Compliance a big challenge for internationalising Chinese banks


One-tenth of international banks' costs are spent on compliance showing the challenge for the Chinese banks

As Chinese banks continue to internationalise, ensuring that they are compliant with the ever changing international regulatory framework is a growing challenge, said analysts. 

Banks with a global footprint have spent millions of US dollars on hiring compliance staff and putting systems in place in a bid to minimise wrongdoing, yet have still received substantial fines from regulators.

Chinese banks have less experience of operating overseas, and are vulnerable to falling foul of overseas regulations, with anti-money-laundering rules being a particular challenge.

"Cultural reform is important for Chinese banks expanding overseas, to manage their compliance risks," said James Tam, financial services partner at PwC.

Tam identified banks' governance, incentive systems and assessment mechanisms as important areas that Chinese banks need to get right in their internationalisation.

Fines have already been levied on some of the largest Chinese banks operating overseas. Last November, for example, Agricultural Bank of China was fined US$215 million by New York's financial regulator for breaching anti-money-laundering rules.

While China's largest banks have operated branches outside China for a number of years, a new wave of internationalisation of Chinese banks is currently taking place.

Cultural reform is important for Chinese banks expanding overseas, to manage their compliance risksJAMES TAM, PWC

"Now the joint stock commercial banks and the city commercial banks [mid-sized and smaller banks], are increasing their presence overseas to follow their customers who are going out," said Tam.

Remaining compliant with anti-money-laundering rules is not just a challenge for Chinese banks.

US regulators alone have issued over US$17 billion worth of penalties for breaching anti-money-laundering rules since the global financial crisis. HSBC, for example, paid US$1.9 billion in 2012, and still has a monitor from the US regulator in place, reporting on its efforts to improve its anti-money-laundering procedures.

A recent report from financial services consultancy Quinlan & Associates found that the world's 50 largest banks spent more than US$127 billion on compliance and controls in 2016, equivalent to between 10 and 15 per cent of banks' total operating costs.

As Chinese banks expand further, they too will have to bear such costs.

The banks themselves said however that they were already paying attention to compliance.

"Bank of China Hong Kong attaches highest importance to combating money laundering and financial crimes and regards it as one of the most important compliance risks in our business operation," said a spokesman for the bank, which now manages most of the Southeast Asian operations of its parent, Bank of China, China's most internationalised bank.

"In our daily operations, we strictly adhere to our relevant policies, procedures and guidelines and continue to strengthen our AML risk management framework."

*This article appeared in the South China Morning Post print edition as: Compliance a challenge for lenders