Dominic Wai, Partner, ONC Lawyers, looks at the role of company secretaries and directors in anti-money laundering compliance.
Millions of dollars come into and go out of Hong Kong every day, legitimate or not, as Hong Kong is an international financial centre with no exchange controls. In the last few years, huge sums have flown out from countries around Hong Kong to or via Hong Kong for tax, funds control or investment reasons. This creates issues and risks of money laundering. There have also been numerous business email scams, or cases of impersonation of C-suite officers, where companies from overseas were deceived into wiring large sums of money to bank accounts in Hong Kong. Such wire transfers and movement of funds via ‘money mules’ are also money laundering as the funds are the proceeds of crime.
As a member of the Financial Action Task Force (FATF), an independent inter-governmental body that promotes policies against money laundering and terrorist financing, Hong Kong is obliged to implement the anti-money laundering (AML) requirements promulgated by the FATF.
Recently, the Securities and Futures Commission (SFC) issued an announcement notifying the industry of AML concerns. In the announcement, the SFC highlighted the following areas of concern identified during its onsite inspections of licensees and its AML investigations:
- failure to scrutinise cash and third-party deposits into customer accounts
- ineffective monitoring of transactions in customer accounts
- failure to take adequate measures to continuously monitor business relationships with customers which present a higher risk of money laundering
- inadequate enquiries made to assess potentially suspicious transactions to determine whether or not it is necessary to make a report to the Joint Financial Intelligence Unit (JFIU), and lack of documentation of the assessment results, and
- failure to monitor and supervise the ongoing implementation of AML and counter-terrorist financing policies and procedures.
While financial institutions and intermediaries under the regulatory regime of the SFC and the Hong Kong Monetary Authority have more stringent AML compliance requirements under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, the trend of the compliance regime has been to expand to other non-financial professionals such as accountants and lawyers. It is therefore important that Hong Kong complies with international AML standards to maintain its status as an international financial centre. To achieve that, directors and company secretaries of Hong Kong companies thus have important roles in maintaining high standards of AML and avoiding the criminal offence of a breach of AML laws in Hong Kong.
Duties of directors and company secretaries in relation to AML
Directors of a company have the duty to act in the best interests of the company and also have the duty of reasonable care, skill and diligence. The duties of directors of listed companies are more specifically set out in Rule 3.08 of the listing rules which makes it clear that directors are responsible for fulfilling their duties of skill, care and diligence to a standard at least commensurate with the standard established by Hong Kong law. They are further required to, inter alia, apply such degree of skill, care and diligence as may be reasonably expected of a person of their knowledge and experience and holding their office within the company. Directors are also required to follow up on anything untoward that comes to their attention.
In relation to AML, Section 25 of the Organised and Serious Crimes Ordinance (OSCO) provides that a person commits an offence if, ‘knowing or having reasonable grounds to believe that any property, in whole or in part, directly or indirectly, represents any person’s proceeds of an indictable offence,’ he or she deals with that property. It is a defence if there is a disclosure of knowledge or suspicion that the funds or property are crime proceeds to the JFIU – as set out in Section 25A of OSCO. For example, if an officer of a company (whether a director, company secretary or manager) has a suspicion that monies that he or she has received or needs to deal with may be crime proceeds and makes a suspicious transaction report to the JFIU (or other authorised officers as defined under the law) before dealing with the monies, if the JFIU has no objection, then it would be safe for the company and the company’s staff to continue with the transaction.
Section 25A of OSCO imposes a legal obligation on a person to make a report to the JFIU or other authorised officers if that person knows or suspects that any funds or property are crime proceeds. Accordingly, if any company secretary or director knows, or has such a suspicion, he/she will need to make a report to the JFIU or disclose to the officer in the company who is responsible for suspicious transaction reporting.
Given that directors are responsible for directing a company’s business effectively, and this includes ensuring compliance with all relevant Hong Kong laws, AML laws among them, a director with reasonable care, skill and diligence would need to comply with AML laws by being able to:
- understand AML laws and risks
- ensure that the company’s systems and personnel (for example identifying a director to be the responsible director) are capable of addressing the AML risks identified, having regard to the specific nature and business of the company, and
- appoint a director or proper senior company personnel to be the central reference point for suspicious transaction reporting.
For company secretaries, a main role and duty is to ensure that the company complies with relevant laws and regulations, which includes AML laws and practices, and to advise the board and directors on such developments. For company secretaries of listed companies, again the requirements are higher as set out in Section F of the Hong Kong Corporate Governance Code (Appendix 14 of the listing rules). Section F requires company secretaries to:
- play an important role in supporting the board by ensuring good information flow within the board and confirming that board policy and procedures are followed, and
- advise the board, through the chairman and/or the chief executive, on governance matters and facilitate the induction and professional development of directors.
The code also requires all directors to have access to the advice and services of the company secretary to ensure that board procedures, and all applicable law, rules and regulations, are followed.
Accordingly, not only does a company secretary need to be apprised of AML laws to ensure that company policy and procedures are in compliance with those laws, but he or she also has the duty to ensure that the board and its directors are also apprised of the relevant AML laws with proper training and understanding of such laws.
The Hong Kong Institute of Chartered Secretaries issued an Anti-Money Laundering and Counter-Terrorist Financing Guideline in May 2016 pursuant to its AML/CFT Charter for corporate service providers (CSPs) to adopt to achieve a high standard of AML measures.
While the guideline is aimed at CSPs, it provides a practical guidance to company secretaries, directors and senior management of companies in designing and implementing their own policies, procedures and controls in the relevant operational areas, taking into consideration the size and industry of the specific company to meet the relevant AML statutory and regulatory requirements.
The AML laws in Hong Kong have been described as ‘draconian’ and ‘unfair’ in the past when a person could be convicted even though he or she may hold a subjective and honest belief that the property is not the proceeds of an indictable offence, provided that a reasonable right-thinking person would so believe. Recently there has been a change in the test to be used for assessing whether an accused has ‘reasonable grounds to believe’. In the case of HKSAR v Pang Hung Fai (2014) 17 HKCFAR 778, the Court of Final Appeal (CFA) laid down a two-limb test, namely that the accused must have:
- grounds for believing that the property in question represents the proceeds of an indictable offence, and
- the grounds must be reasonable.
Regarding the grounds for believing that the property in question represents the proceeds of an indictable offence, the accused’s perception and evaluation can be taken into account and the test of reasonableness should be used to determine the amount of weight to be given to such perception and evaluation. Regarding the test that the ‘grounds must be reasonable’, the CFA held that the test is whether any reasonable person looking at the grounds ‘would believe’ (rather than ‘could believe’) that the property dealt with represents the proceeds of an indictable offence and the meaning of ‘believe’ should be used in the sense of ‘know’.
Subsequent CFA judgments, in particular the 2015 judgment in the Carson Yeung case – HKSAR v Carson Yeung (FACC 5 and 6/2015) – have left this two-limb test of the defendant’s ‘grounds to believe’ intact.
With the new test in the Pang Hung Fai case, a court may now take into account the subjective and honest belief of an accused regarding the property in question, making Hong Kong’s AML laws less ‘draconian’. However, it remains the case that directors are subject to the duty of skill, care and diligence to effectively direct the company’s business, and company secretaries still have a duty to assist the directors and the board to apply such skill, care and diligence to comply with the law, including AML laws, and therefore to avoid any risk of breach of AML laws and investigation by the authorities that might affect the interest of the company.
Partner, ONC Lawyers