Dealing with clients from China needs awareness and consideration that the Middle Kingdom is and has always been in a complex political situation, compliance expert Hui Zhang writes in an essay for finews.first. What are the pitfalls to avoid?

This article is published on finews.first, a forum for authors specialized in economic and financial topics.

Confucius: «When it is obvious that the goals cannot be reached, don't adjust the goals, adjust the action steps»

The wealth management industry is over 200 years old. But effectively serving the world’s wealthy was and is going to get far more complicated in the years ahead. Focusing on growth markets and in particular on Ultra-High-Net-Worth (UHNW) clients from China or Hong-Kong adds an additional layer of complexity in particular for the Compliance function. What are the pitfalls to avoid?

Dealing with clients from China needs awareness and consideration that China is and has always been in a complex political situation. This has recently even led to U.S. sanctions against

  • various China officials, government and corporate entities in relation to the detention and alleged human right violations of Uyghur Muslims in China’s western Xinjiang province (trade restrictions but no asset freeze);
  • the implementation of the Hong Kong National Security Law (freezing of assets of sanctioned individuals); and
  • China’s assertion of its territorial claims in the South China Sea (export ban of 24 Chinese companies).

China has drastically changed its money transfer rules since 2018: Before this new regulation was installed, Chinese clients had multiple ways to transfer money abroad via Hong Kong or other routes to the west.

After the publication of the «interpretation on illegal forex trading by Supreme People’s Court and Supreme People’s Procuratorate» in September 2018, the majority of these possibilities is subject to imprisonment and/or large fines. As of now, no retrospective legal/administrative consequences of these conducted transactions have been observed. The tightening of the regulations again capital flight has been reinforced.

«The country provides access to publicly available records such as credibility related databases»

As a result, the interests of Chinese clients in «Golden-Visa» and other residency investment schemes which are nowadays proposed by a large number of countries all across the world are boosted.

The new Chinese Individual Income Tax (IIT) Law has come into force in January 2019 and targets taxpayers who are domiciled in China (or resides in China for a total of 183 days or more in a calendar year) to pay for personal income derived from within and outside China. However, a resident taxpayer without domicile in China will have a worldwide income tax payment obligation in China earliest in 2025.

China’s media landscape is far better than its image displayed in the international media. The country provides access to publicly available records such as commercial and personal credibility related databases, corporate registers on the local, provincial and state levels. The same consideration is made for data sources from adjacent jurisdictions such as Hong Kong and Macau. However, the exploitation and analysis of such information and data will need an in-depth understanding of China’s media landscape and the evaluation of the accuracy and trustworthiness of the source.

«Chinese clients who discover Swiss wealth management for the first time will experience difficulties»

For the identification of a so-called Politically Exposed Person (PEP) in China, a significant difference between the legislative and advisory bodies such as the National People’s Congress (NPC), the Chinese People’s Consultative Conference, Standing Committee of the NPC must be made.

In addition, Chinese clients who discover the Swiss wealth management offering for the first time will experience difficulties in fully understanding the needs for KYC and Source of Wealth documentation. This is due to the fact that numerous local Chinese banks have neither fully understood nor effectively implemented the global AML/KYC standards.

Moreover, Chinese UHNWI have discovered new growth markets in other Asian countries for their investments which will then request an agile Compliance set-up and broader market knowledge to identify and mitigate specific risks.

«Chinese clients have a very different profile compared to clients from CIS, Latin America or the Middle East»

These clients are subject to a substantial shift of the core activity before or even after the account opening which is mainly driven by an opportunistic approach (for example entrepreneurs who have been active for decades in the coal industry are changing into very active traders on the stock exchange. Given the situation, as described above we see a clear need for expertise and experience.

The experience shows that Chinese clients have a very different profile compared to clients from CIS, Latin America or the Middle East. A holistic risk assessment can only be achieved with the help of Compliance officers who speak Mandarin or Cantonese but who also have a professional and academic background with a strong focus on the region, excellent inter-cultural background and know-how of Swiss wealth management market standards and a unique skillset for investigation and analysis.

«The assessment depends largely on a bank’s methodology to map out local media outlets»

A thorough understanding of Chinese clients’ needs identification and mapping of their potential sanctions and reputation risk exposure – beyond pure database research. The assessment is based on the evaluation of media sources but it depends largely on a bank’s methodology to map out local media outlets (from reputable to tabloids, from Beijing affiliated to Hong Kong-biased) in order to provide the holistic context for Compliance analysis.

In the words of Confucius «to adjust the action steps», the bank’s Compliance framework needs a strong positioning as an integrated advisory role in addition to its regulatory control function to establish a right to win for Chinese UHNWI in the Swiss private bank sector.

Hui Zhang, a Chinese Compliance officer, has been active in large financial institutions in China and Switzerland for the last 16 years. She moved to Switzerland in 2012, where she worked for Credit Suisse and subsequently for Banque International à Luxembourg (BIL) till today. While based in Shanghai, she worked for Agricultural Bank of China, AXA Insurance, Comway Capital, and Stanley & Partners Real Estate Investment Banking Services. She has extensive knowledge of the Chinese financial regulation framework and its development and is experienced in Swiss AML regulations.

Ralph Ebert co-authored this article. As a German lawyer, he is active in legal and compliance for big and private banks with 15 years of experience. He currently works as head of compliance at Banque International à Luxembourg (BIL) in Switzerland. He previously worked in Seoul, Montreal and Paris, before moving to Switzerland in 2008. He worked for companies including BNP Paribas, Credit Suisse, UBP and Credit Agricole Indosuez. He specialized in the fight against money laundering. He also focuses on the integration of regtech solutions, consequences for compliance and the modern compliance culture.

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