The Changing Regulatory Landscape in Hong Kong & Singapore

The 2008 financial crisis triggered a global movement to increase financial regulation; for Asia Pacific, however, the real watershed came much later. The Panama Papers, leaked from law firm Mossack Fonseca in 2015, placed the spotlight on Hong Kong as a leading centre for the creation of shell companies. That same year the 1MDB scandal erupted, in which the Malaysian Prime Minister was accused of funnelling hundreds of billions of US dollars into personal accounts via a complex web of transactions, many of which were facilitated by Singapore’s private banking system. Now, these rival financial hubs are accelerating efforts to improve their compliance regimes in response to global transparency initiatives, such as those led by the Financial Action Task Force (‘FATF’ ), the global standardsetter for anti-money laundering (‘AML’) regulation.

Ahead of the next FATF evaluation of Hong Kong in 2018, the government has issued two legislative amendment bills of which the key reforms are: a) the requirement for all companies to maintain a register of beneficial owners, and b) the introduction of statutory customer due diligence requirements for designated non-financial businesses, such as real estate agencies and accountancy firms. Following a disappointing FATF review of Singapore in 2016, which identified several gaps in its AML regime, the city state has already passed a bill into law that requires enhanced disclosure of company ownership information.

It’s not just FATF – in 2016 Hong Kong and Singapore also signed up to the OECD’s Common Reporting Standards, which require automatic exchange of financial information between participating jurisdictions. This is on top of myriad bilateral agreements, including one signed in June 2017 which allows Indonesia to tax assets located in banks or financial institutions in Hong Kong that have not been reported correctly to the Indonesian tax authorities. A similar agreement between Indonesia and Singapore is likely to be finalised soon. Another agreement concluded in July 2017 between the Securities and Futures Commission (‘SFC’ ), Hong Kong’s securities market regulator, and the UK’s Financial Conduct Authority (‘FCA’ ), will allow greater cooperation between the two regulators in the supervision of cross-border regulated companies; the new deal will even permit the FCA to conduct on-site inspections in Hong Kong, if accompanied by the SFC.

More rules, more regulations: so what? The FATF is increasingly focused on the effectiveness of AML legislation, and regulators seem to be taking note. Hong Kong’s SFC has introduced a new ‘managers-in-charge regime’ – the first of its kind in Asia - in an attempt to strengthen the accountability of senior executives. This can be seen in recent enforcement trends: between 2015 and 2016 there was a 55 percent increase in the number of SFC enforcement actions against individuals, while there was a 24 percent decrease in those issued against firms. 

The regulatory screws will continue to tighten; but will they actually have any material effect in reducing financial crime? Until now, it appears that they haven’t. Hong Kong’s Joint Financial Intelligence Unit received 40 percent more reports of suspicious financial activity in 2016 than the year before, yet the number of people convicted of money laundering in the territory actually fell by 8 percent in the same period. And it was arguably only in the aftermath of the 1MDB corruption scandal in 2015 that Singapore’s regulators became aware he extent of the exposure of its banking system to money laundering: since then the Monetary Authority of Singapore has shut down two Swiss private banks and imposed penalties totalling USD 21 million on a further eight banks.

Hong Kong and Singapore were respectively ranked the second and fourth most financially secret jurisdictions in the world by the Tax Justice Network (‘ TJN’ ), a multinational advocacy group, in its most recent secrecy survey (2015). These positions are unlikely to change significantly, as one of TJN’s criteria for an improved ranking is the public disclosure of company ownership information. Singapore’s new rules on beneficial ownership only require companies to pass on information to the relevant registry, and to authorities in the event of a criminal investigation. If passed into law, Hong Kong’s proposed reforms will be the same. It remains to be seen whether Hong Kong and Singapore can keep up the momentum of regulatory change, and crucially whether the political will exists to push through the necessary reforms. The key for regulators in Hong Kong and Singapore is in persuading the business community that a stronger AML regime does not have to come at the expense of market competitiveness. Businesses have to realise that it is crucial to maintain a positive international reputation; as key markets such as the US and the UK extend the extraterritorial reach of their regulatory regimes, integrity will remain high on the global business agenda.