Following an evaluation of Hong Kong in 2008, the Financial Action Task Force ("FATF")1 identified the following deficiencies in the Hong Kong anti-money laundering ("AML") and counter-terrorist financing ("CTF") regime:
- The customer due diligence ("CDD") and recordkeeping requirements for financial institutions ("FI") did not have statutory backing (i.e., the guidelines were not sufficient for FATF purposes);
- The financial regulatory authorities lacked supervisory and enforcement powers;
- There were no criminal sanctions or supervisory sanctions to deal with cases of non-compliance; and
- Remittance agents and money changers were not subject to a regulatory regime.
The Securities and Futures Commission ("SFC") has now taken concrete steps to enhance the Hong Kong AML/CTF regime so as to conform to international standards.2 At the end of January 2012, following industry feedback, the SFC announced a new set of guidelines as part of Hong Kong's AML/CTF regime (the "Guidelines"), which comprise:
- Guideline on Anti-Money Laundering and Counter- Terrorist Financing; and
- Prevention of Money Laundering and Terrorist Financing Guideline issued by the SFC for Associated Entities.
The Guidelines will come into effect on 1 April 2012, replacing the existing Prevention of Money Laundering and Terrorist Financing Guidance Note previously published by the SFC. The Guidelines are intended to assist licensed corporations and associated entities in designing and implementing appropriate and effective policies, procedures and controls in compliance with the requirements of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (the "AMLO"), and/or other applicable AML/CTF legislation and regulatory requirements.
The AMLO will be Hong Kong's first AML-specific legislation. AML requirements and obligations will no longer be ancillary obligations entrenched in another piece of legislation, as they currently are in the Organized and Serious Crimes Ordinance3 and the Drug Trafficking (Recovery of Proceeds) Ordinance4. The AMLO, which was gazetted on 8 July 2011, will come into effect on 1 April 2012.
The new AML/CTF regime addresses the following issues.
Customer Due Diligence
The Guidelines list the steps that should be taken when carrying out CDD and provide examples of relevant information that should be obtained, including identifying and verifying the identity of customers, beneficial owners in relation to customers, and persons acting on behalf of customers (e.g., authorized account signatories and attorneys). As part of the verification process, the performance of a company search for companies incorporated in Hong Kong will become mandatory. For companies incorporated overseas, FIs must:
- perform a similar company search enquiry in the place of incorporation and obtain a company report;
- obtain a certificate of incumbency or equivalent; or
- obtain a similar or comparable document to a company search report or a certificate of incumbency, certified by a professional third party in the relevant jurisdiction.
Although "customer" is not a defined term under the AMLO, the term "customer" refers to a person who is a client of the licensed corporations under the Guidelines. CDD measures are expected to be conducted:
- at the outset of any business relationship, before performing any occasional transaction that is valued at HK$120,000 or more, or that is a wire transfer of HK$8,000 or more (in either case, whether in single or several apparently linked operations);
- when the customer or its account is suspected of being involved in money laundering or terrorist financing; or
- when the veracity or adequacy of any information previously obtained for the purposes of identifying the customer is doubted.
A customer that falls within specified requirements (e.g., if the customer is an FI itself) may be subject only to simplified due diligence ("SDD") pursuant to the Guidelines. Nevertheless, other aspects of CDD still need to be undertaken and ongoing monitoring of the business relationship must be conducted. Further, SDD must not be applied when the FI suspects that the customer, its account or the transaction is involved in money laundering or terrorist financing or when the FI doubts the veracity or adequacy of any information previously obtained for the purpose of identifying the customer.
The Guidelines require effective ongoing monitoring by FIs. This entails: reviewing customer information; monitoring customers' activities to ensure consistency with the nature of their business, risk profile and source of funds; and identifying transactions that are complex, large or unusual, or patterns of transactions that have no apparent economic or lawful purpose and that may indicate money laundering or terrorist financing. The Guidelines set out the different aspects of the business relationship that may be considered, and FIs are expected to adopt a risk-based approach to such monitoring, depending on the risk profile of the customer.
