Hong Kong Government Issues Important Money Laundering And Terrorist Financing Risk Assessment
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The government has this week published a comprehensive report [PDF] detailing Hong Kong’s Money Laundering and Terrorist Financing (ML/TF) Risk Assessment. This is the product of a year’s consultation, data analysis and stakeholder engagement by the government.
With the international standards setter, the Financial Action Task Force (FATF), due to conduct its onsite evaluation of Hong Kong’s ML/TF safeguards this autumn, the government has been taking various anticipatory steps in recent months. This report is a clear pre-curser to FATF’s evaluation and follows FATF’s recommendation that jurisdictions identify and assess their ML/TF risks and apply mitigating measures. The report follows important legislative amendments introduced by the government in March to strengthen the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap 615) (AMLO). This now covers designated non-financial businesses and professions, in line with FATF standards (see our earlier ebulletin here (Herbert Smith) for details).
Key aspects of the report
Overall money laundering and terrorist financing risk
The report recognises that, as a major international finance centre with strong links to Mainland China, Hong Kong is exposed to ML risk. The report states that internal ML risk is posed most frequently by fraud and drug-related crimes. Externally, fraud, drug crime, corruption and tax evasion are cited as presenting the greatest ML risks. Overall, the report assesses Hong Kong’s ML risk is medium-high. Referencing its robust legal framework, strong governmental and regulatory commitment, and effective international co-operation, the report concludes that Hong Kong’s ability to combat ML is also medium-high.
Terrorist financing is covered in far less detail in the report, with the overall risk assessed as medium-low.
Main focus areas
The report runs to over 100 pages. After summarising the geo-political, legal and regulatory framework, the report proceeds to a detailed sectoral risk assessment. This first focuses on financial institutions (Chapter 5), with detailed analysis on banking, securities, money service operators, insurance and money lenders. This is followed by an assessment of non-financial business and professions (Chapter 6), which have now been brought within the same legislative regime as financial institutions under the AMLO. The remainder of the report is devoted to particular structures – whether payment methods (Chapter 7) or company structures (Chapter 8) – and the particular risks they pose. Finally, terrorist financing risk is assessed in Chapter 9.
Areas identified for improvement
In light of the risk assessment, the government proposes five key areas where further work is required:
Enhancing the anti-money laundering / counter terrorist financing framework
This has been largely dealt with by the legislative amendments in force from 1 March 2018 and highlighted in our earlier ebulletins (Herbert Smith). As well as amending the AMLO, the Companies Ordinance has been updated to require Hong Kong companies to keep beneficial ownership information, again in line with FATF standards. Several sanctions-related updates are also cited in the report.
Strengthening risk-based supervision and partnerships
The report recognises the advanced financial regulatory regime in Hong Kong. It notes that capacity-building efforts are required to help new sectors now caught by the AMLO, including their regulatory bodies where relevant. A focus on engaging private sector partners in the fight against ML is also recognised as important.
Sustaining outreach and raising awareness
This is linked to 2 and recognises the ongoing role the government plays in highlighting ML/TF risks. By taking a systematic sectoral approach, the report is a valuable starting point for businesses and professions in assessing these risks.
Monitoring new and emerging risks
The report recognises that, in light of the increasingly sophisticated methods deployed, particularly through technological innovations and virtual currencies, the government must continue to monitor evolving ML/TF risks and advise the market accordingly.
Strengthening law enforcement efforts
Exchanging financial intelligence and multi-agency collaboration (domestically and internationally) is at the heart of this work stream, to ensure prosecution, restraint and confiscation of illicit funds.
The report provides a helpful assessment of risk for those operating in a wide range of financial and non-financial roles. In addition, the report provides a valuable review of high-risk payment methods and corporate structures. Regulated industries should review the relevant chapters of the report and assess their internal compliance regimes.
The FATF evaluation, which is expected to be conducted on site in the autumn and culminate in a report by June 2019, is the core driver to the report. It has prompted Hong Kong to conduct a review of its laws and procedures and to take necessary steps to bring its regime in line with international standards.
From a regulatory point of view, there will be less impact for Hong Kong banks in the run up to the FATF review. Most have robust anti-money laundering structures in place, having been subject to the AMLO since 2012. We have also seen a marked increase in anti-money laundering enforcement by the Hong Kong regulators and law enforcement authorities over the last two years, which has left financial institutions in little doubt of their requirements under the law. The financial regulators, the Hong Kong Monetary Authority (HKMA) and Securities and Futures Commission (SFC), are pro-active in alerting relevant institutions to the changing regime. The HKMA, SFC (and the Insurance Authority) have already issued circulars to alert regulated businesses to this report, with the HKMA also planning seminars around the report’s contents.
Greater impact will be felt by non-financial institutions and professionals, who were only brought under the AMLO this year. While it may be little extra work for the professions – lawyers and accountants were already subject to strict KYC and AML requirements from their regulatory bodies – for smaller organisations and companies, it may be a significant burden to comply with the new requirements.
We will provide further updates on this report and the ongoing FATF evaluation in due course. If you have any questions, please contact the authors.
Our summary of the report’s risk assessment for trust or company service providers can be found here (Herbert Smith).
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Author: Herbert Smith Freehills Investigations
Source: Herbert Smith Freehills LLP
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