Chapter 9 private banking

Chapter 9
Private Banking
The Presentation Slides for Teaching
Anti-Money Laundering and Counter-Terrorist Financing
Website : https://sites.google.com/site/quanrisk
E-mail : quanrisk@gmail.com
Copyright © 2021 CapitaLogic Limited

Declaration
 Copyright © 2021 CapitaLogic Limited.
 All rights reserved. No part of this presentation file may be
reproduced, in any form or by any means, without written
permission from CapitaLogic Limited.
 Authored by Dr. LAM Yat-fai (林日辉),
Chief Data Scientist, CapitaLogic Limited,
Adjunct Professor of Finance, City University of Hong Kong,
Doctor of Business Administration,
CFA, CAIA, CAMS, CFE, FRM, PRM, MCSE, MCNE.
Copyright © 2021 CapitaLogic Limited 2

Outline
 What is private banking?
 Offshore company
 Trust
 Enhanced AML framework
 The Panama Papers

Private banking
 Regulatory definition
 Minimum HKD 8 mn liquid assets under a bank’s
management
 Maintain personalized relationship
 Receive personalized banking services
 Operational characteristics
 A bank officer visits a customer’s office to conduct
banking transactions for the customer

Wealth pyramid
Private banking
Wealth management

Source of wealth

Why private banking?
– customer’s perspective
 The customer has too much money
 Safety custodian of wealth
 Protection against inflation
 Capital appreciation
 Tax avoidance and/or deferral
 Estate planning
 Social status

– bank’s perspective

– bank’s perspective
 Good profit
 More revenue
 Less cost
 Lower risk
 Business referral from private banking
customers
 Other high net worth individuals
 Corporate decision makers

Revenues and costs
 Selling investment products
 Commission
 Management fee
 Custodian fee
 Other service charges
 Collateralized lending
 Loan interests
 All in large transaction amounts

Collateralized lending
0
1
2
3
4
5
6
7
8
9
10
Collateral Loan
7 7
3

HKD 700,000

Relationship manager
“关系”经理

No. of customers serviced
by one relationship manager

Major private banks in Hong Kong
 HSBC
 Hang Seng Bank Limited
 Standard Chartered Bank (Hong Kong) Limited
 Bank of China (Hong Kong) Limited
 Bank of East Asia
 Goldman Sachs (Asia) L.L.C.
 Morgan Stanley Asia International Limited
 JP Morgan Chase Bank, National Association
 UBS AG
 Credit Suisse AG

Outline
 Trust

A model corporate structure
Owner(s)
Share
-holder(s)
Director
Authorized
signatory
Chairman
and director
Authorized
signatory
Director
Authorized
signatory
Company
secretary

Offshore company
Nominee
director

Why offshore company?
 Separate company from shareholders
 Only the nominee director on the record
 Very loose oversight from government
 Very flexible
 0% tax rate on corporate profit

ML risk of offshore company
 Legal status as any foreign company
 Deemed to be the higher risk customer
 KYC must be in place to identify and verify
 beneficial owners
 objectives of the business relationship
 funding sources
 Detailed justification report must be prepared

Independent identity verification
 A certificate of incumbency issued by the
corporation’s registration agent in the country
of incorporation
 Similar company report certified by an
independent and licensed professional
 Unreliable but better than nothing

Bearer shares

Outline
 Trust

Trust
 Formed under the Trustee Ordinance
 Not a statutory entity
 A group of individual persons and/or corporations playing
different roles
 Statutory rights and obligations unclear
 Cannot enter business relationship with a FI
 Participants enter business relationship separately with a FI
 Individual KYC and/or corporate KYC to be applied

A simple trust

Major participants of a trust
 Settlor
 The entity who contributes funds and/or assets to create the trust
 Beneficiary
 The entity who receives benefits from the assets owned by the trust
 Trustee
 The entity who administers a trust
 A fiduciary owes the highest duty to manage the assets in the trust
 Protector
 The entity who has some control over the trustee
 Usually including a power to dismiss the trustee and appoint another
trustee
 Not a mandatory component of a trust

Information to be collected from a trust
 Name of the trust
 Date of establishment
 The jurisdiction whose laws govern the
arrangement as set out in the trust instrument
 The identification number granted by an authority
 Identification information of settlors,
beneficiaries, trustees and/or protectors
 in line with guidance for individuals and/or
corporations