Suspicious Transaction Reports
Existing AML legislation in Hong Kong will continue to apply, in particular, the Drug Trafficking (Recovery of Proceeds) Ordinance, the Organized and Serious Crime Ordinance, and the United Nations (anti-terrorism measures) Ordinance,5 all of which require FIs to report any property where an FI knows or suspects that such property represents the proceeds of crime or terrorist property. The Guidelines provide comprehensive guidance in relation to the identification and reporting of suspicious transactions, setting out the general principles that apply once knowledge or suspicion has been formed, as well as a non-exhaustive list of examples of various circumstances that may give rise to the suspicion of money laundering or terrorist financing.
FIs must consider if any action needs to be taken in relation to their existing customers with whom the business relationship had been established before the AMLO came into effect. FIs are required to perform CDD on customers where a transaction takes place that, by virtue of the amount or nature of the transaction, is unusual, suspicious or inconsistent with what the FI knows about the customer, its business or risk profile, or the source of its funds. CDD must also be conducted when a material change has occurred in the way the customer's account is operated or where the customer or its account is suspected to be involved in money laundering or terrorist financing. Where the FI doubts the veracity or adequacy of any information previously obtained for the purpose of identifying the customer, CDD should also be carried out.
A clear and well articulated AML/CTF training policy should be implemented and FIs are expected to monitor the effectiveness of staff training. This should be specific to what the staff needs to carry out their particular roles within the FI with respect to AML/ CTF, with a focus on training new staff prior to their commencing work. The Guidelines set out the areas of training that may be appropriate for different groups of staff members, and FIs are encourage to incorporate a mixture of training techniques and tools in the training system as appropriate. The Guidelines require that staff training records be maintained for a minimum of three years. This requirement is in line with the SFC's Guidelines on Continuous Professional Training.
Criminal Charges and Civil Sanctions
The AMLO gives bite to the AML/CTF regulatory regime by introducing criminal charges or civil sanctions for non-compliance with requirements imposed under the AMLO. Furthermore, the SFC, the Hong Kong Monetary Authority and the Office of the Commissioner of Insurance will be able to impose supervisory sanctions for non-compliance. Disciplinary actions by these authorities can include public reprimand, remedial action and fines of up to HK$10 million (equivalent to approximately US$1.3 million) or three times the amount of profit gained or costs avoided as a result of the contravention. The penalties that may be meted out are, arguably, harsher than necessary in seeking to put in place the appropriate levels of CDD in Hong Kong in the context of non-compliance.
The AMLO and the Guidelines will function alongside existing AML legislation and are intended to fortify the current AML/CTF regulatory regime. FIs in the banking, securities, insurance, and remittance and money changing sectors will be affected by the AMLO and Guidelines and may be forced to tighten their internal controls. Management and compliance personnel of such entities should ensure that they are familiar with the changes and commence preparations so as to comply with the specific requirements by the effective date.
Money laundering and terrorist financing are clearly issues of importance to both regional and international regulators. For example, Singapore has also recently expressed an intention to take a firmer stance against money laundering and terrorist financing. In particular, it is considering a tougher penalty regime for violations of AML/CTF regulations and laws, making the laundering of proceeds from tax offences a criminal offence and stepping up its enforcement resources to deal with suspicious transactions reported by financial institutions. In light of the general increased focus on AML/CTF regulations and laws and the substantial criminal and civil penalties for non-compliance with the AMLO requirements, FIs would do well to ensure compliance with all applicable requirements of the SFC's Guidelines and the AMLO.
1 FATF is an inter-governmental body whose purpose is to develop and promote national and international policies to combat (i) money laundering and (ii) the financing of terrorism.
2 For further information regarding the initial AML proposals, please refer to "Anti-Money Laundering Proposals in Hong Kong", available at http://www.dechert.com/Financial_Services_Quarterly_Report_03-31-2010 /.
3 Cap 455, Laws of Hong Kong.
4 Cap 405, Laws of Hong Kong.
5 Cap 575, Laws of Hong Kong.
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