Hong Kong's Lax KYC and Border Controls Attract Chinese Cash
Hong Kong Needs the Business. China Has the Cash.
Funds flows along the path of least resistance. Illicit funds flow along dark and opaque alleyways where uncomfortable questions are avoided, and regulators look the other way.
Since 2019 illicit money flows to Hong Kong are steadily increasing as the Hong Kong government relaxes regulatory standards to replace historic money flows which have left the city as national security restrictions change Hong Kong’s financial, legal, and media industries to the detriment of the marketplace.
The Extradition Treaty of 2018 chased away family offices and high network individuals. Greg Torode of Reuters piece is a good primer.
By 2020 the National Security Law, with its destructive impact weighing fully on society, (to the point of Hong Kong morphing into a quasi-police state), banks and other financial institutions started their shift out of the territory. Draconian COVID measures, which were part of the effort to curb political dissent, also impacted the financial system resulting in Hong Kong having another large drain of assets and talent.
Bloomberg piece on this matter upset the Hong Kong government as much as I have seen any press piece get under their skin.
In response to the decline of its financial system the Hong Kong government has made a choice. Retreat from the first tier of world financial centers and attempt to serve China as a city that can foster China’s transactions with the world. For some of us, this almost seems like a return to the 1950’s use case for Hong Kong as a financial clearance center for the CCP.
We are now in a new stage for Hong Kong. Washing money.
Nikkei does an admirable job here describing the inflows of Chinese money to Hong Kong.
Chasing Chinese wealth is all Hong Kong has left. No longer competing with London or New York as a home for high quality equities, Hong Kong has at least some separation from Beijing that makes it a better location than the mainland for wealthy individuals trying to shield their fortunes. Yet, more importantly it offers a loose regulatory environment which mainlanders find more suitable than intrusive bankers in other jurisdictions.
Why mainland money doesn’t go to Singapore or the US to take advantage of systems the market has deemed as superior for international wealth management by more normal investors has a very short answer. KYC.
KYC, short for “Know Your Customer” is the shorthand for banks knowing where their clients’ money is coming from, having some idea of the legality of their client’s business operations, and serving as a check on the use of the financial system by their clients to make sure no one's using those financial institutions abilities to further illicit activity.
KYC in Hong Kong in the past was always the model that the rest of Asia tried to reach in terms of diligence and quality of work. As one who managed large amounts of money, and working in a politically sensitive company, the KYC process for me in Hong Kong often resembled something associated with proctology.
Without a doubt that has changed. Mainland money flowing into in Hong Kong is largely thanks to Singapore’s vetting process keeping it out. The Hong Kong financial machine must eat, and if the traditional clean money from the past isn't coming in, then Hong Kong will take what comes. (Hello Russia)
How that money comes from China into Hong Kong is also unique.
Except for Hong Kong if you are crossing the border anywhere in Asia, and you're carrying more than USD $10,000 you are required to file/notify authorities. In Hong Kong you must declare “only if you are asked” by Customs. In other words, if you're carrying a sack of cash you don't have to say anything unless a custom’s officer asks what's inside. This extends to trucks full of cash that come across the border or the more usual route from Macau.
Macau does have a requirement for declaration of cash exceeding USD $15,000 when leaving. But again, it is only if the Customs Officer asks. (Get it?)
At the end of the day, Singapore has cleaned its act up, and combined with the erosion of the attractiveness of the Hong Kong financial markets has picked up the business that once was Hong Kong’s.
Hong Kong still needs business. Chinese wealth needs a place where uncomfortable questions are not asked, and money can easily flow in and out. That would be Hong Kong, a market with lower regulatory standards and an ability to move large sums of cash unfettered from government involvement.