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Regulatory Pressure for KYC Compliance Set to Ratchet up in 2018 for Hong Kong Firms


HONG KONG and ATLANTA -- As 2017 comes to a close, there is little sign of regulatory pressure diminishing for financial institutions operating in Hong Kong - and any company for that matter - as money laundering, terrorist financing and tax evasion remain firmly on global regulatory radars.

The influence of AML regulation in the US, UK and EU, as well as local and regional concerns, have led to a significant broadening of compliance measures across most of Asia. The record fines levied against financial institutions and companies for KYC breaches has clearly signaled to companies in the region the need to invest in proper KYC processes and to leverage burgeoning initiatives, like KYC utilities.

This is driving a deepening of operational and technology requirements around AML compliance for banks and other financial institutions in Hong Kong. The growing regulatory focus on concomitant risks such as tax evasion and anti-corruption means the tide of compliance change will not ebb any time soon.

Clearly, the burden for financial institutions operating here is significant. This includes not only direct costs for compliance operations and technology, but also indirect costs arising from the impact of AML compliance on productivity, customer acquisition and business growth.

Banks alone in this region are now spending an estimated US$1.5 billion annually, according to an earlier in-depth LexisNexis Risk Solutions survey of AML compliance and risk professionals across China, Hong Kong, Indonesia, Malaysia, Singapore and Thailand. Banks in Hong Kong spend an average $1.9 million annually on compliance. Both figures, LexisNexis Risk Solutions considers underreported.

That analysis revealed that firms in the region see regulation as the primary motivation for AML compliance change, with 28% of respondent citing it as a top driver. Significantly, a need to improve business results was the second most cited top driver (21% of respondents).

Mike Shaw, vice president, Global Market Development, LexisNexis® Risk Solutions said: “Financial institutions in Hong Kong see AML compliance and especially KYC processes, driven nearly as much by a desire to improve business results as by regulatory or reputational risk concerns. We know from our research that Hong Kong and Singapore companies cite compliance and reputational risk as the top two drivers, reflecting the maturity of regulation in these markets.”

What is clear is that firms are challenged by all aspects of compliance screening, from onboarding to reporting. Regulatory reporting, customer risk profiling and KYC for account onboarding are cited as the most challenging aspects of a firms’ compliance screening operations.

Most firms in the region have failed to achieve fast onboarding times. Even for domestic retail customers, the segment with the most straightforward KYC procedures, only 15 per cent of respondents in the abovementioned survey complete customer due diligence in under an hour. Nearly all (96 per cent) survey respondents indicate that their KYC processes require a variety of Asian language documents, which can introduce added complexity to compliance procedures.

While AML operations are increasingly reliant on sophisticated technology to automate behavior analysis and entity screening, the study shows that on average technology costs make up a mere 19 per cent of AML budgets in Asia. This suggests that technology use at AML operations in Asia is still somewhat immature. Personnel costs are by far the largest portion (81 per cent) of AML compliance spending in the region.

Mr. Shaw concluded: “We are seeing increasing recognition of the role of a KYC utility in efficiently and cost-effectively meeting the KYC challenge. Not only does a KYC utility drive efficiency and reduce customer friction, but by making it easier to access financial services, it also provides Hong Kong with a competitive edge in a highly competitive global economy. To create a KYC utility, though requires big data technology and deep experience actually building utilities and consortia. It’s encouraging that financial institutions in Hong Kong are very clear on the potential benefits to the business of a well-managed AML compliance program, and that knowing your customer for compliance purposes will also help them better understand and serve their customer by increasing financial inclusion as well as financial transparency.”

About LexisNexis Risk Solutions
LexisNexis® Risk Solutions harnesses the power of data, sophisticated analytics platforms and technology solutions to provide insights that help businesses across multiple industries and governmental entities reduce risk and improve decisions to benefit people around the globe. Headquartered in metro Atlanta, Georgia, we have offices throughout the world and are part of RELX (LSE: REL/NYSE: RELX), a global provider of information-based analytics and decision tools for professional and business customers. For more information, please visit LexisNexis Risk Solutions and RELX.

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