Changes to Hong Kong’s AML legislation will give institutions more flexibility

Recently proposed amendments to Hong Kong’s anti-money laundering and counter-terrorist financing legislation will afford the territory’s banking and financial institutions more flexibility in their financial crime controls, industry officials have said.

“The changes to the 2012 Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) provide local regulated institutions a lot more flexibility in its AML controls. For a while, technology has gradually been working its way into helping firms prevent money laundering and terrorist financing. This has caused some inconsistencies across the industry, as some institutions are more willing to use technology than others, and without specific guidance from [the] Hong Kong Monetary Authority, firms have been unwilling to use [it], in case of punishment,” said Jacob Wissum, a consultant with regulatory advisory consultants Bovill in Singapore.

He said the HKMA would shortly confirm that firms could use technology to verify customers’ identity. “It will provide ease for institutions … as a society, we have moved away from paper documents. However, before using such technology, institutions will need to test and calibrate the systems they use to verify the identity of customers, to ensure they are up to regulatory standards,” Wissum said.

On June 23, 2017, the HKMA issued a circular regarding the proposed legislation. The suggested measures include tightening controls over local solicitors, accountants, real estate agents and trust and company service providers (TCSP). The territory’s new Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 would introduce customer due diligence (CDD) and record-keeping obligations for designated non-financial businesses and professions (DNFBPs) when they engage in specified transactions.

The bill was published in the local Government Gazette and presented for debate before the Legislative Council on June 28, 2017

“Subject to the passage of the bill by the Legislative Council, the government proposes to implement the amendments on March 1, 2018,” the Hong Kong Monetary Authority (HKMA)’s circular said. An HKMA spokeswoman told Thomson Reuters Regulatory Intelligence that the subject bureau on the amendment bill was the Financial Services and the Treasury Bureau (FSTB).

Bringing Hong Kong in line with FATF requirements

A spokeswoman said the bill was intended “to bring Hong Kong’s regulatory regime up-to-date in line with international requirements as promulgated by the Financial Action Task Force (FATF)”.
“The legislative proposals are pertinent to Hong Kong’s fulfilment of the relevant FATF obligations, and will further reduce the risk of money laundering and terrorist financing in Hong Kong. This will safeguard the integrity of Hong Kong as an international financial centre, and add to our credibility as a trusted and competitive place to do business,” she said.

The Paris-based FATF sets the international AML, CTF and know-your-customer (KYC) standards.
The main objective of the bill is to introduce statutory customer due diligence (CDD) and record-keeping requirements for a range of DNFBPs, including solicitors, accountants, real estate agents and trust or company service providers (TCSPs). The bill also seeks to “introduce a licensing regime for TCSPs to require them to apply for a licence from the Registrar of Companies and satisfy a ‘fit and proper’ test before they can provide trust or company services as a business in Hong Kong,” the HKMA said.

The government also views the bill as an opportunity to propose certain improvements to AMLO, to ensure it complies with the latest FATF requirements and to facilitate compliance, the HKMA said.

The bill’s impact on the banking sector

The HKMA’s circular said the four enhancements of greatest relevance to the banking sector were:
• relaxing the threshold which defines beneficial ownership from the existing “not less than 10 percent” to “more than 25 percent”, having regard to the prevailing FATF standard and international practice;
• introducing flexibility to measures permitted to be taken for verifying a customer’s identity, in the light of technological development in the methods used by financial institutions for obtaining information relating to customers;
• reflecting the existing criteria relating to wire transfers in the FATF recommendations by requiring the recording of basic information about a recipient and, where applicable, an intermediary institution involved in a transaction; and
• removing a sunset clause in the AMLO so that financial institutions will have the flexibility to rely on solicitors, accountants, TCSP licensees as well as other financial institutions (including a foreign financial institution in the same parent group) as intermediaries to carry out CDD measures.

Some have suggested, however, that the bill on its own will not overly burden institutions.
“Most of the proposed amendments relevant to financial institutions, except those related to wire transfers, tend to relax or alleviate the requirements under the existing legislative framework,” said Paul Dorrans, a consultant with law firm Simmons & Simmons in Hong Kong.

Dorrans said, for example, that the lowering of the beneficial ownership threshold to no more than 25 percent would enable institutions to rely on intermediaries, including a foreign financial institution, in the same group to carry out CDD.

