AML/CTF (anti-money laundering/countering terrorist financing) efforts in Hong Kong are gaining momentum as it gears up for the upcoming mutual evaluation by FATF (the Financial Action Task Force) in 2018.
Updating the legal framework
The government gazetted two bills in June: the Anti-Money Laundering & Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017; and the Companies (Amendment) Bill 2017 These push for a more comprehensive scheme which will bring the existing framework more in line with prevailing international standards.
The key proposed changes include:
- Imposing CDD (customer due diligence) and record-keeping obligations on designated non-financial businesses and professions in certain transactions;
- regulating TCSPs (trust and company services providers) through a licensing scheme under which their owners and management will need to satisfy a “fit and proper” test (unless one of the exemptions applies, e.g. where a TCSP is an operation ancillary to a licensed corporation’s principal business);
- requiring all companies incorporated but not listed in Hong Kong to keep a register of PSC (persons of significant control) which can be inspected by authorities upon request; and
- requiring financial institutions to record details of recipients and beneficiary institutions in wire transfers.
These new obligations will be backed by disciplinary and criminal sanctions.
Although financial institutions should expect an increased compliance burden in relation to transfers or the upkeep of PSC registers (if they fall within the ambit of the requirements), there are other proposals in the new regime which indicate a relaxation of the existing CDD obligations. For instance:
- The threshold of “beneficial ownership” under AMLO will now be “more than 25%”, as opposed to “not less than 10%” in the past; and
- financial institutions will be able to fulfil their CDD obligations through a related foreign financial institution within the same group, if the related institution is subject to similar AML/CTF requirements under a group policy and the group is regulated by an appropriate authority.
Robust enforcement actions and individual accountability
The proposed relaxation in CDD requirements is by no means an indication AML will become less of a priority for regulators and authorities. On the contrary, they remain committed to strengthening AML enforcement in Hong Kong.
Two years in a row since 2015, the SFC (Securities and Futures Commission) has conducted thematic on-site inspections to evaluate the effectiveness of licensed corporations’ AML procedures and controls. In a circular issued in January 2017, the SFC has made it clear that AML/CTF compliance will remain a “focus of supervision”.
One emerging theme is the SFC’s emphasis on senior management accountability. On top of the severe regulatory consequences for non-compliance, recent enforcement actions demonstrate a willingness on the part of the regulator to pursue individuals whom they consider to be in a position to prevent the breaches from arising in the first place. For example, Guoyuan Security Brokerage (Hong Kong) Limited and iSTAR International Futures Co Limited saw their former responsible officers and managing director suspended (in addition to the institutions being reprimanded and fined, HKD4.5 million [USD576,000] and HKD3 million respectively).
The recent signing of the Memorandum of Understanding between the SFC and the Hong Kong Police last month is another tell-tale sign of the SFC’s focus on individual conduct. We anticipate enhanced collaboration between the SFC and the Hong Kong Police who are no strangers to rigorous investigations on the substantive money-laundering offences under the Organized and Serious Crimes Ordinance, Drug Trafficking (Recovery of Proceeds) Ordinance and United Nations (Anti-Terrorism Measures) Ordinance.
It remains to be seen how this might impact their investigative approaches over time. The potential interplay between the Hong Kong Police’s power of arrest and the SFC’s power to compel responses during interviews, and the implications for any subsequent criminal proceedings, are certainly what financial institutions should be considering now, especially when responding to enquiries from the authorities. It would be prudent to re-examine critically current systems and controls to identify and address any regulatory and criminal risks that may become apparent under this new framework.
The market response and challenges ahead
As expected, the market has thus far adopted a cautious approach given the renewed concerns over AML risks. The number of suspicious transaction reports increased by 80 percent from 42,555 in 2015 to 76,590 in 2016, around 80-90 percent of which came from the banking sector.
There are bound to be new AML challenges for both regulators and market participants going forward, as we see in the recent scandal surrounding Commonwealth Bank of Australia and ever-increasing cybersecurity risks. A proactive three-pronged approach, namely bespoke risk assessment, early detection and prevention, and efficient crisis management in the unfortunate event of a breach, remains the most effective way to mitigate AML risks.
Kane Mak is a supervising associate and Cynthianna Yau is an Associate at Simmons & Simmons in Hong Kong.