markets players under any circumstances, Hong Kong will remain the best possible location.

Option A – Zero Tax

  • Claim of offshore profits is prepared when (maximum 18 months after inception) audit and tax declaration are submitted. Pre-ruling is possible but expensive (circa USD 30K) and often useless as if the below rules are respected there are no issues
  • NO Hong Kong Director, employees, office warehousing, transit of goods, clients and suppliers. the main rule being:
  • No profits should derive from activities conducted, managed, controlled in Hong Kong.
  • Records keeping of proofs and demonstrations that the business is managed outside of Hong Kong, if we are in charge of a XERO accounting, instead of the client doing so, we could better follow-up the company activities.

The advantage of this option is in the title, the risk is to see the shareholder’s country of tax residence claiming that the Company profits derives from an activity conducted in the shareholder/director country of residence and enforcing taxes.


    Option B – Light Substance

    • Company is subject to profit tax (8.25 % the first USD 250,000 then 16.5 %)
    • Hong Kong Director with bank access (view or dual signatory)
    • Office located within the Director business environment/activities and not at a Corporate Services Provider address

    This option allows the shareholders to claim that all activities were conducted in Hong Kong, the HK tax authorities (Inland Revenue Department) will be happy to tax the company.

    But paying taxes in Hong Kong, or simply said in any country, doesn’t means that the Company has substance in the jurisdiction where profit taxes are paid. If the shareholder wish to benefit from a Double Tax Treaty Agreement then the Hong Kong Company would have to obtain a Tax Residence Certificate.

    In order to obtain the Tax Residence Certificate, the Hong Kong Company will have to demonstrate the below;

    1. Local resident Director with the abilities to 1. Formulate strategic policies 2. Determinate business directions 3. Organize the work plan 4. Decide on the mode of business financing 5. Implement management policies, work plan etc. 6. Evaluate the business performance
    2. The Director will organize the meetings in Hong Kong for the directors/partners to make resolutions with a description of the subject matters discussed.
    3. The company should hire employees besides administrative officers; this could be “solved” with an employment contract for the local resident Director.
    4. The fix place of business should be in Hong Kong, an office lease (sublet) would suffice
    5. The main banker should be in Hong Kong.

    The Option B – with a light substance, could then suffice when the shareholders are not residents in a country with a double tax treaty agreement with Hong Kong or simply said when the risks of being taxed (in their country of residence) on the Hong Kong Company profits, are considered as too low to implement a more sophisticated solution.


      Option C – Hong Kong Substance

      • Experienced Hong Kong Director
      • Employment contract for the Director paying retirement taxes and insurances
      • Bank signatory power, individual with main bank in Hong Kong
      • Lease agreement in Director’s office or at a separate fully dedicated to the company location.
      • Multiples substance related actions, including meeting with clients/suppliers.

      This option could/will match the requirements to obtain the Hong Kong Tax Residence Certificate and has the advantage of a public exposure in accordance with what are expecting banks and business partners.  

      Agreements impacting the Hong Kong Company profits

      Tech companies are facing specific issues, the companies are working “in the cloud” and ends up having their substance spread into different continents.

      Employees are often very talented freelancers working from home, instructions and meetings are taking place online, administration is often weak in term of demonstration/proofs of activities.

      A Hong Kong company could have from inception a profit-sharing agreement with another company which will provide the skills, knowledge, human resources, network and potentially a loan to the company and in exchange of part of the profits.

      Correctly worded, with a calculation based on the profits calculated quarterly. The agreement is to be stamp duty for date validation.


        Is it necessary to infantilize compliance officers?

        Compliance

        Should we continue to train compliance officers by mentioning unreachable goals, by inflating the importance of their actions and erecting them as the ultimate line of defense which will protect the society against criminals and terrorists?

        Or should we be more pragmatic and told them that only 0.2 % of the proceeds of crime are seized, that most of their actions will disturb and inconvenience the work of legitimate business owners and that their job description is above all to protect their financial institution?

        Are the compliance officers kids to be motivated or adults to be respected for the efficiency of their actions?

        With 99% of criminal proceeds being injected without being noticed in the financial institutions, maybe the training should be focused on criminal activities, on criminal personalities and on the right, provocatively the obligation, to go FAST to the next potential case.

        The current tick-in-the box system isn’t working as it should, compliance officers are losing their energy by over-working on cases that they should close FAST if any wrong doing isn’t detected.

        With the obligation to protect their employers, by adding multiples layers of useless information as their employers should demonstrate the efficiency of their AML organization, everything is getting SLOW, everything but the criminals.

        To compensate for the routine of a very administrative job description the training sessions are going over the top in describing the importance of the work, infantilizing the compliance officers.

        We need to show more respect:

        1. To the compliance officers, by allowing them to go faster to the next suspicion
        2. To legitimate business owners, by stopping the inconveniences    
        3. To the public, by changing the system and so increasing the efficiency

        How to avoid a Suspicious Activity Report (SAR)?

        A Suspicious Activity Report (SAR) named in Hong Kong a STR as Suspicious Transaction Report is raised mainly by Financial Institutions and sent to the Financial Intelligence Unit (FIU).

        Being subject to a SAR is a risk to international entrepreneurs and companies with cross-border activities. The bank compliance department will raise a SAR if they don’t understand part of the transactions and / or have difficulties with the company activities.

        For legitimate activities , for companies located in offshore jurisdictions with or without complex business models, for businessmen with activities located in medium or high risk countries the emission of a SAR could simply destroy your bank relationship and see the termination of your account.

        Additionally working with a company which was once signaled by a Suspicious Activity Report (SAR) could also impact drastically your business.

        Banks are de-risking , terminating many bank accounts for ” administrative reasons ” , its obviously difficult to blame them when noticing the huge pressure they are facing from regulatory bodies and recently again with the FINCEN leaks.

        YOU are concerned!

        Its easier to terminate an account than to conduct a proper compliance, the pressure on banks will impact drastically small and medium enterprises as when the account is important a Suspicious Activity Report (SAR) is raised and this also will trigger additional compliance from the bank, but if the account as only few millions deposited the bank will be at ease to terminate the account.

        A Suspicious Activity Report (SAR) can be avoided with simple and effective steps:

        1. A very detailed onboarding compliance report , with explanation and proofs to have the bank au fait of your activities
        2. A continuous monitoring of your business partners , making sure that their potential issues might not impact your own bank relationship.
        3. Immediate information to your bank if you have to process a transaction not in line with your onboarding compliance report.
        4. immediate information to the bank if your activities are growing fast, if you develop new markets, with explanations and the copies or agreements.
        5. Immediate and diligent answer to a question from your bank , remaining calm in front of poor and often difficult to comprehend questioning.

        Using the services of your corporate services provider to answer to a financial institution is a good concept, avoiding emotional reactions and demonstrating with documents being the only valid answer.