Hong Kong money laundering laws require banks to assess the risk of tax evasion in evaluating bank account opening applications. Prospective customers applying to open bank accounts must exercise sensitivity in understanding how their overall profile looks objectively from a tax evasion perspective to a bank and must exercise care in managing the presentation of their profile.
Though global initiatives to require financial institutions to provide tax authorities with greater transparency as to the financial affairs of taxpayers have gained significant recent attention, the obligations imposed upon financial institutions to combat tax evasion have garnered much less attention. In Hong Kong, tax evasion is captured within the anti-money laundering regime, with the result that in the process of opening a bank account and in monitoring the ongoing operation of a bank account, banks must assess the risk of the account holder evading taxes and take appropriate action.
Background
The Organized and Serious Crimes Ordinance (“OSCO”) establishes reporting requirements and dealing prohibitions in respect of property that represents proceeds from an indictable offence. While OSCO has traditionally been viewed as legislation to combat money laundering in connection with traditional criminal activity, it is not so limited. An “indictable offence” includes a reference to conduct which would constitute an indictable offence if it had occurred in Hong Kong. As Hong Kong tax laws create an indictable offence for certain misrepresentations to the tax authorities with intent to evade tax, tax evasion may, in some circumstances, constitute an indictable offence for the purposes of OSCO.
The Hong Kong Monetary Authority (“HKMA”), the regulator of banks, has repeatedly emphasized that banks have a duty to put in place appropriate systems and controls, including at the stage of opening a bank account, to combat tax evasion as part of their money laundering control programmes.
HKMA Requirements
The HKMA requires banks to consider the nature and location of customer activities and other indicators that may suggest that customers are concealing taxable assets as well as the nature of their own services to identify areas of risk. In this latter regard, private banking, wealth management and corporate banking services are more likely to give rise to tax evasion related risks and hence, call for greater vigilance as compared to retail banking.
Assessing Tax Risk Level
In evaluating a bank account opening application, the HKMA mandates that banks determine whether a prospective customer poses an elevated risk of tax evasion. In so doing, banks must consider a range of factors, with no one factor being necessarily determinative. As a result, a person applying to open a bank account must take great care to ensure that they present themselves in a manner which limits the possibility of a bank reaching an (erroneous) conclusion that they pose a high risk of tax evasion. Conversely, banks must take care in assessing the observable behaviours of the person to reach a view as to whether their activities seem suspicious.
For example, where an applicant for a bank account adopts a structure which is complex without a clear and legitimate commercial purpose or a structure which impedes the discovery of the identity of beneficial owners, banks may reach a view that the applicant poses a higher risk of tax evasion. A charitable foundation may innocuously be characterized as a high tax evasion risk applicant simply because it is difficult to ascertain the beneficiaries of the foundation.
Responding to Tax Risk
Where banks consider that a prospective customer poses an elevated risk of tax evasion, the HKMA requires banks not only to determine whether there is a legitimate explanation for the concerns which have been identified but to apply enhanced due diligence measures. In the former regard, a simple response of “tax planning” is unlikely to be a sufficient explanation and it may be necessary to confirm whether professional advice has been sought as to the legality of the arrangements. If such a confirmation is unavailable, the bank will need to consider rejecting the account opening application. In the latter regard, whilst a bank has no duty to ensure that a prospective customer is tax compliant, it is obliged to obtain additional information to mitigate against any obvious risk that the prospective customer’s tax affairs are out of order.
TIMOTHY LOH LLP regularly advises regulated financial institutions on compliance with money laundering and sanctions regulations. The firm is widely recognized for its broad and deep experience in the regulation of financial services. As such, the firm is ideally positioned to advise customers on how to best present themselves in the mission critical task of opening a bank account in Hong Kong