HK government to introduce two AML bills in summer

Hong Kong’s government is aiming to introduce two new bills this summer, following its public consultation on new measures to strengthen the anti-money laundering (AML) and counter-financing of terrorism (CFT) regime.

In a set of consultation conclusions published earlier this month, the Financial Services and the Treasury Bureau (FSTB) said the public had shown general support for its proposals.
The measures included the establishment of a beneficial ownership register for Hong Kong companies, introducing customer due diligence (CDD) requirements for designated non-financial business professions (DNFBPs) and a licensing regime for trust and company services providers (TCSPs).

“We will proceed to prepare the amendment bills based on the consultation conclusions. Our target is to introduce the amendment bills into the Legislative Council by July 2017,” the FSTB said.
The government is planning a rapid implementation of the new measures, ahead of a scheduled mutual evaluation of the territory’s AML regime by the Financial Action Task Force (FATF) in 2018. Jurisdictions including Singapore and the United States had deficiencies in some of the particular areas the new measures seek to address, FATF found.

“Hong Kong will soon undergo a mutual evaluation to be conducted by other FATF jurisdictions in respect of our AML/CTF efforts, the extent of our compliance with the FATF recommendations, and the effectiveness of our implementation of the relevant regimes. As a matter of priority, we need to address the gaps identified in our AML/CTF regime … so as not to adversely affect the overall rating of Hong Kong in the mutual evaluation,” the FSTB said.

“Our compliance in this respect has a bearing on our hard-earned reputation as an international financial centre. Maintaining the status quo is not an option.”

CDD requirements

The government said while it had received some pushback from the legal and the real estate sectors regarding the planned CDD measures, any deviation in Hong Kong’s AML regime from the core FATF principles would “very likely result in our failing the FATF requirements”.
The Estate Agents Authority (EAA) had argued that the sector should be exempted from the statutory CDD and recordkeeping requirements under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) due to what it called the low money laundering risks of the sector. The EAA argued it did not make economic sense to launder money through property transactions given the high costs involved and the slow turnover.
“We do not see a convincing case to carve out the sector, given its coverage under the FATF’s defined scope of DNFBPs. It is the FATF’s clear requirement that CDD and recordkeeping requirements should apply to real estate agents when they are involved in transactions for their clients concerning the buying and selling of real estates,” the FSTB said.

“We will have difficulty passing the FATF test if the real estate sector is to be carved out altogether from the AMLO.”

It said real estate agents in Hong Kong were already required by the EAA to identify and verify the identity of customers, which amounted to “simplified CDD” under the AMLO, and to report suspicious transactions to law enforcement agencies as appropriate.

“We see no grounds to derogate from the prevailing practice by offering exemption in the AMLO,” the FSTB said.

The Law Society of Hong Kong (LSHK) had also argued that solicitors and foreign lawyers should be treated separately from other DNFBP sectors and be excluded, due to an AML/CTF mechanism embodied in Practice Direction P which sets out mandatory requirements of CDD, recordkeeping and staff training for law firms.

Here the FSTB said that as the guidelines lack the force of law, they would not conform to FATF requirements and would likely result in a negative note from the FATF. Singapore and the United States had received unfavourable ratings for their DNFBP regime because the CDD requirements were not set out in law, it said.

The FSTB also said it would consider introducing dealers in precious metals and stones to DNFBP regulation under the AMLO in future, but at the moment the Hong Kong Police Force believed the sector posed little money laundering threat.

While some respondents had proposed expanding the scope to cover wine and art dealers, the FSTB said these sectors fell outside the FATF’s defined scope of DNFBPs and would therefore not be covered. The FATF was unlikely to deem mahjong parlours or the Hong Kong Jockey Club as “casinos” in its assessment, it said.

The FSTB also said, following feedback, it would introduce an enabling provision in the AMLO to allow regulatory authorities to issue sector-specific guidelines as they considered appropriate for implementation of the CDD requirements.

Beneficial ownership registry

The FSTB said there was general support among consultation respondents for enhancing the transparency of company ownership by establishing a register of beneficial owners holding more than 25 percent of a company’s shares.

“We will take care to ensure that the final piece of legislation will enhance transparency of the corporate ownership regime in Hong Kong, without unnecessarily increasing the compliance costs of Hong Kong companies,” the government said.

Despite calls from some respondents that certain companies should be carved out from the beneficial ownership registry requirement due to the perceived compliance burden, the FSTB said it would maintain the original proposal of exempting only listed companies regulated under the Securities and Futures Ordinance (SFO). It would, however, reserve a general rule-making power in the legislation for the Secretary for Financial Services and the Treasury to add further exemptions should the need arise in future.

“There is no consensus among respondents on what further types of companies other than listed companies should be exempted from the beneficial ownership regime,” the FSTB said.
“Meanwhile, no strong or evidence-based justifications have been put forward for the suggested exemptions. Given the FATF’s unequivocal intention to catch legal persons of all forms, carving out the various types of companies will undermine the effectiveness of the disclosure regime and run the risk of subjecting these companies to possible abuse.”

The FSTB said it would modify its original intention to make companies keep beneficial ownership information for 10 years down to six years, following feedback from the Privacy Commissioner. This was also in line with the requirement under the AMLO, it said.

Licensing regime

There was also general support for the government’s plan to set up a licensing regime for TCSPs, under which anyone providing such services would have to be licensed by the Companies Registry and meet a fit-and-proper test.

As such services are offered by a range of participants from different sectors, the FSTB said it would try to avoid regulatory overlap by exempting from the licensing requirements any authorised institutions and licensed corporations already subject to regulation by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), respectively. It said these were already subject to CDD and recordkeeping regulation under the AMLO.

The FSTB said it would also take the same approach for solicitors and accountants who engage in the TCSP business.

“Our thinking is that for accountants and solicitors providing TCSP services, insofar as they are covered by the regulatory remit of the HKICPA [Hong Kong Institute of Certified Public Accountants] and the LSHK, we do not see the need for them to obtain a licence.”
The FSTB said it would reserve a rule-making power in the legislation for the Secretary for Financial Services and the Treasury to grant further exemption for a certain class of TCSP operators should the need arise in the future. It would also extend the proposed 90-day transition to the new regime to 120 days to facilitate TCSP operators’ migration to the new regime.

Published 26-Apr-2017
 Trond Vagen, Regulatory Intelligence

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