Hong Kong start-ups starved of banking services

HONG KONG: When lawyer Jonathan Lau left his swanky office and moved into a tiny co-working space to pursue his start-up dream, he thought he had prepared himself for everything. That is, until he needed a bank account.“We rocked up to the Citi branch in Central, filled out all the paperwork, and within a week they just told us straight up, no, we are not going to approve you. They weren’t happy with the fact that we didn’t have a regular lease,” said Lau, co-founder and Chief Technology Officer of Designjar, an online platform that aims to be a one-stop shop for businesses who need digital marketing materials.

And that was just the start. Lau said he tried more than 20 banks in Hong Kong. At HSBC and Hang Seng, he was told scheduling a meeting with a relationship manager would take at least four weeks. At OCBC Wing Hang, he was asked to show six months of operating history. Standard Chartered Bank, Lau said, simply didn’t call him back, after saying that he needed to put down a minimum deposit of US$25,000.

Eventually he managed to open two checking accounts so he could start paying rent and employees. But once Designjar goes live, it will need to receive payments online, something that requires a merchant account, which is even more difficult to set up.

“At this point, we have no idea how that’s going to work,” Lau admitted. “It did come as a surprise to us, because we really thought Hong Kong being the international city and commercial hub that it is, opening a bank account should be relatively easy.”

Hong Kong is consistently ranked one of the most business friendly places in the world. It currently scores highest on the Heritage Foundation’s Ease of Doing Business Index. That’s a reputation the de facto central bank Hong Kong Monetary Authority (HKMA) is keen to protect, and it is worried after receiving several complaints from businesses that either could not open bank accounts or that had their existing accounts closed.

Jonathan Lau (right) with co-founder Raymond Yip. Like many young businesses in Hong Kong, their startup Designjar has had trouble opening bank accounts. (Photo: Designjar)

In an email response to Channel NewsAsia, the HKMA said it ”has noted comments about difficulties experienced by companies, particularly overseas companies, SMEs and start-ups, in opening bank accounts in Hong Kong,” and that it “is collaborating closely with the business community on this subject.”

Lawyers say the problem is not unique to Hong Kong. Regulations have been tightened globally since the global financial crisis. But Hong Kong is the second home to some of the world’s most global and thus most tightly regulated banks, so they say businesses here have borne the brunt of the crisis.

Among the city’s biggest banks, Standard Chartered has paid close to US$1b to settle money laundering and sanction violation charges in the United States. HSBC was made to pay some US$2b. Bank of China hasn’t been fined yet, but is under investigation in Europe for the same reasons.

It is not just money that is at stake – thanks to a new batch of legislation, bankers can now bear criminal responsibility if they fail to comply with the law. In Hong Kong, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance came into effect in 2012.

“A banker who gets this wrong faces severe penalties, including the possibility of going to jail. That has made banks a lot more cautious in terms of opening bank accounts,” said Jill Wong, a partner at Howse Williams Bowers, who served as the HKMA’s Deputy General Counsel.

If the only task is to tackle money laundering, banks could still choose to focus on large transactions. But with the added responsibility to prevent terror financing, banks’ field of surveillance has been widened much more.

“A suicide vest costs as much as an iPhone. Fitting out a car to be a bomb can cost you US$25,000-50,000. These are very insignificant amounts of money when you think of the harm and injuries that could be done by suicide bombers and car bombs, so the equation for terror financing is different from money laundering,” Wong said.

Jonathan Lau said he understands all this. He was a lawyer himself after all. But he said when you are on the receiving end, it does make you question if there’s no better way to address the issue.

Wong called the current regulatory approach a sledgehammer, and said she was yet to see evidence that it is effective.

“We’ve had the pendulum swing from maybe not having enough regulation to too much regulation,” she said. “Nowadays banks are not only supposed to ‘know your customers’, in certain trade finance types of transactions, they are supposed to know their customer’s customer. So how far do you take this due diligence?”

“What we need now is for the pendulum to swing back to a place in the middle, what you call the right balance,” she added.

In its email to Channel NewsAsia, the HKMA said it will soon issue guidance to help banks “formulate customer-friendly account opening procedures, so that legitimate businesses, big or small, can have access to basic banking services.” But experts say moving that pendulum requires global coordination, and it is difficult to see how tiny Hong Kong can make much of a difference on its own.

First appeared at Channel News Asia