“The relaxation of ultimate beneficial ownership identification is a sigh of relief”, as 10 percent “was overly stringent and challenging in certain cases to ascertain, and super equivalent to global minimum standards of FATF,” said Oonagh McKinley-Hutchinson of regulatory services consultancy Protiviti in Hong Kong. She said this might also have a negative impact on client relationships, and hence Hong Kong’s attractiveness to certain customers.

“The flexibility in verification in practice should also alleviate a lot of the challenges in documentation receipt. The main impact on compliance will be a review of existing policies and procedures and update to training materials, but positively reduce some of the outstanding follow-up documentation requirements where the 10 percent threshold was trying to be met and outstanding documentation trying to be obtained,” she said.

The bill’s impact on DNFBPs

The bill will, however, have considerable implications for DNFBPs, in that they will now be required to comply with the statutory CDD and record-keeping requirements when conducting transactions.

“For solicitors, accountants and real estate agents, who are currently subject to professional self-regulation by the respective regulatory bodies— which have issued guidelines on CDD and record-keeping procedures for voluntary or mandatory compliance by members
— their respective professional bodies will continue to maintain the role of overseeing AML and CTF compliance. For trust or company service providers, the bill introduces a licensing regime to enforce CDD and record-keeping requirements for TCSPs. It is necessary for them to apply for a licence from the Registrar of Companies and to satisfy a ‘fit-and-proper’ test before they provide trust or company service to the public,” said Alfred Wu, a partner with law firm Norton Rose Fulbright in Hong Kong.

Indeed, what was not mentioned in the HKMA’s circular was that the government also intends to amend the city’s Companies Ordinance to require all Hong Kong-incorporated companies except listed companies — including any financial institutions that meet the definition — to keep a register of persons with significant control, which is amenable to regulatory inspection.
“This, together with the new AML requirements and manager-in-charge regime, shows a trend to tighten regulation in the financial industry, and thus increases the compliance burden on the local HKMA-regulated institutions. Compliance and legal staff should review and update the internal systems and policies to reflect the latest regulatory requirements,” Dorrans said.
The AML amendment bill, therefore, would add to the compliance burdens on TCSPs by urging them to comply with prescribed CDD measures and record-keeping requirements, Wu said.
“For DNFBPs who have adopted the self-regulation measures, the practical impact of the amendment will be limited, despite the additional compliance checks and investigations required.”

Practical tips for HKMA-regulated institutions

Looking ahead, Wu suggested HKMA-regulated institutions might wish to:
• Review internal policies and record-keeping systems and consider whether any consequential amendments need to be made to comply with the licensing, CDD and record-keeping requirements.
• Review their agreements with customers to see if they need to be amended to facilitate their compliance with the new AMLO regime.
• Assess whether they have the necessary systems and controls in place to discharge their statutory obligations under the new AMLO regime.
• Consider whether professional third-party trustees or outsourcing is necessary and, if so, how this can be implemented.
• Provide training to relevant staff on CDD and record-keeping measures.
Financial institutions must comply with the intent, as well as the letter, of the law
Given that AML and CFT internal control environments differ from one financial institution to another, the level of work compliance and legal professionals will need to do if the bill is passed will depend on their existing compliance procedures and the extent to which they adhere to best practices.

“The circular appears to closer align local HK regulation with general FATF standards like, for example, relaxing the threshold of beneficial ownership to closer align with FATF guidance. However, just because a beneficial ownership percentage changes in the regulation, financial institutions should always consider a risk-based approach to not only comply with the letter of the law or regulation, but with the intent as well, to manage their own risks,” said Sven Stumbauer, AlixPartners’ global AML and sanctions leader in Miami.

Ultimately, compliance and legal professionals will need to have access to timely and accurate information to conduct meaningful due diligence about the entities with which they do business, to protect against money laundering and terrorism financing.

Regulators will also need to set effective standards, including a strong definition of a “beneficial owner”, Eryn Schornick, a policy advisor to Global Witness in Washington, D.C., told Thomson Reuters Regulatory Intelligence.

“The Clearing House Association, a major trade association for the largest American commercial banks, has reiterated in a public letter to the U.S. Congress that without a way to ensure a comprehensive collection of beneficial ownership information for U.S. companies, it would be hard for banks to comply with customer due diligence requirements for corporate clients,” she said.

Published 03-Jul-2017 by 
Ajay Shamdasani, Regulatory Intelligence

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