AML/CTF: Hong Kong reforms
CSj looks at the implications for company secretaries and risk and governance professionals of the government’s latest proposals designed to strengthen Hong Kong’s anti-money laundering and counter-terrorism financing regime.
Next year, the Financial Action Task Force (FATF) – the Paris-based organisation that recommends how nations should combat money laundering, terrorism financing and other threats to the international financial system – will review the strengths and weaknesses of Hong Kong’s anti-money laundering and counter-terrorism financing (AML/CTF) regime. It will be FATF’s Fourth Mutual Evaluation of Hong Kong and officials on both sides hope there will be improvement since the third exercise in 2008 which uncovered a range of deficiencies relating to, among other things, customer due diligence and record keeping; regulating financial institutions; money transfer regulations; and cross-border movement of cash.
Since then, the government has discussed a range of measures to strengthen Hong Kong’s AML/CTF regime, including the legislative proposals outlined in two public consultations held earlier this year. The first consultation – Proposal on Enhancing Anti-Money Laundering Regulation of Designated Non-Financial Businesses and Professions (DNFBPs) – was aimed largely at more stringent supervision of real estate agencies, law firms, accounting firms and trust companies. The second consultation– Proposal on Enhancing Transparency of Beneficial Ownership of Hong Kong Companies – sought, among other things, to improve the transparency of beneficial ownership of companies incorporated in Hong Kong.
If enacted, the proposals of the first consultation would require amendments to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO), while the proposals of the second consultation would require amendments to the Companies Ordinance.
‘Maintaining the status quo is not an option,’ the Financial Services and the Treasury Bureau (FSTB) noted in April when releasing the conclusions from the two public consultations. Overall, the FSTB added, ‘there is broad support for the government to enhance AML/CTF regulation in Hong Kong in fulfilment of our international obligations under FATF. A majority of the respondents indicated agreement with the overall direction and principles as well as the broad framework of the legislative proposals.’
The Hong Kong Institute of Chartered Secretaries (the Institute) was among the respondent organisations expressing broad support. ‘The Institute welcomes the proposed requirements,’ says Chief Executive Samantha Suen FCIS FCS(PE). ‘We would expect that Chartered Secretaries would have no issue with the compliance thereof, given their solid training and experience.’
As a result of the consultations, the government plans to prepare amendment bills based on the consultation conclusions and introduce them into the Legislative Council during its current 2016–2017 session. ‘A balanced approach to legislation should be adopted so as to minimise the regulatory burden and compliance cost on affected businesses,’ the FSTB stated earlier this year.
An ideal position
The legislative amendments discussed above will have an impact on company secretaries. For example, as DNFBPs, company secretaries working for company service providers would be subject to enhanced customer due diligence and record-keeping requirements.
‘The Chartered Secretary is well versed in AML/CTF concerns,’ Ms Suen points out, noting that Institute members are already specified intermediaries under the AMLO and are routinely accepted by financial institutions as suitable certifiers of corporate due diligence documents.
The Institute has supported its members by setting standards relating to customer due diligence and record keeping and harmonising them with those of financial institutions. It has backed this up with continuous training. ‘The standards set by the Institute are among the most advanced and are made available to the public to set best practices for corporate service providers,’ Ms Suen adds.
Under the proposed new beneficial ownership rules, company secretaries would need to ensure compliance with the proposed requirement for organisations to maintain a register of persons with significant control. The Institute agrees with the government’s conclusion that disclosure of beneficial ownership should only be made to competent authorities. ‘We believe that is the proper approach as set out in our submission to the consultation,’ Ms Suen says.
The proposals of the two consultations are designed to bring Hong Kong’s AML/CTF laws in line with international standards. Hong Kong enacted its AMLO nearly five years ago and FATF guidelines have evolved since then. ‘The proposals are in the right direction to ensure our local laws are in line with the FATF standards in order to safeguard the integrity and reputation of Hong Kong as an international financial centre,’ says Cliff Lam, Associate Managing Director at Kroll, a forensic accounting consultancy.
He points out that the specific transactions that are the target of the proposed new rules include real estate purchases; management of client assets such as savings or securities accounts; company formation and management; and buying and selling of business entities. ‘These transactions are usually of high value and may involve a certain extent of financial crime risks,’ Mr Lam says. ‘It is important that practitioners should really know their clients, the source of funds for the transactions and the source of wealth of their clients.’
