By Saeed Azhar, Michelle Price and Anshuman Daga
SINGAPORE/HONG KONG (Reuters) - Thousands of clients are being booted out of bank accounts in Asia's wealth management industry, which is cleaning up after a money laundering scandal in Malaysia, the 'Panama Papers' expose, and a global push for tax transparency, bankers say.
"For some global wealth managers, up to30 percent of private wealth clients in Asia are in the firing line," said Benjamin Quinlan, CEO of Hong Kong consultancy Quinlan & Associates.
The clean-up is mainly focused on problematic clients in the Asian financial hubs of Singapore and Hong Kong, which manage more than $1 trillion of managed assets combined.
Bankers expect a new round of consolidation among small wealth managers, as the costs of client due diligence and surveillance become unsustainable.
The scrutiny in Asia began in 2014 as banks moved to comply with tougher anti-money laundering rules, top bankers and compliance officers at nearly a dozen banks in Asia told Reuters.
But it has really gathered pace this year, they said.
TAX INFORMATION EXCHANGE
The urgency increased with announcements that Switzerland and Singapore were conducting criminal investigations into billions of dollars allegedly misappropriated by Malaysian state investment fund 1Malaysia Development Berhad.
Then came the leaked documents in April from Panama law firm Mossack Fonseca on 214,000 offshore companies. They showed Hong Kong was the world's most active center for the creation of shell firms, which can be used to avoid taxes.
Private banks in Asia have also felt the pressure of aggressive tax amnesty programs in Indonesia and India aimed at bringing offshore wealth back home and fear regulators may impose big fines on banks who breach the rules.
Next year a global tax transparency campaign starts to bite: Singapore, Switzerland and Hong Kong will be among 101 jurisdictions to begin collecting tax information that they will share to combat tax evasion.
All of this has"sparked amajor review andfiltering process," Quinlan said, "with one global private bank we spoke tolooking to offboard roughly 3,000 wealth managementclients in Asiain 2017".
Compliance and regulatory costs affecting the banking industry have soared since the 2008 global financial crisis.
Consultants LexisNexis Risk Solutions said anti-money laundering efforts are costing banks $1.5 billion annually in Asia Pacific and rising. Banks globally are expected to spend $12 billion on anti-money laundering compliance in 2016, says Quinlan & Associates.
Account and transaction surveillance is expensive, so it is often cheaper for banks to kick out tricky clients, bankers say.
For some, there is no warning: they know their accounts have been closed when they suddenly are unable to access them online or get an unexpected check in the post, six people working at law firms, funds and service providers said.
They said several funds incorporated in the Cayman and British Virgin Islands but operating in Hong Kong, were among those who found their bank accounts abruptly closed.
"We had one client whose account was just frozen, and they couldn’t get the money out," said one Hong Kong fund administrator.
One corporate account at a global bank in Hong Kong was shut due to the client's inability to provide detailed identities of investors in his company, a direct source told Reuters.
DECADES OF TRANSACTIONS
New standards adopted two years ago in Asia require banks to clearly identify a client, the client's business and - crucially - the origin of the money deposited. The banks also need to check the clients have paid all due taxes back home.
In some cases, compliance staff at large older banks sit glued to old mainframe style computers tucked away in remote parts of the bank. For hours on end, they click through and manually scan decades of transactions, people who conduct these searches told Reuters.
According to the head of a major corporate investigation firm, some banks in Hong Kong and Singapore have even used private eyes to perform due diligence on certain customers.
Nearly 40 percent of wealth firms in the Asia-Pacific region have cited compliance as their main strategic budget focus next year, EY said in its Global Wealth Report. That compares with 11 percent and 9 percent for European and North American firms respectively.
"You need to make sure you've got the right controls in place – people, compliance, technology," said Rahul Malhotra, who heads JPMorgan's private banking business in Southeast Asia. "Cost-to-income ratios are definitely going to be impacted in this business, which will result in further consolidation."
Compliance staff also are gearing up for tax investigations.
Western governments led by the United States have already aggressively targeted European wealth management centers such as Switzerland to recoup undeclared tax money. This led to whopping U.S. fines against top wealth managers including UBS, Credit Suisse, HSBC and a host of Swiss banks.
Asia could be next in the line of fire, with Singapore and Hong Kong as key targets, lawyers and banking sources say.
(Additional reporting by Anshuman Daga in Singapore, Lisa Jucca in Hong Kong and JR Wu in Taipei. Editing by Bill Tarrant)