Everyone, including the legal profession, has a responsibility to combat money laundering and terrorist financing. It is important to stay vigilant and protect ourselves from being used by criminals to launder the proceeds of crime through the local financial system.
The Hong Kong Government is considering introducing new legislation to more stringently combat money laundering and better align the jurisdiction’s laws with worldwide regulations promulgated by the Financial Action Task Force (“FATF”), an organisation based in Paris of which Hong Kong is a member. The FATF assesses how effectively its members are implementing its regulations by performing periodic checks referred to as mutual evaluations. Hong Kong is scheduled to have its next evaluation in 2018 and our Financial Services and the Treasury Bureau is very keen to impress FATF.
The legal profession is self-regulatory and under the statute, the Law Society may exercise regulatory and disciplinary powers over the profession. In support of the effort to protect the global financial system against money laundering and terrorist financing, we issued a Practice Direction in as early as 2007 detailing, inter alia:
(a) the mandatory requirements for law firms on client identification and verification, client due diligence exercises, record keeping;
(b) the current relevant legislation on money laundering and terrorist financing;
(c) the basic policies and procedures required of law firms;
(d) the relevant legal issues on legal professional privilege, client confidentiality, litigation, civil liability and confidentiality agreements;
(e) examples of suspicious transaction indicators and risk areas; and
(f) suspicious transaction reporting.
The Practice Direction had immediate advisory effect when it was issued. On 1 July 2008, certain parts of it, notably the guidance on client identification and verification, customer due diligence, record keeping and staff training, became mandatory. Any law firm, solicitor or foreign lawyer practising in Hong Kong who fails to comply with the mandatory provisions will face disciplinary proceedings, in addition to the risk of being subject to severe consequences of criminal prosecution and loss of reputation as a result of any involvement in or facilitation of money laundering or terrorist financing activities.
With the implementation of the Practice Direction, the Law Society has put in place, for a decade by now, a legal anti-money laundering (“AML”) mechanism which is binding, enforceable and authoritative for our members. The mechanism satisfies the international standards on customer due diligence and record keeping and is enforceable by sanctions which are effective, proportionate and dissuasive.
Despite the above, the Government apparently still wants to extend the strict regulations it has imposed on the banks and financial services industry in 2012 with respect to customer due diligence requirements and attendant penalties. The Bill seeks to impose new obligations on the Law Society to regulate the profession and the FATF’s standards and requirements without acknowledging that Practice Direction P already takes these into consideration. Although the Government recognises the Law Society’s good work, it does not seem to give credit to our past efforts. If it overrides our independent self-regulatory function and imposes the same standards on all professions, including accountants and estate agents, it will ignore the peculiarities of each profession and the Law Society’s existing regulations.
There is no evidence or indication that there is an increasing risk that solicitors and foreign lawyers will be involved in money laundering or terrorist financing activities, or that the Practice Direction is not serving its purpose. Subjecting solicitors and foreign lawyers to the regulatory regime of the Anti-Money Laundering and Counter Terrorist Financing (Financial Institutions) Ordinance (“AMLO”) will be out of proportion to the risk engendered by solicitors and foreign lawyers in Hong Kong in relation to money laundering and terrorist financing.
There is no doubt on the tremendous effort that the FATF has undertaken to set the global AML standards. Nevertheless, in deciding whether to adopt the standards, consideration must be given to the peculiarity of the local situation to ensure that the standards are appropriately applied in a cost effective manner.
Less than a year ago, I asked members to share their experiences on opening bank accounts in Hong Kong, as there were widespread reports that businesses were facing undue difficulties in doing so. The experiences shared ranged from members’ own encounters to observations through their handling of matters on behalf of their clients or employers. The general sentiment was that many of the account opening procedures and requirements adopted by banks were unnecessarily excessive and complicated, inflexible and time consuming. Without having access to a bank account, a business cannot successfully function here. The frustrating experience in one of the preliminary steps in establishing a business here is driving business owners away from Hong Kong.
While we fully appreciate the need of financial institutions to tighten compliance measures to address concerns about money laundering and terrorist financing, we are also aware of the obstacles to genuine businesses, which are hurting Hong Kong as an international financial centre and a legal service hub.
The legal profession is the only profession which already has enforceable AML regulations. The existing mechanism has been working well. There is no basis to upset the status quo by tightening measures that are disproportionate to the AML risks encountered by the legal profession. Further, the codification of customer due diligence and record keeping requirements will unnecessarily escalate regulatory costs on legal practices and create more obstacles for law firms to expand and attract new clients.
The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 was gazetted on 23 June. The Law Society has vigorously objected to the inclusion of solicitors and foreign lawyers as one of the DNFBPs (designated non financial businesses and professionals). However, with its focus solely on the FATF evaluation, the profession’s view had been ignored. The Government pressed ahead with the Amendment Bill on the basis that it did not consider that the current regime could satisfy the FATF requirements, despite the general concern that an across-the-board implementation of stringent statutory AML requirements could adversely affect the business environment of Hong Kong.
The Law Society is studying the Amendment Bill carefully and will be making further representations to the Government and the LegCo as appropriate. Members are also encouraged to study the Amendment Bill and forward any comments you may have.
Many member firms have their own strict customer due diligence requirements in place. Changing them or adapting them will be burdensome and costly. Members who feel that their views are not being listened to by the Government are invited to approach and write directly to the Financial Services and the Treasury Bureau.