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Compliance: Not the friend you want but one you need

Rejection
By Shruti Chaturvedi
25 Oct 2016

One month from the US regulator fining the New York unit of Mega International Commercial Bank, Taiwanese lenders are feeling the pressure and facing an unprecedented level of scrutiny on their existing loan books. But the extra paperwork should be viewed as a minor inconvenience with long-term benefits.

A $180m fine for anti-money laundering (AML) violations imposed on Mega is having a noticeable impact on its peers. Bankers working at numerous overseas branches of Taiwanese banks have told GlobalCapital Asia  that their head offices are starting to pay close attention to compliance to prevent such a mishap from occurring.

The result is extra paperwork and bankers having to go through the accounts of old clients to complete new know-your-customer requirements. Loan departments have also been asked to provide a deeper level of details such as photocopies of the IDs of business owners or management as well as proof of their address in the form of utility bills.

Borrowers too are facing a more challenging time. Those that are relatively inexperienced or running a small set-up have to be walked through the new compliance processes and explained why the information is necessary. Anecdotally, bankers say it is adding to the time they spend on working on syndicating loans as well as getting approvals for participating in deals.

In addition, they also risk alienating some borrowers that are not used to this level of enquiry. There is fear that the extra hoops and the inability of some borrowers to meet the new requirements, may preclude corporates that genuinely need funds for growth.

Bankers say that the time that could have been devoted to origination or processing new loans is being diverted to dealing with old deals.

Understandably, the extra work is frustrating for bankers who have to chase new deals to meet their annual targets in a year of already low activity. But they need to realise that it is a small discomfort to endure in order for them to be able to take better and quicker decisions in the future. If the documents are in place today, it will make it easier for banks to dust them off when a company returns for a loan.

And returns are likely, given the Asian loan market is dominated by refinancing and repeat borrowers.

The new regime may mean having to turn down a few deals due to lack of information, but this will also signal to borrowers that they need to be more forthcoming about themselves if they really need funds.

If AML and counter terrorist financing was not on top of the agenda for Taiwanese banks, the incident with Mega has ensured it now firmly is. Lenders are also being more selective about where they want to set up an operation, or continue operating, considering the increased cost of compliance.

Global banks learnt the value of compliance the hard way after the global financial crisis, and eight years on continue to face punitive action by regulators and mind-boggling fines. Taiwanese banks are now putting in place sounder due diligence and KYC processes, which will help them avoid fines such as the one that hit Mega. No system is fool proof, but if the extra time and effort helps plug even some of the leakage, it would be well worth it.

By Shruti Chaturvedi
25 Oct 2016