Hong Kong: HKMA Rates Level Of Money Laundering And Terrorist Financing Risk For SVF Sector As Medium

Last Updated: 29 July 2019
Article by William Hallatt, Hannah Cassidy and Natalie Curtis

Last Friday, the Hong Kong Monetary Authority (HKMA) published its money laundering and terrorist financing (ML/TF) risk assessment report for the stored value facility (SVF) sector in Hong Kong.

The latest assessment confirms that the SVF sector continues to carry a medium level of ML/TF risk.

While the majority of the sector continues to be characterised by lower ML/TF risks (as indicated by the use of SVF products for low value transport and retail transactions), some pockets of higher ML/TF risks have emerged, arising from SVF products with functions such as overseas cash withdrawal and cross-border remittances.

SVF licensees should consider the HKMA's report, and (where necessary) update their institutional ML/TF risk assessments and enhance their internal systems and controls.

The HKMA has identified various areas for further action. Among other things, it plans to consult the industry in due course on proposed amendments to the AML/CTF guideline for SVF licensees, including updating the application of the risk-based approach.

Brief overview of assessment

The latest risk assessment comprises of a medium level of threat and a medium level of vulnerability, which is in line with the risks presented by the SVF sector globally.

The threat to the sector was found to be concentrated in:

  • network-based SVFs being exploited for various fraud-related activities;
  • prepaid cards being loaded from opaque funding sources and misused for cash withdrawal in higher risk countries; and
  • person-to-person (P2P) functionality being abused for illegal bookmaking activities.

Although the majority of the SVF sector is of low ML/TF risk, the level of vulnerability has been assessed to be medium, due to the rapid development in P2P fund transfers and remittance, as well as the offering of prepaid cards with high stored values and overseas cash withdrawal functions.

The HKMA also assessed the AML/CTF policies, procedures and controls adopted by the SVF sector, as part of its supervisory engagement with SVF licensees.

The latest assessment follows the preliminary ML/TF risk assessment of the SVF sector which was included in the government's report of April 2018 setting out the risk assessment for various financial and payment sectors in Hong Kong (see our e-bulletin of May 2018 for further details). The level of ML/TF risk for the SVF sector was also assessed to be medium at the time.

HKMA's to-do list

The areas which the HKMA intends to work on include:

  • enhancing the regulatory framework, and hence the resilience of the SVF sector to ML/TF risks, while maintaining functionality aimed at customer convenience and ease of use (this includes the upcoming consultation on proposals to amend the AML/CTF guideline as mentioned above);
  • strengthening understanding of ML/TF risks by monitoring new typologies and addressing any information gaps, via ongoing cooperation with law enforcement agencies and other financial regulators;
  • continuing risk-based supervision (including thematic reviews and industry training), focusing on areas of higher ML/TF risk and the effectiveness of AML/CFT policies, procedures and controls;
  • engaging with the SVF sector and providing guidance to enhance licensees' understanding and mitigation of risks;
  • enhancing cooperation with regulatory authorities in other jurisdictions, in particular Mainland China, in view of the increasing cross-border usage of SVF products and services; and
  • supporting innovative means by which SVF licensees implement financial crime controls, and exploring the greater use of technology and analytical tools in supervisory work.

Upcoming FATF mutual evaluation report

Going forward, there are likely to be further enhancements to the AML/CTF regime for Hong Kong (in the SVF and/or other sectors), following the anticipated release in September 2019 of the Financial Action Task Force (FATF)'s report on the mutual evaluation of Hong Kong.

The mutual evaluation assesses the effectiveness with which AML/CTF measures are implemented in Hong Kong, as well as technical compliance of the FATF's guidance.

According to public information about the draft evaluation report, Hong Kong's system has been assessed to be "compliant and effective overall". However, there are a few areas which Hong Kong should prioritise going forward, including the prosecution of money laundering linked to foreign predicates, increasing risk understanding and AML/CTF implementation by smaller institutions, and strengthening supervisory measures for some sectors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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