Frank Lam, Assurance Services Director and Leader of Family Office at BDO Hong Kong, and Institute Council member
The family office industry has experienced tremendous growth in recent years, particularly in Asia’s financial hubs like Hong Kong and Singapore. This rapid expansion has created new risks and challenges. Given the private nature of family offices’ operations and wealth, complexity of their investment and holding structures, and the low entry barrier of setting up the family offices, the industry faces the growing threat of fraudulent market players and fake or exaggerated beneficial owners and it would ultimately undermine the confidence of the investment communities and the image of the general public towards family offices.
While conducting a thorough background check is a critical first step to verify if the family offices are really who they claim to be, there are some voices from the market highlighting the need to step up the scrutiny of family offices. We understand that the regulator in Singapore has imposed stricter requirements including an account with a local private bank and disclosures of personal details of ultimate beneficiaries and relevant staff members of family offices.
“While navigating the complex regulatory landscape in Hong Kong poses challenges, a multifaceted approach to enhanced due diligence can help family offices mitigate risks and capitalize on investment opportunities.”
While stricter rules and increased scrutiny for family offices are prudent measures to maintain the integrity and legitimacy of this rapidly expanding industry, we have to bear in mind that wealthy families naturally tend to maintain privacy and keep a low profile of their investment activities. Any need to disclose extensive family information may not align with their intention of setting up of their single family offices. Therefore, we urge Hong Kong to adopt a more balanced approach for family offices. Drawing inspiration from existing know-your-customer (KYC) procedures for banking services could provide a template for enhancing transparency without overly infringing on the confidentiality that family offices often seek to preserve. By striking this balance, Hong Kong can fortify its position as a premier financial hub, attracting legitimate family offices while safeguarding against fraudulent entities.
The rapid growth of the family office industry in Asia’s financial hubs highlights the importance of proactive measures to ensure the legitimacy of the participants and preserve investor confidence. While navigating the complex regulatory landscape in Hong Kong poses challenges, a multifaceted approach to enhanced due diligence can help family offices mitigate risks and capitalize on investment opportunities. This needs to be balanced with respecting the privacy preferences of the wealthy families, for instance by adapting the existing KYC frameworks. By striking the right balance, Hong Kong can foster a thriving and trustworthy family office ecosystem that safeguards assets and supports long-term growth. (Leo Li, Principal of Family Office and Jenny Cheung, Manager of Family Office at BDO, contributed to this response.)
Dixon Wong, Managing Partner, Oakwise Capital and Family Office, and an Institute member
The Singapore government’s intensified scrutiny of family offices stems from anti-money laundering cases that began to be investigated in 2021. As the investigation deepens, the amount involved has reached over a billion Singapore dollars and there are still criminals at large. This has a great impact on Singapore’s rule of law and status of an international financial centre.
In the long term, the current strengthening of review and supervision, aimed at improving financial transparency and combating illegal financial activities, is a necessary step to protect the health of the industry, prevent fraud, and maintain financial stability. On the other hand, the current over-the-top censorship and regulatory attitude of the Singapore government has indeed brought some challenges and inconveniences to the banking industry and ultra-high-net-worth families interested in setting up family offices in Singapore. For example, increased financial and compliance costs for new applications and existing family office operations may inhibit and interrupt the willingness and plans of single-family offices to choose to set up in Singapore.
“The current strengthening of review and supervision... is a necessary step to protect the health of the industry.”
The situation highlights the importance of due diligence and record-keeping in this industry. However, compared with mature family offices in developed markets, many newly established family offices in Hong Kong and Singapore in recent years have encountered difficulty in investment due diligence, easy investment but difficulty in investment recovery, and insufficient risk control. When faced with complex market environments and investment opportunities, they often face challenges including the following:
- Limited channels for obtaining information: Due to information asymmetry, it is difficult for family offices to obtain complete and accurate target company data.
- Difficulties in verifying the financial authenticity of the investment target: Financial risks and crises require professional financial knowledge.
- Examining the internal risk control system: The company’s control environment, risk identification and assessment, control activities and measures, information communication and feedback, supervision and evaluation mechanisms are all key to evaluating the company’s internal risk control system.
Overall, by leveraging the specialized expertise and services of the accounting profession, family offices can overcome various due diligence challenges, enhance their investment decision-making processes, and mitigate risks more effectively.
Clement Siu, Deputy Managing Partner, Global Vision CPA Limited, and an Institute member
With Singapore being a key competitor to Hong Kong in terms of attracting wealth owners and family offices, the recent actions by Singaporean authorities are poised to have ripple effects within Hong Kong’s family offices sector. This heightened scrutiny poses both challenges and opportunities for the industry.
Single family offices, with their private and intricate structures, can serve as conduits for illicit activities. Strengthening scrutiny is vital in mitigating the risks associated with money laundering. By imposing stricter oversight measures, governments not only ensure compliance with regulatory requirements but also foster transparency and accountability within the financial sector.
Upholding high standards of financial integrity and regulatory compliance can bolster the reputations of both Singapore and Hong Kong as global financial centres. This can attract legitimate businesses and investors while deterring those with malicious intent, safeguarding the interests of investors and the financial system.
However, it is imperative to ensure that regulatory measures are proportionate, balanced, and do not unduly burden legitimate businesses or hinder innovation and growth within the financial sector.
“It is imperative to ensure that regulatory measures are proportionate, balanced, and do not unduly burden legitimate businesses or hinder innovation and growth.”
Family offices typically collaborate with various professionals, including lawyers, accountants, and investment consultants, professionals who are well-versed in anti-money laundering (AML) laws and regulations. As professional accountants in Hong Kong and Institute members, we can play a crucial role in assisting family offices with their due diligence challenges. For instance, as an experienced auditor, I possess key characteristics essential for these tasks:
- Knowledge and expertise: I have a deep understanding of applicable laws, regulations, and industry practices related to AML and stay updated on any changes.
- Analytical skills: My ability to assess complex financial information enables me to identify anomalies and errors in wealth histories provided by family offices, uncover discrepancies within financial records, and make informed judgements.
- Attention to detail: My meticulous approach ensures accurate and reliable reviews of documentation, especially when red flags are identified.
- Professional scepticism: This mindset helps me to question information, seek corroborating evidence, and exercise judgement in due diligence processes.
