Ms Carmen Chu discusses the actions the HKMA is taking to disrupt AML threats to Hong Kong, the impact of increased collaboration across the private and public sectors, and technology initiatives that are making a difference.
This interview was conducted for the “AML Tech Barometer 2023” report, published by NICE Actimize and Regulation Asia to explore AML and fraud trends based on survey and interview data collected from 289 practitioners in Asia Pacific.
What are the biggest AML/CFT threats in Hong Kong and how is the HKMA addressing these challenges?
Carmen Chu: As noted in the Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report, the biggest threats to the banking system continue to be from fraud and mule accounts—driven in part by the rise in online activities—as well as corruption and tax crimes. This is common for international financial centres.
The HKMA has been taking a number of actions to address these challenges, including strengthening collaboration to detect and disrupt fraud and other financial crimes through public-private partnership in the AML ecosystem, keeping our legal and regulatory regime up-to-date and in line with international standards, and encouraging industry adoption of Regtech to help maximise outcomes of AML work.
What impacts have the HKMA’s measures to protect banking customers had so far?
Carmen Chu: Fraud and mule accounts remain a key focus for the HKMA’s AML efforts. In Hong Kong alone, there were over 19,000 deception cases reported in the first three quarters of 2022, up 40% year-on-year, with losses of around HKD 3.3 billion.
In response to emerging risks, the HKMA and the banking sector have been intensifying AML work and developing innovative approaches to protect the public from losses from fraud and financial crime. We have been achieving good results through our public-private partnership in information sharing and plan to further scale up these efforts in 2023, in terms of both the volume and quality of intelligence as well as the number of participating banks.
Up to Q3 2022, the Fraud and Money Laundering Intelligence Taskforce (FMLIT)—a public-private partnership for information sharing among the Hong Kong Police Force, the HKMA and 23 banks— has identified over 19,000 suspicious accounts and networks associated with crimes under investigation by the law enforcement agencies, with around HKD 820 million in criminal proceeds restrained or confiscated.
We have also worked with retail banks to develop a 24/7 stop payment service allowing them to offer immediate assistance in intercepting funds whenever a victim reports a fraud to the Police. Most recently, we have worked with the Police, banks and stored value facility licensees on the launch of a search engine called “Scameter”.
This allows members of the public to input information to be checked against databases of information previously linked to scams (including fraudulent websites purported to be hosted by banks) before a transaction is conducted, and is already estimated to have avoided at least HKD 400 million in fraud losses to the public since its launch.
How has the HKMA promoted innovation in the AML space? What progress has been seen so far and what do you see as the next steps?
Carmen Chu: In the face of rising levels of online fraud and financial crime, the HKMA has transformed the way it engages with banks to shape the direction of innovation in AML work; we have been encouraging the wider adoption of technology since the first AML/CFT Regtech Forum in November 2019.
Our most recent initiative is AMLab, which brings banks and local Regtech firms together in facilitated workshops. The first AMLab on the use of network analytics to identify fraud mule accounts took place a year ago with five banks, and this theme has just been “encored” in our third AMLab in November.
Adoption of network analytics by retail banks is progressing well. To date, about 60% of retail banks which are also members of the FMLIT are now deploying network analytics, more than twice as many as three years ago. In the first nine months of 2022, these banks also increased their identification and reporting of suspicious accounts and networks by 127% compared to a year ago, leading to an increase of 166% in the amount of criminal proceeds restrained or confiscated by law enforcement agencies.
My key message is that not only large institutions but also smaller banks can apply AML Regtech techniques and achieve good results, complementing more traditional transaction monitoring systems without incurring high costs or having to recruit large numbers of data scientists.
We will reinforce these messages in the coming months, firstly with a publication specifically focusing on network analytics, including further examples of use cases and guidance on how barriers were overcome, and secondly, with a new initiative to enhance the effectiveness of banks’ rule-based transaction monitoring systems which will be rolled out in two phases.
The first phase involves key updates to the HKMA guidance paper on name screening, transaction monitoring and STR reporting to better address recent developments in data and technology. The second phase will cover feedback from thematic reviews we have undertaken together with a leading Regtech firm.
In parallel, the HKMA has also recently started a pilot on the application of data analytics using granular financial crime data across multiple banks for the first time. This will help inform more timely supervisory responses aimed at reducing and preventing serious harm, particularly from mule account networks for fraud and financial crime.
How has work progressed to develop the new bank-to-bank information sharing platform?
