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.

Director Services, the related risks & solutions for the clients

Director Services

The risks for the clients requesting Directors Services are not often considered accurately. There are opportunities to mitigate the risks and to protect the client’s interests.

Directors powers and duties

The notion of Nominee Director and the corresponding nominee agreement are unknown from third parties (except bankers and we will engage this topic below) and this leave room to Directors powers being potentially abused. Having an agreement mentioning that the Director will only act on written instructions is enforceable but obviously only after the commission of potential illicit actions.

Directors engaging in good faith the company into a delicate situation

Honesty doesn’t compensate experience and skills, a Director could fail his Director’s duties by inadvertence, misjudging an operation and not taking into consideration a specific law or regulation. The potential to see errors is important, the demonstration of this is reflected by indemnify agreements and liability insurances requested to protect the Directors.

Directors personal reputation and private activities

Extreme political views, engagement into private activities in opposition with the Company values, the Directors activities on social medias could damage the company reputation. The public exposure of a Director is nowadays easily accessible to competitors, business partners and compliance departments.

Directors professional profiles

Directors are often selected from the team of the Corporate Services Provider, from a Certified Public Accountants firm or from a Legal professional’s firm. Despite the Company obvious advantage to have such professionals well aware of the compliance process as Directors, this is also a demonstration that the Directors are not specialized into a specific activity, say digital marketing, and this only will drag attention to their Nominee roles.

Directors Business activities

Risks are attached to every operation, to every Companies, by multiplying operations and companies and by engaging in many Directorships the risks are increasing drastically. The possibility to see a director bringing reputational, or worst, issues to a new client is real. Additionally, the Directors access to proprietary information (and the multiplication of such clients) is generating difficulties to always maintain a “Chinese-wall” between clients.

Banking difficulties

This subject itself could be expended into a long article, as a matter of fact the most important notion is the UNUSUAL CONFIDENTIALITY level so, basically, it’s a judgment call from the bank compliance department about the use of Nominee Director Services. Some banks are very reluctant to accept Companies using Nominee Directors and Nominee shareholders services.


    The risk assessment process could be supported by an unbiased legal professional (not providing the said Directors Services). In addition to a compliance on the company providing the individual directors I would suggest the below actions.

    1. Hiring two Directors

    One Director could go rogue, two at the same time would be extremely rare. Having the directors not located in the same country could also represent some tax advantage.

    2. Request for a qualified, fit & proper, Director

    The Director should have at least 5 years of experiences in a Senior position, plus adequate experiences as a Director for other companies.

    3. Request for a list of occupied positions

    The Director in addition of his/her qualifications should present an impeccable public profile, a compliance should be effectively prepared on his/her profile and the client should obtain a list of all the Direction positions held, at least in the company jurisdiction.

    4. The Director should have something to lose

    Let’s be straight-forward, a taxi-driver would not attach great importance to his public exposure as a company Director, a director should suffer (and will but it’s another story) from any wrong doing by any of the Companies for which he does act as a Director.

    5. Soft factors are important too

    Where does the Director reside? A public housing location will not be credible for an important company, his age and professional experiences are also informing about his qualities when your business partners will search the public register.

    6. Documents list to obtain

    Passport copy, identity card copy, address proof (utility bill) of less than 3 months old, Resume (CV), list of positions as Director in the same jurisdiction.

    7. Compliance to be performed

    Short compliance on the Companies for which the Director is acting, searching for red flags about activities and adverse medias. Full compliance on the proposed Director – private database and open sources.


    Few words about the Hong Kong situation:

    In Hong Kong there is No PUBLIC Register of significant controllers, so the use of Nominee Directors and Nominee shareholders is effective to protect confidentiality, privacy and business freedom.

    These services were in the past very well accepted, quite common and so obviously misused by criminal and tax cheaters. AML laws and regulations and more effectively bank’s reluctance to onboard clients using nominees did put the services providers on heavy pressure.

    The main issue is the compliance, and so the associated costs, incurred by a Corporate Services Provider before accepting a client and for the continuous monitoring of the Company activities.

    The Corporate Services Provider is confronted to a long list of risks, this will be explained further in another article. Offering nominee services is often reserved to existing clients or to other professionals whom performed due compliance and are knowing their clients very well.

    Disclaimer:
    
    I the co-founder of a Corporate Services Provider licensed in Hong Kong which provide Nominee Directors and Nominee Shareholders services.

      Hong Kong Company Registration Search

      Hong Kong Company information are publicly available with a simple registration search.

      Forget about business confidentiality and privacy, we live in a new era of transparency and everybody could access information.

      A Hong Kong Company registration search will reveal the director(s) name and addresses with their passports number.

      A Hong Kong Company registration name will also reveal the shareholders names, addresses, passports numbers, corporate shareholders names and addresses as well as additional information about the capital and the number of shares.

      To access information about a Hong Kong Company you should go online and pay a small fee, at least not all the information are available free of charge as it is the case for the UK company house.

      Less to say a small fee will not be a constraint to unwanted curiosity so how to protect you personal information ?

      A ) by using Hong Kong nominee director services

      B) by using Hong Kong nominee shareholder services

      Hong Kong Company registration search could be performed on https://www.cr.gov.hk/

      Hong Kong nominee director services are facing some reluctance by the banks during the onboarding process, the reasons behind privacy needs should be explained in details and the financial institution should be convinced of the treat created by a public exposure.

      Hong Kong nominee shareholders services don’t pose the same issues when banking in Hong Kong, its a more common situation.

      Nominee shareholder, useless or efficient ?

      A nominee shareholder agreement is an additional layer of privacy to protect the ultimate beneficial owner of a company.

      Because of the anti-money laundering rules and regulations, many countries organized public registers of beneficial owners and controllers of private companies. In such context a nominee shareholder could be proven ineffective in protecting the ultimate beneficial owner from public exposure.

      But some countries, as Hong Kong, implemented a Significant Controllers Register which is NOT of public access, the only public exposure for the shareholders of a Hong Kong Company will remain the Company Registry accessible against payment.

      The Hong Kong Significant Controllers Register is available to law enforcement and tax authorities and kept / maintained by the company secretary or a designated representative.

      The use of nominee shareholder services in Hong Kong is efficient , in other countries , say UK, this is totally useless and will create additional questioning by Financial Institutions.

      A nominee shareholder could be an individual or a corporate entity and the nominee shareholder agreement is basically a declaration of trust with an indemnify for the nominee.

      Nominee shareholder services in Hong Kong are not trendy, this because of the additional burden when preparing a compliance report to open or to maintain the corporate bank account.

      Nevertheless a nominee shareholder agreement will in Hong Kong protect the ultimate beneficial owners from unwanted public exposure and less to say its a necessity for residents in countries with high crime rates.