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On June 11, 2018, the Hong Kong Monetary Authority (HKMA) held an industry seminar to discuss the Money Laundering and Terrorist Financing Risk Assessment Report.[i] Published by the Hong Kong Government in preparation of the upcoming Financial Action Task Force visit, the Risk Assessment highlights the vulnerabilities and threats to various sectors in Hong Kong. Although the report rates Designated Non-Financial Businesses and Professions (DNFBP) as “Medium Low” to “Medium” money laundering risks, the filing of Suspicious Transaction Reporting (STR) within related sectors have shown an uptrend. For example, in 2016, the legal sector filed 969 STRs, an increase of 8 percent year-on-year. Moreover, 15 percent of such STRs filed were classified as “high risk” by the Joint Financial Intelligence Unit and involved 16 different jurisdictions.
Given the increasing role of DNFBPs within money laundering, effective March 1, 2018, Hong Kong has expanded the types of businesses that are subject to the Special Administration Region’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) with the addition of a new amendment. More institutions are now required to follow the customer due diligence (CDD) and record-keeping requirements – to which only financial institutions have traditionally adhered.[ii] Now included are Hong Kong’s DNFBPs, including solicitors, foreign lawyers, accountants, real estate agents, and trust- or company-service providers[iii] engaged in certain designated transactions in Hong Kong.[iv]
Which Type of Transactions will be Covered?
For these non-bank institutions (DNFBPs), involvement in certain transactions considered risky for money laundering or terrorist financing triggers the AMLO. Buying and selling whole business entities and managing corporations fits that bill. Similar activities include buying and selling real estate, as well as managing money, securities, or bank accounts. DNFBPs engaging in these activities will need to employ CDD prior to establishing a business relationship with a customer. Certain record-keeping requirements[v] will also be necessary for transactions worth more than HKD 120,000 or when there is suspicion of money laundering, terrorist financing, or general concern that a person’s identity is in question.[vi]
DNFBPs may have had various forms of CDD requirements in place prior to the AMLO amendment but the scope of CDD has expanded. For example, solicitors were already required to verify a customer’s identity when acting on behalf of a customer in financial transactions.[vii] Now, the AMLO will require DNFBPs to identify and verify customer identification prior to customer onboarding.[viii] This means that in addition to collecting information on the customer’s name, address, telephone number, occupation (for individuals) and for legal entities, the entity’s legal status and nature of business at onboarding, solicitors are now required to verify such information to confirm that clients are who or what they say they are.[ix] In addition, AMLO requirements state that customer records should be maintained for at least five years after the end of the business relationship.[x]
DNFBPs will also have a duty to continuously monitor business relationships with customers and their transactions.[xi] Risk factors associated with the customers and their activities will determine the extent and frequency of monitoring. For example, the Hong Kong Institute of Certified Public Accountants in its guidelines advised that more frequent reviews will be required when a customer is known to be a politically exposed person.[xii]
Technological Solutions Make New Requirements Simpler to Implement
The extension of CDD and record-keeping requirements to include DFNBPs will have broad implications on professionals, especially those in smaller-sized professional service firms previously unaccustomed to AML/CTF regulations. For many, the perception of due diligence involves a labour-intensive process of conducting checks on an extensive number of counterparties. However, leveraging effective technological tools, a solution supported by the HKMA, may resolve some of the challenges associated with CDD and simplify DNFBPs compliance. The use of technology not only streamlines the CDD processes by quickly identifying trusted sources across multiple platforms, but also uses automation to make continuous due diligence less labour-intensive. Furthermore, the technology automatically generates an audit trail of all due diligence procedures undertaken.
The increasing importance of technological solutions is widely acknowledged in the due diligence world, where practitioners have seen challenges posed not only by the inefficiencies of dealing with bulky projects, but also by the exponential growth of data. Throwing bodies at a problem does not necessarily provide an answer to the new compliance demands of the AMLO; an effective solution requires the collaboration of human and machine.
[i] Chapter 6, Section 6.1, Sectoral Risk Assessment – Designated Non-Financial Businesses and Professions.
[ii] Schedule 2, Part 2, Section 3, Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. https://www.elegislation.gov.hk/hk/cap615?xpid=ID_1438403529089_006
[iii] Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Ordinance 2018.
[iv] Part 2, Section 7, Subsection 3, Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Ordinance 2018.
[v] Section 8.4, Guideline on Anti-Money Laundering and Counter-Terrorist Financing (For Authorized Institutions), February 2018.
[vi] Schedule 2, Part 2, Section 3, Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. https://www.elegislation.gov.hk/hk/cap615?xpid=ID_1438403529089_006
[vii] Section A, Items 1 and 2, Practice Direction P. http://www.hklawsoc.org.hk/pub_e/professionalguide/volume2/default.asp?c…
[viii] Schedule 2, Section 2, Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. https://www.elegislation.gov.hk/hk/cap615?xpid=ID_1438403529089_006
[ix] Section A, Items 1 and 2, Practice Direction P. http://www.hklawsoc.org.hk/pub_e/professionalguide/volume2/default.asp?c…
[x] Schedule 2, Section 20(3), Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. https://www.elegislation.gov.hk/hk/cap615?xpid=ID_1438403529089_006
[xi] Schedule 2, Part 2, Section 5, Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance. https://www.elegislation.gov.hk/hk/cap615?xpid=ID_1438403529089_006
[xii] Guidelines on Anti-Money Laundering and Counter-Terrorist Financing for Professional Accountants, February 2018, HKICPA
