The Financial Action Task Force (FATF) published the Mutual Evaluation Report of Hong Kong (Report) on 4 September 2019, assessing Hong Kong’s anti-money laundering and counter-financing of terrorism (AML/CFT) regime to be compliant and effective overall.
The SFC issued a circular on 6 September 2019 (Circular) which highlights some of the focus areas for further work moving forward.
We have highlighted below the key points which licensed corporations (LCs) need to note based on the Report and the Circular.
Some financial institutions have inadequacies, especially in relation to cross-border financial flow, non-resident customers and politically exposed persons (PEPs), and the application of mitigating measures commensurate with their ML/TF risks. The Circular states that LCs should deepen their understanding of relevant ML/TF risks and apply effective measures to manage the ML/TF risks identified.
The Report notes inadequacies among some smaller financial institutions in the implementation of certain AML/CFT measures, including those relating to:
- the risks posed by non-residents
- enhanced customer due diligence on PEPs
- transactions connected with territories subject to targeted financial sanctions such as North Korea and Iran
The SFC requires LCs to review their AML/CFT policies, procedures and controls regularly. They should take the above concerns into account in their regular reviews to manage ML/TF risks and take immediate action to rectify any inadequacies identified.
The Report notes the difference in the HK regulatory requirements on foreign PEPs and domestic PEPs. Foreign PEPs are those based in places outside the People’s Republic of China and they automatically trigger enhanced due diligence (EDD) including senior management approval. LCs may, however, adopt a risk-based approach when dealing with domestic PEPs (PEPs in Mainland China and Macao) and decide whether EDD is required. The Report notes this as a shortcoming which is not in line with Recommendation 12 on PEPs. It may be that this anomaly will be addressed by future changes to Hong Kong requirements.
When assessing country risk, LCs should take account of factors such as whether a country is subject to financial sanctions or prone to corruption (see 2.8, 4.13 and 4.14 of the SFC Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations)).
The Report notes significant differences in the level and quality of suspicious transaction reporting among LCs, especially in the non-banking sector. The Circular reminds LCs to regularly review the adequacy and effectiveness of their systems and processes for promptly identifying and reporting suspicious transactions to the Joint Financial Intelligence Unit.
The Report notes that while Hong Kong has a high conviction rate, sentences are generally low, indicating that ML cases pursued are at the lower end of the scale. Hong Kong has not yet prosecuted a legal person for ML. The Report also notes that the focus of prosecutions is on fraud, and that there should be additional attention paid to the proceeds of other forms of criminal and terrorist activity, including drugs, tax evasion, corruption and the financing of overseas terrorism.
For more see Conventus Law.