Implications Of Enhanced Anti-Money Laundering Regulation For MPF/ORSO Trustees

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On 6 January 2017 the Financial Services and Treasury Bureau (FSTB) issued a consultation on enhancing anti-money laundering regulation of designated non-financial businesses and professions (DNFBPs) (the Consultation). Baker McKenzie’s response to the Consultation can be viewed here. Baker McKenzie has also issued the following two client alerts on the topic: Trustees to be licensed in Hong Kong; Anti-Money Laundering Regulations on Trustees.

The Consultation closed on 5 March 2017 and the FSTB issued its Consultation Conclusions on 13 April 2017.

This client alert summarises the key changes proposed by the FSTB that may impact MPF / ORSO trustees, a category of Trust or Company Services Providers (TCSPs) that comprise one of the four DNFBP sectors which are subject to the proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO).

• Licensing regime: Each MPF / ORSO trustee will be required to apply for a licence as a TCSP (a TCSP licence) from the Companies Registry. There will be a deeming provision in the amended legislation to the effect that an applicant for a TCSP licence will, for the first 120 days of the implementation of the licensing regime, be deemed to be operating with a licence from the day it files an application with the Companies Registry. A TCSP licence will be valid for three years and renewable on application.

A number of respondents (including Baker McKenzie) suggested exemptions for certain categories of operators. However, the FSTB only proposes to exempt authorised institutions and licensed corporations which are providing TCSP services as ancillary to their principal business (e.g. as an in-house service for clients within the same institution) from the licensing requirements, given that they are already subject to customer due diligence (CDD) and record-keeping requirements under the AMLO.

Implications – All MPF / ORSO trustees need to obtain a TCSP licence, regardless of whether they are individual or corporate trustees and regardless of whether they are affiliated to any authorised institution or licenced corporation.

• CDD: The terms “clients”, “customers” and “business”, which are the key terms in identifying the customers in respect of whom a TCSP licencee should carry out CDD, will have to be defined according to the ordinary meanings of the words, having regard to the facts of each individual case under consideration.

Implications – MPF / ORSO trustees will need to identify who their customers are in the MPF / ORSO context. It is possible that in some circumstances employee members will be considered their customers and in some cases they will not. Each case needs to be considered individually and according to the structure and operation of the trust.

• Risk-sensitive approach for applying CDD measures: A risk-based approach, having regard to the business nature and risk profile of the respective sectors, should be adopted when undertaking CDD. A risk-based approach means that customary CDD is to be conducted in normal circumstances; simplified CDD is to be adopted for low-risk cases; and enhanced CCD is to be adopted for high-risk situations. The FSTB will also include an enabling provision in the AMLO to allow regulatory authorities to issue sector-specific guidelines.

Implications – MPF / ORSO trustees will need to assess if they have the capacity and expertise to carry out risk-based CDD for each risk category.

• Record-keeping requirement: MPF / ORSO trustees will need to maintain identification data, account files, business correspondence and records of transactions for a period of six years.

Implications – We note that the six-year record keeping requirement is in line with that observed by financial institutions under the AMLO. However, under the Mandatory Provident Fund Schemes (General) Regulation, an MPF trustee is required to ensure that an accounting or other record required to be kept in respect of the MPF scheme is kept for at least 7 years after the end of the financial period in which the record is made or, if the record relates to a person’s membership of the MPF scheme, for at least 7 years after the person ceases to be a scheme member. With the different prescribed timeframes, MPF trustees should revisit their record keeping procedures to ensure that they comply with each of them.

• Regulatory authority: The Registrar of Companies will be designated as the licensing and supervisory authority for the MPF / ORSO trustees under the AMLO.

• Sanctions for TCSPs: Criminal liability will be imposed on MPF / ORSO trustees who operate without a TCSP licence and the proposed sanction level will be a fine at level 6 (a maximum of HKD 100,000) and/or imprisonment of up to six months.

For non-compliance by an MPF / ORSO trustee with statutory CDD and record-keeping requirements under the AMLO, supervisory sanctions such as public reprimand, remedial order and a pecuniary penalty not exceeding HKD 500,000, will be introduced.

The FSTB will now proceed to prepare the amendment bill which it aims to introduce to the Legislative Council by July 2017. The new regime is targeted to commence in 2018.

How can MPF / ORSO trustees prepare themselves for the new regulatory changes?

MPF / ORSO trustees may wish to:

  • review internal policies and record keeping systems and consider if any consequential amendments need to be made to comply with the licencing, 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

Source: Lexology

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