Full trust KYC
 Trust
 KYC on the trust
 Major participants
 KYC on individual person if the major participant
is an individual person
 Full corporate KYC if the major participant is a
corporation

Outline
 Trust

A typical private banking customer
Gate
keeper
Nominee
director
Company
secretary
Beneficial
owner

End-to-end private banking services
 Set up offshore
company
 Hire company secretary
 Arrange nominee
director
 Customer onboarding
 Enhanced AML
compliance
 Investments in
 Financial assets
 Private equities
 Real estates
 Real assets
 Collateralized lending
 Portfolio management
 Tax avoidance

Risk based approach
Private
banking
ML risk of customer →
Ml
risk
of
financial
service
→

Enhanced CDD
 Purposes and reasons for opening the account
 Business background
 Employment background
 Estimated net worth
 Source of wealth
 Corroboration of major economic activities that gave rise to the wealth
 Family background
 Information on spouse
 Parents in the case of inherited wealth
 Source of funds
 Description of the origin and means of transfer for funds that are acceptable for account
opening
 Anticipated account activity including nature and level of businesses and
transactions
 References or other sources to corroborate reputation information
 Introduced by whom and when and the length of relationship
 Name search with at least two commercial watch list databases

Enhanced CDD
 Self-declaration of ownership and directorship of
offshore company
 Face-to-face meeting
 Registered mail to residential address
 Media search with positive comments
 Detailed analysis by AML compliance
 Approval from senior management
 Minimal interruption to your customer

Legal search service

Preventive customer risk profiling
 Predicate the suspicious scenarios which may
be triggered by the future transactions of a
private banking customer
 Prepare in advance the best customer responses
 Collect supporting documents in advance
 Knowledge on transaction monitoring

Frequent ongoing monitoring
 At least annual
 Enhanced CDD
 Face-to-face meeting
 Registered mail
 When there is a trigger event

Suspicious transactions
 Sanctions list matching
 Advise transaction alternatives to avoid matching
entities in sanctions lists
 Transaction monitoring
 Higher risk transactions by higher risk customer
are consistent with the customer profile

Suspicious transaction reporting
 General private banking transaction
 Higher risk customer
 Larger amount and/or higher frequency
 Regulatory approach
 Higher risk transaction
 Suspicious transaction
 JFIU approach
 Transaction consistent with customer profile
 With preventive customer risk profiling
 Not a suspicious transaction

Record keeping
 Thick file
 Include a lot of relevant and/or irrelevant information
 Media records with positive comments
 Family history
 No. of wives and/or girlfriends
 Independent review by accountants and/or solicitors
 Detailed analysis
 Even though a customer belongs to the group of higher
risk
 The customer has lower chance to connect to the ML
activities
 Ready to be examined by regulators

Enhanced AML compliance
 Know your customer
 Enhanced CDD
 Frequent monitoring
 Suspicious transactions
 Close monitoring
 Record keeping
 Thick file
 Detailed analysis
 Approved by
 Senior management

The Wolfsberg Group
 A non-governmental association of thirteen
global private banks
 Founded in 2000 at the Wolfsberg, Switzerland
 To develop financial industry standards for
AML and KYC
 Criticized the FATF's AML documents as "too
prescriptive and too narrowly conceived"

Wolfsberg members
 HSBC
 Standard Chartered Bank
 Barclays
 UBS
 Credit Suisse
 Société Générale
 Deutsche Bank
 Banco Santander
 Citigroup
 Goldman Sachs
 JP Morgan Chase
 Bank of America
 Bank of Tokyo-Mitsubishi
UFJ

Major Wolfsberg standards
 Wolfsberg Private Banking Principles, May
2012
 Wolfsberg Guidance on PEPs May 2017
 Wolfsberg Correspondent Banking Principles
2014
 Wolfsberg Trade Finance Principles, 2017

Outline
 Trust

The Panama Papers
 2.6 Terabytes
 11.5 million documents
 214,488 offshore companies

Reference
 HKSI, 2018. CPWP M2 – Ethics and
Compliance Study Guide.

Chapter 9 private banking

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Chapter 9 private banking