Given the challenges that Hong Kong currently faces there was much expectation ahead of the recent budget speech of Hong Kong’s Financial Secretary Paul Chan Mo-po. Whilst cash giveaways and tax breaks grabbed the headlines there were some important developments in tackling financial crime. In his speech, Mr Chan referred to the Financial Action Task Force’s (FATF) recent publication of the Mutual Evaluation Report on Hong Kong’s anti-money laundering (AML) and counter-financing of terrorism (CFT) regime (the Report). Despite the Report confirming Hong Kong was the first jurisdiction in the Asia-Pacific region to have achieved an overall compliant result in the current round of FATF evaluation, improvements are still needed.
In this article we look at some of the proposed changes, provide an update on the steps that have been taken and share our thoughts on what this might mean for companies operating in Hong Kong.
What are the proposed financial crime developments and who will they affect?
In response to FATF’s feedback in the Report, [Hong Kong] “must enhance prosecution of money laundering involving crimes committed abroad and strengthen supervision of certain non-financial businesses,” two major changes have been announced:
- A consultation is to be launched to consider incorporating virtual asset services providers and dealers in precious metals, stones and jewellery (DPMS) into the AML/CFT framework; and
- A new bureau specialising in financial crime investigation will be established, doubling the number of AML/CFT investigators.
If fulfilled, such developments should bring Hong Kong more in line with other leading AML/CFT regimes, such as the European Union’s (EU) Anti-Money Laundering Directives (AMLD).
What could these changes mean for affected organisations?
Cryptocurrencies and other virtual assets have drawn attention as a means of payment in criminal activity such as dark-web drug sales and ransomware attacks. They have also been utilised for money laundering and terrorist financing purposes. In 2019, FATF updated its guidance to member jurisdictions regarding virtual asset service providers, which include cryptocurrency exchanges and other designated virtual asset business types.
FATF’s guidance sets out a technology-neutral approach to AML/CFT regulation and requires jurisdictions to bring virtual asset service providers into their regulatory frameworks. Specifically, a FATF-compliant supervisory approach will apply the same principles to traditional financial services sectors such as banking and securities as to virtual asset service providers. The budget announcement may mean that virtual asset service providers will be required to adopt a full set of AML/CFT controls, including Know Your Customer, transaction monitoring and suspicious transaction reporting processes.
Similarly, the acquisition of precious metals, stones and jewellery is a favourite way of laundering illicit funds and as such DPMS already falls within the AML/CFT regimes in a number of jurisdictions. Under FATF’s own recommendations and under the EU AMLD DPMS organisations which engage in high value cash transactions may be required to implement an AML/CFT compliance framework.
Typically under these regimes, a full range of Customer Due Diligence (CDD) checks is required on any transaction equal to or over 15,000 Euros/USD (cHK$130,000) under FATF or 10,000 Euros (cHK$87,000) under the EU AMLDs. In keeping with AML/CFT compliance generally, organisations would be expected to adopt a risk based approach and implement policies and procedures to manage risks identified through policies and procedures covering issues such as CDD (and Enhanced Due Diligence where appropriate), suspicious transaction reports and record keeping. Such a framework will also need to be implemented through clear communication and training (in some organisations a culture change may well be required) and assessed to ensure effectiveness.
Is a new financial crime investigations bureau necessary?
Hong Kong is a major global financial centre with significant amounts of money flowing through the territory. Whilst Hong Kong does have a relatively low domestic crime rate, as a global city it faces a significant risk of attracting those from outside of Hong Kong who seek to launder the proceeds of crimes.
According to Hong Kong’s Joint Financial Intelligence Unit, the number of suspicious transaction reports has more than doubled from 23,282 in 2012 to 51,588 in 2019. With the Report highlighting that there are c1,600 AML/CFT investigations per year. Interestingly, the Report highlights that 70% of investigations focuses on fraud with only 30% focusing on other areas such as corruption and tax evasion so it one focus area of the new bureau may be to level this ratio up.
Given the increased volume of reports and the number of investigation, plus the number and diversity of risks Hong Kong as a global financial centre faces, a standalone bureau of specialists focusing on just these areas seems a sensible way forward, bringing Hong Kong in-line with other jurisdictions.
What should companies do now?
These changes are still at their early stages, there is still a consultation process to go through for the additional areas to be included in the AML/CFT regime and it is not clear what their final format will take. However, organisations should always be proactive in identifying and managing AML/CFT risks in their organisation, including monitoring changes in law carefully. Virtual asset services providers or DPMS’s should be especially vigilant and prepare themselves for increased supervision.