Wimbledon is a magnet for the rich and famous. It is a key social event in the private banks’ corporate hospitality budget.
But those budgets are increasingly being tightened due to the rising costs of compliance. The stringency has come after several painful incidents caused bad publicity.
HSBC stained its reputation in 2012 with a record fine for allegedly laundering the money of Mexican drug barons. Members of the drug cartels would arrive at the bank’s Mexican branches with the proceeds of drugs, and were able to deposit hundreds of thousands of dollars in cash into an account without the clerk questioning its origin, and get it transferred to the US.
US law also prohibits banks doing business with countries under US sanctions. Some are aimed at countering transactions to finance terrorism, some to cut finances for the nuclear arms race. Standard Chartered, HSBC, RBS, Lloyds and Barclays were all penalised for processing payments for Iran – through US clearing banks – often removing the reference to Iran to circumvent automatic red flags in the system.
More recently, private banks have been assessing their exposure to the corruption scandal engulfing Fifa, the organising body of world football. Banks processed payments used to bribe Fifa officials to secure broadcasting rights or to ensure a particular country was awarded the World Cup hosting rights.
The know-your-customer rule requires banks to identify if a client is ‘politically exposed’ in that he holds such great influence that he presents a risk for potential corruption, or is a relative of a politically exposed person.
A compliance officer at a global bank said: “We would need to recognise not only the children of the person, but also whether our client was the daughter’s husband.”
In practice, scrutinising and monitoring the clients for political connections and for the source of their wealth is challenging. One private banker complained: “I used to talk with my clients over lunch about yachting. Now I need to ask them where they got their money from.”
A relationship manager at a wealth management company in India said: “In Delhi, the client is polite enough to have a cup of tea. When visiting a client in Mumbai, however, we often get told off. They say ‘Why are you here?’ and ‘Don’t waste my time.’”
Switzerland has long been the traditional home of opaque bank accounts. But the old Swiss offshore model, built on secrecy, is fading. The long arm of US law made itself felt in the Alpine country when a federal campaign fined its banks for helping wealthy Americans evade tax. Since then, Switzerland has signed several agreements on automatic exchange of information about their banking clients.
The reputation risk and the increased expenses of complying with the anti-money laundering rules and sanction regimes made many global banks cut back on private banking operations internationally, and caused a shake-out in the sector. Private banks are now highly risk-averse, and many have started shedding non-compliant clients.
Coutts – the guardian of the Queen’s wealth – is the jewel in the tarnished crown of Royal Bank of Scotland. After the bailout, RBS’s fall from grace was a national obsession, and Coutts’s lavish client entertainments and event sponsorships raised eyebrows as it was now part of a government-owned group, so the British taxpayer was having to foot the bill.
After scaling back internationally and focusing on its domestic business, RBS has become one of the safest banks in the world. It has even sold Coutts’ overseas arm Coutts International.
An HSBC compliance officer said: “The US fines made RBS and HSBC very strict. Private banking clients are moving to JP Morgan now.”
RBS’s sale of its private bank in Hong Kong and Singapore was a move against the global trend: everyone is looking to do business with the rising billionaires of Asia. China has the world’s second-largest billionaire population and is on track to unseat the US as the largest.
Due to the fierce competition, Asian clients dictate the pricing, so margins are thinner, but investment banks are leveraging off their local private banking divisions to get the big merger and acquisition deals from the Asian tycoons. Lee Shau-Kee, one of Hong Kong’s richest landlords, for example, has Morgan Stanley as his investment banker to advise him on his acquisitions.
China is a relationship country. Half in Asia have made their money in property. Monopolies for land development rights, mobile telephone networks or gambling in Macau are granted by politicians. The luxury brand flagship stores in Beijing count on customers buying gifts for senior government officials as an important revenue source. Every March, the National People’s Congress – when the Communist Party delegates are all in town – means a two-week shopping spree.
The stereotype of the classic Asian private banking client is the self-made tycoon; an entrepreneur who has gone from rags to riches. There is no inherited wealth – it is all relatively new.
Unlike European private wealth clients who prefer to have their assets managed, Asian clients play an active role in investment decisions and want to get an introduction to investment banking services.
Investment banking in China is a gold rush. State-owned companies issuing shares is one of the cash cows. Hiring sons, daughters or nephews to win lucrative investment banking mandates from the parents’ companies has become common practice too.
While Hong Kong has surpassed London both in the number and the worth of its billionaires, the plush Mayfair private banks still have the buzz, driven by the influx of international wealth.
And they do not come here for the weather. The super-rich of Russia and the Middle East like the strength of British jurisdiction, and enjoy having a luxury pied-à-terre in London and their children in British schools. Prime-location London flats also keep their value as collateral for lombard loans to fund the purchases of yachts.
There is an increasing concern that buying London properties through anonymous shell companies registered in offshore tax havens is a large-scale money laundering routine.
Additionally, the sovereign debt risks in the eurozone periphery made many Italians, Spanish and Greeks move assets to London, fearing their accounts might be ‘cyprused’, or frozen by their governments.
Although private banking conjures up images of glamour and luxury in its dealings with the world’s wealthiest people, the category has become diluted. Even the Metro Bank offers private banking services. Some are confused about ‘premier’ banking, which is a step up from telephone menus and call centres, but offers nothing more than a ‘banking butler’ (known as a relationship manager) and an ego boost. Premier accounts are available for anybody with an annual income of £100,000.
True private banking requires a big leap in terms of wealth. Many complain, however, that private banking advisers are only about pushing investment products on their clients.
Maria Sovago is a freelance journalist
Private banks have been assessing their exposure to the corruption scandal engulfing Fifa.
In Europe, private wealth clients prefer to have their assets managed.
The wealthiest of Russia or the Middle East like the strength of the British jurisdiction.
