According to a media report (https://www.yicai.com/news/102816355.html), Interactive Brokers (“IBKR”) – the world’s largest internet-based securities broker headquartered in the United States – has raised the requirements for online account opening for residents of mainland China, following other overseas securities brokers such as Futu, Tiger and Longbridge. Mainland Chinese applying for an account at IBKR are now required to provide proof of overseas employment or residency.
It is reported that IBKR may have adopted this measure due to the following: This year, Chinese tax authorities have strengthened the enforcement of tax collection and administration on individual overseas income. As a result, many mainland Chinese investing in Hong Kong stocks or U.S. stocks have received tax supplementary payment notices from the Chinese tax authorities. Driven by concerns regarding these new requirements and noting that the United States does not currently participate in the tax-related information exchange under the Common Reporting Standard (CRS) Framework, some mainland Chinese investors have attempted to avoid having their tax-related information exchanged with China’s tax authorities. They have done this by choosing to open accounts with U.S.-based securities brokers rather than those in other Asian countries or regions. This method of tax avoidance has been widely discussed on social media and has garnered a lot of public attention.
How to manage the opening of accounts and avoid triggering regulatory risks under Chinese law has always been a matter of concern for the foreign financial institutions that provide services to clients with mainland Chinese backgrounds. This revision to IBKR’s account opening policy is one example of foreign financial institutions undertaking measures to adapt to changes in market conditions and control compliance risks under Chinese law. For foreign financial institutions serving clients with mainland Chinese backgrounds, the following insights can be drawn:
1. Foreign financial institutions need to adjust their effectively and in a timely manner.
Since China lacks specific regulatory provisions for cross-border financial services, foreign financial institutions have no clear regulatory guidelines to follow when serving clients with mainland China backgrounds. Based on the principle of prudent operation, foreign financial institutions need to regularly assess their legal and compliance risks in accordance with advice from legal counsel in mainland China and based on the results of these assessments adjust their risk control measures effectively and in a timely manner. Given the uncertainty of China’s cross-border marketing regulatory policies, the timeliness and effectiveness of these adjustments is crucial.
2. Foreign Financial Institutions should pay attention to risks arising from market changes.
Based on the media report, we can infer that one of the drivers behind IBKR’s action may be the large influx of Chinese investors opening accounts with U.S.-based securities brokers to evade tax-related information exchange under the CRS. This is not due to changes in China’s regulatory policies or law enforcement environment for cross-border financial services but rather has been triggered by the strengthened enforcement of tax collection and administration on individual overseas income by China’s tax authorities. Financial institutions themselves were passively affected by the changes in investor behavior. This is a reminder to foreign financial institutions that when assessing compliance risks, they should not only focus on changes in China’s regulatory policies and law enforcement environment but also pay attention to the compliance risks caused by changes in market and investor behavior. It is recommended that financial institutions regularly discuss with their internal and external legal counsel the incidental risks that may arise from changes in the market and investor behavior, and how to manage these risks.
3. Foreign financial institutions need to recognize regulatory red lines and avoid crossing them.
IBKR’s timely measure of raising the account opening threshold for clients with mainland China backgrounds is commendable from the perspective of compliance risk management. Although Chinese laws and regulations do not provide clear regulatory guidelines, foreign financial institutions are advised to recognize and understand the regulatory principles and red lines of Chinese government. They should take all actions to avoid violating regulatory red lines, and demonstrate, where necessary, to the Chinese government their adherence to the principles of prudent operation when onboarding clients with mainland Chinese backgrounds. In this way, they can maintain normal operations without triggering compliance risks.