The Institute believes that its members are best placed to ensure such knowledge is accurate. ‘The Chartered Secretary is trained to recognise higher risks of money laundering and terrorism financing,’ points out Ms Suen. ‘It is a function of professional training to develop the ability to risk-manage.’
Trust in regulation
Under the proposed legislative amendments, Hong Kong-based trust companies, and company formation and service providers would be regulated for the first time. Such entities would be required to pass a ‘fit and proper’ test and obtain a licence from the Registrar of Companies in Hong Kong.
The Institute supports the need for licensing of corporate service providers. ‘The Companies Registry is the natural choice, as it is involved in company formation,’ says Ms Suen. However, she notes that the effectiveness of such a regime will depend upon the level of resources that regulators are willing to commit to deal with oversight, especially over untrained persons.
‘If the person is a specified intermediary, like a Chartered Secretary, or a lawyer or accountant, then oversight is much easier and supported by their professional bodies,’ Ms Suen points out. ‘If the person is untrained, there will be a learning curve prior to effective compliance.’
Many corporate service providers face regulation in other countries. ‘We are already compliant with the requirements of regulators in various other jurisdictions and these are applied to our procedures in Hong Kong,’ says Joe Cheung, Managing Director, Corporate and Private Clients, at Vistra, a firm that establishes corporate structures and provides trustee and administration services.
Mr Cheung says the Hong Kong proposals are no more onerous than currently implemented in other financial centres. ‘We welcome the requirement to perform customer due diligence and record keeping since we are already doing so,’ he says, citing Vistra’s global resources.
While trust companies have no objection to regulatory oversight in principle, how public the register of persons with significant control should be is a contentious issue. Mr Cheung adds that there is a reasonable entitlement to privacy in personal financial affairs. ‘We do not believe public scrutiny into such matters will benefit Hong Kong society.’
The government’s conclusions noted that ‘only a notable few, mainly from an international advocacy background, opined that Hong Kong should maintain a central register for unrestricted public access,’ adding that ‘we agree that access to… registers should be restricted to the competent authorities only.’
Trust providers tend to agree. ‘In my view there is no legitimate need for the public to access each and every company’s beneficial ownership information,’ says Hans Peter Stadelmann, Managing Director of Alpadis Trust in Hong Kong, citing client safety as a reason not to make data widely accessible. ‘A publicly transparent beneficial ownership register is no protection for the clients, but good and enforceable regulations are.’
The Hong Kong Monetary Authority (HKMA) is the go-to authority under the AMLO for supervising authorised institutions’ compliance with legal and supervisory requirements. However, the Joint Financial Intelligence Unit (JFIU), set up in 1989 under the Organised and Serious Crimes Ordinance (OSCO), provides the actual grassroots enforcement.
The JFIU’s key to successful intervention is the suspicious transaction report (STR). In Hong Kong, when a person knows or suspects that any property is, or is intended to be, the proceeds of drug trafficking or a crime, or terrorist property, this knowledge or suspicion should be reported to an authorised officer as soon as practicable. In 2016, the JFIU received more than 76,500 STRs, of which more than 68,000 – nearly 90% – were filed by financial institutions. There is no breakdown for members of the Institute, but law firms filed 969 STRs, real estate agents 58, and accounting firms just three. Trust and corporate services providers filed 27 STRs.
‘The Chartered Secretary views STR filings as important,’ says Ms Suen. She notes that company secretaries, lawyers and accountants are trained to recognise higher risks of money laundering and terrorism financing. ‘As professionals who do know their customers, they would reject high-risk customers. It would not be surprising if their STR filings are lower.’
Criminal prosecutions for accountants, lawyers and estate agents would not be an option under the proposals, although provisions under OSCO would apply to employees of financial institutions who knowingly contravene certain AMLO provisions. They could face prison terms of up to seven years and fines of up to HK$1 million.
Under the legislative proposals, the Institute, The Law Society, The Hong Kong Institute of Certified Public Accountants and the Estate Agents Authority would be responsible for investigating breaches and applying appropriate sanctions under their respective disciplinary regimes. For Institute members for whom such actions would not be appropriate, the proposed trust and company service provider regime would be applicable.
