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#Anti Money Laundering #Customer Due Diligence

New year, new law

International Compliance Association

aml , Hong Kong , Hong Kong Monetary Authority , regulators , The Securities

As this is the start of the New Year, the imminent start of the Lunar New Year of the Dragon and my first offering for the ICA blog, it seems appropriate to give an overview of the AML situation here in Hong Kong and to look ahead to the new law that takes effect on 1st April 2012.

Hong Kong has had AML legislation since 1989 after the enactment of the Drug Trafficking (Recovery of Proceeds) Ordinance which, like most initial AML legislation, addressed proceeds from purely drug-related offences. The scope of the legislation was widened in 1994 with the enactment of the Organized and Serious Crimes Ordinance to include the proceeds of all predicate crime and subsequent to the terrorist attacks in September 2001, the United Nations (Anti-Terrorism Measures) Ordinance was introduced in 2002. These have remained the three key pieces of legislation in Hong Kong to fight money laundering and terrorist financing.

Hong Kong has three primary regulators for AML/CFT purposes. The Hong Kong Monetary Authority (HKMA) regulates licensed banks, restricted-license banks and deposit-taking companies. The Securities & Futures Commission regulates licensed individuals and corporations engaged in securities and futures contracts and the Office of the Commissioner of Insurance (OCI) regulates insurers carrying on general and long term insurance business. The OCI is the only regulator that remains under direct Government control although there are plans already in place to make it an independent regulator.

It is now a little over four years since Hong Kong was subject to its third mutual evaluation by the Financial Action Task Force (FATF) in November 2007 and, as Consultant to the HKMA at that time, I was party to the meetings that took place between the FATF team and the HKMA. The Mutual Evaluation Report was published in July 2008 and generally recognized the strengths of Hong Kong’s AML/CFT regimes and the effective supervisory regimes over the banking, securities and insurance sectors.

Of course, the report also highlighted a number of deficiencies, notably, customer due diligence (CDD) and record-keeping requirements were not in law or regulation; there were only basic CDD requirements for the RAMC sector; there was a lack of regulatory oversight in the RAMC and DNFBP sectors and the enforcement and sanctions powers of the OCI were limited in scope.

Three years after the publication of the Hong Kong mutual evaluation report, the Government gazetted the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance on 8th July 2011, aimed largely at implementing improvement measures required by FATF and this takes effect on 1st April 2012.

Major changes introduced by the new law include the creation of a new regulator for the RAMC sector, formed from the Customs & Excise Department, who will be responsible for “fit & proper” tests on potential licensees and for conducting supervisory examinations. This replaces the old system of simple registration with the Commissioner of Police to run an RAMC business.

CDD and record-keeping requirements have now been codified and set out the circumstances in which CDD must be conducted. Failure to adhere to these requirements can result in criminal prosecution. This was the subject of much debate during the industry consultation phase.

A similarly contentious issue is the introduction of a pecuniary penalty of up to HK$10 million or three times the profit gained or costs avoided as a result of contravention. Regulators generally used to rely on a range of administrative sanctions to punish breaches. FATF has been pushing many countries towards the introduction of a pecuniary penalty system and its introduction here has certainly caught the attention of the banking industry.
The regulators are currently finalising revisions to their AML/CFT Guideline to include the requirements of the new legislation so that everything is in place by 1st April.

It will be interesting to see how eagerly the regulators use their new powers and whether they will take the same approach and start cracking the whip like the FSA did or whether there will be an unwritten “grace” period. My experience tends to favour the latter.


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