Cost of tax cheats hits private banks

LONDON - Reuters

Private banks managing the financial affairs of the world’s wealthy face spending millions of dollars every year on vetting new clients, as regulators get tough on banks that harbor tax cheats and money launderers.

While the world’s rich are getting wealthier and putting more money into private banks, a growing proportion of the cash is from geo-political troublespots in the Middle East and Asia.

That is leading the banks, mostly based in Europe and the United States, to spend hundreds of hours on costly checks aimed at meeting regulators’ demands to root out bad clients, eating into their profit margins.

Paul Kearney, head of Kleinwort Benson’s private investment office, said his team incurs between $7,600 and $37,800 of costs in vetting each new client, depending on the background intelligence required and the jurisdiction in which the research is undertaken. “Currently the international client base is the faster growing so we would expect our costs to increase in the next 12-24 months,” he said, adding costs could equate to up to 10 percent of the first year’s earnings from that account.

Some in the industry question whether all the effort will make much difference.

Top banks, including HSBC, have paid huge fines to U.S. lawmakers to make amends for unwittingly laundering Mexican drug money, while Britain’s Financial Conduct Authority has fined three banks, including RBS’s Coutts, for lax money laundering controls since its crackdown gathered pace in 2012.

Data from the 2013 World Wealth Report compiled by RBC Wealth Management and Capgemini shows the investable wealth of the world’s so-called “high net worth” individuals rose by 10 percent to a record $46.2 trillion in 2012, after dropping 1.7 percent in 2011.

The flow of money into the $18.5 trillion global wealth management sector increased 23.7 percent in 2012, reversing a 27.9 percent outflow in 2011. However, average pretax profit growth was 5.3 percent in 2012, down from 12.3 percent in 2011, with high costs blamed for the dip, consultancy Scorpio Partnership said.