Such violations would also be subject to the Institute’s disciplinary procedures. ‘The Institute already has detailed disciplinary rules and takes into account proper procedures and safeguards to ensure fairness and natural justice,’ says Ms Suen. ‘The Institute would apply its existing rules to matters of discipline and regards its current disciplinary rules as effective.’
She adds that discipline is a hallmark of any professional body where members fall below the requisite professional rules or standards. ‘Penalties could range from disapprovals, public censure, to suspension and/or removal from membership,’ she adds.
Road to the future
The proposed amendments come at a time when Hong Kong’s professionals are facing new challenges, such as those presented by China’s Belt and Road initiative that is expected to utilise Hong Kong’s legal, financial and corporate expertise. ‘Belt and Road will involve significant infrastructure projects,’ observes Alan Linning, a partner with the Sidley Austin law firm. ‘The questions that will be asked are – who is doing them and what is the source of the funding?’
Rebecca Li, a former Hong Kong Independent Commission Against Corruption officer, now with Berkeley Research Group, a management consultancy, points out that much of the Belt and Road development will be in nations that have weak AML/CTF regimes. ‘You need to know about anti-corruption activities in developing countries,’ she says.
In addition, Hong Kong is seeking to strengthen its AML/CTF regime just as the banking industry in the US wants an overhaul of the rules there, including those covering STRs. The global financial community is examining the ramifications of an influential report describing US regulations as anachronistic and inefficient.
The report, A New Paradigm: Redesigning the US AML/CFT Framework to Protect National Security and Aid Law Enforcement, issued in February by The Clearing House, a US banking advocacy group, proposes a system under which banks report only on transactions that reflect law enforcement priorities, rather than every suspicious transaction. Such a change would ‘lessen the burden’ on banks, the report argues, tapping into the anti-regulation fervour of President Donald Trump’s administration.
The HKMA regards Hong Kong banks as critical to ensuring an effective stance against money laundering. ‘We work closely with other stakeholders within both the government and the industry to ensure that the banking sector is able to play its gatekeeper role in Hong Kong’s regime,’ the HKMA commented in a statement. ‘We participate in various international forums, including [FATF] to ensure that our risk-based approach to AML/CFT supervision is consistent with international practice and allows the most effective use of resources to address areas of higher risk.’
Ms Suen says the FATF expects Hong Kong to deploy professionals such as Institute members to maintain a high standard of compliance. ‘In a paper in 2010, FATF noted that there is an issue as to the requisite professionalism to discharge customer due diligence and record keeping requirements,’ she says, citing FATF Recommendation 22. ‘This is a topic that would no doubt be honed in upon,’ she adds. ‘Namely, whether by imposing rules and regulations, could untrained persons be expected to genuinely be able to discharge them?’
George W Russell
SIDEBAR: HKICS submissions
Earlier this year, the Institute made submissions to the two government consultations on legislative proposals to enhance the anti-money laundering and counter-terrorism financing (AML/CTF) regime in Hong Kong.
In its submission to the Proposal on Enhancing Transparency of Beneficial Ownership of Hong Kong Companies, the Institute supported the proposal to require an ultimate beneficial ownership register in line with Financial Action Task Force (FATF) requirements. The Institute called for the register to be only open to searches by competent authorities and it appears that the government will adopt such an approach.
In its submission to the Proposal on Enhancing Anti-Money Laundering Regulation of Designated Non-Financial Businesses and Professions, the Institute supported the proposal to introduce a licensing regime for trust and corporate service providers (TCSPs), as a class of designated non-financial businesses and professions. However, it expressed concerns regarding the ability of unqualified persons to carry out customer due diligence and record keeping. The proposal in the consultation was to allow any natural person over 18, who is an undischarged bankrupt and not having committed certain offences, to be licensed as a TCSP. The Institute believes that only those with experience and/or those who are qualified individuals (in line with the position adopted by Hong Kong’s major competitors) should be considered ‘fit and proper’ to be licensed.
‘FATF has pointed out that a majority of countries surveyed believe that strong consideration should be extended to the “fit and proper” requirements for TCSPs as expertise is required to understand business structures and their intended purposes, as well as to conduct effective vetting of owners. The persons carrying out senior roles in TCSPs should therefore have relevant experience, knowledge and good character,’ says Mohan Datwani, the Institute’s Senior Director and Head of Technical & Research.