Carmen Chu: We are supporting the banking industry in developing a new framework for detecting and sharing early signs of suspicion to complement the existing public-private partnership and public sector initiatives to enhance prevention and detection and, most critically, help stop customers’ financial losses from fraud.
Good progress has been made in addressing the legal, cybersecurity and technical challenges of this new bank-to-bank sharing platform, which is targeted to be launched in the coming months.
What new trends can be observed from recent suspicious transaction reports?
Carmen Chu: In line with what we have observed in major international financial centres, the majority (over 80%) of all suspicious transaction reports (STRs) were filed by the banking sector in Hong Kong. The Stored Value Facility sector ranked second, contributing over 8% of total STRs, showing the increasing maturity of controls in the sector.
These STRs continue to provide timely and actionable intelligence for the AML ecosystem, including some previously unknown networks identified using analytical tools. But a big part of the discussion is also about asset recovery, or intercepting fraud related fund flows so we can return them to victims.
The banking sector’s ability to intercept fraudulent payments has been enhanced significantly by working with the Anti-Deception Coordination Centre (ADCC) of the Hong Kong Police, which the HKMA has strongly supported. Under the 24/7 stop payment mechanism, the banking industry helped intercept over HKD 2.2 billion in suspected fraudulent payments in 2021.
What should the industry learn from the HKMA’s use of its supervisory and enforcement tools?
Carmen Chu: The HKMA deploys a range of supervisory and enforcement tools in a proportionate manner to address concerns identified in our supervisory process. One principal objective is to bring about prompt remedial actions and, where warranted, disciplinary actions will be taken to reinforce the message that banks must have AML/CFT systems that are commensurate with their risks.
In recent cases, the lessons highlight the importance of conducting on-going reviews of AML control systems to ensure their design and implementation remain effective. Senior management oversight is also a vital part of an effective ML/TF risk management framework of banks. Proper guidance to staff and clear designation of responsibilities are also crucial.
How does the HKMA view the risk of virtual assets given recent events and what action is being taken to manage these risks?
Carmen Chu: While the HKMA recognises the potential for innovation, the risks associated with virtual assets (VAs) and virtual asset service providers (VASPs) and the need to address them are also becoming better understood. As far as AML is concerned, the Financial Action Task Force (FATF) extended its AML/CFT standards to activities involving VASPs in 2019. Hong Kong, being a FATF member, is currently in the advanced stages of amending its AML/CFT framework to include a licensing regime for VASPs, which will come into effect in 2023.
The HKMA had responded to VASP sector developments through a circular in January 2022, addressing both financial crime risks and investor protection, and the approach to be adopted by banks when interfacing with VASPs. In short, the HKMA adopts a risk-based approach to supervising authorised institutions’ VA activities in line with applicable international standards and based on the principle of “same risk, same regulation”.
If I were to highlight one area in which the global AML/CFT community is clearly expecting better progress, it would be implementation of the travel rule in accordance with the FATF standards. As risk appetite and the volume of business related to VASPs grows, it will be important to demonstrate full compliance and address challenges regarding interoperability between systems and across jurisdictions. In this regard, the HKMA will continue its active participation in FATF discussions and engagement with the industry and relevant stakeholders.
What should the banking industry understand from the HKMA’s AML/CFT initiatives and their impacts to Hong Kong’s financial system?
Carmen Chu: We are firmly in a digital era and our financial system, while providing more efficient services, is now more prone to being abused for moving and hiding the proceeds of online fraud and other financial crimes. Everyone—financial institutions, regulators and law enforcement—have to identify and embrace new ways of doing things while closely collaborating with each other.
The most promising areas are data and network analytics, which authorities including the HKMA are applying to AML Suptech. Another is the development of private-private partnerships alongside the existing public-private ones. These initiatives enable banks to collaborate with other stakeholders in the AML ecosystem to spot illicit fund flows more efficiently and share information and intelligence quickly, which leads to more targeted and actionable suspicious transaction reports, and helps to protect the safety and integrity of the financial system and customers from losses.
At a time when the global economy is facing uncertainties and challenges, alongside new developments and opportunities, we must continue to demonstrate the value that banks’ AML and financial crime risk management efforts bring to members of the public. And we must have the ambition to deliver our improved processes at a scale and pace which will deliver the right results and a real impact to global financial stability and consumer protection.
This interview was conducted for the “AML Tech Barometer 2023” report, published by NICE Actimize and Regulation Asia to explore AML and fraud trends based on survey and interview data collected from 289 practitioners in Asia Pacific. Download the report here.