HK SFC licensing and compliance hints – January 2022

View PDF

Authored by: Lavita Pong

Implementation of revised financial return form and migration to WINGS

The new financial return form was gazetted on 17 December 2021 (see SFC circular of 17 December 2021 and the Gazette notice). The form is available on the SFC’s website (click here). You can also refer to our previous article of 24 November 2021 regarding the new data required (link).

The timetable below shows the implementation dates:

To make new electronic submissions, the responsible officer or an officer approved by the SFC for filing such returns can download the WINGS mobile app (see SFC circular of 21 January 2022) and sign the return electronically.

The SFC has also issued a user guide and demonstration videos to provide guidance on how to submit financial returns through WINGS. These are available on the SFC’s website under “User Guide – Submission services” on WINGS (wings.sfc.hk).

SFC AML and CFT webinars 2021

The SFC held AML/CFT webinars on 6 and 7 December 2021, as follows:

1. SFC Anti-Money Laundering and Counter-Financing of Terrorism Webinar 2021 (link) presented by the SFC
2. Anti-Money Laundering & Terrorist Financing Suspicious Transaction Reporting presented by the Joint Financial Intelligence Unit (link)

These presentations are available on the SFC’s website (see the SFC circular of 16 December 2021) and the SFC encourages the industry to consider using them for internal training. The first presentation provides updates on major regulatory changes and the SFC’s inspection findings, which are summarised below.

Update on the SFC’s revised AML Guideline

The SFC has summarised the recent changes in the SFC’s AML Guideline which came into effect on 30 September 2021 (with the exception of the requirements relating to cross-border correspondent relationships which will come into effect on 30 March 2022).

• Third-party deposits and payments
  • The meaning of third party is broad. Any person or entity other than the investor is considered to be a third party.
  • The SFC mentions that firms can provide their company policies to a client, and encourages clients to deposit funds into a designated bank account (in the client’s own name or the name of any acceptable third party) to facilitate easy identification of the source.

• Cross-border correspondent relationships
  • The SFC gives useful guidance on what falls in-scope of the requirements, and the required measures (slides 10 and 12 of the presentation).
  • A Hong Kong asset manager which has been delegated with an asset management function by an overseas asset manager and thereby exercises its own investment discretion to place orders would fall out of the scope of such relationship (slide 11 of the presentation).

Other updates

• Mitigating ML/TF risks of virtual assets
  • In May 2021, the Financial Services Treasury Bureau issued its Consultation Conclusions on the Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong (link). It is expected that the relevant amendment bill will be introduced into the Legislative Council during the first half of 2022.
  • In October 2021, the FATF issued the Updated Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers (link).

• New technology for AML/CFT
  • On 1 July 2021, the FATF issued the “Opportunities and Challenges of New Technologies for AML/CFT” (link).
  • Machine learning and natural language processing (both are subsets of artificial intelligence) and Application Programming Interface are cited as offering the most potential for AML/CFT, based on responses to FATF’s digital transformation questionnaire distributed to government authorities, and public and private sector experts.
  • The industry should mitigate challenges and obstacles such as operational issues as well as legal and ethical issues caused by use of technology.
  • Getting management buy-in and ensuring compatibility with international standards are ways to implement new technologies.
  • The industry should not become over-reliant on new technologies.
  • Human input and capacity-building continue to be essential elements.

Inspection findings and supervisory observations

• Inadequate policies and procedures
  • Insufficient measures for identifying a natural person for corporate investors with complex structures
  • Insufficient documentation of CDD measures taken (in connection with name screening result assessment and transaction monitoring)

• Institutional risk assessment
  • Failure to establish enhanced controls and action plans after assessment

• Customer risk assessment
  • Failure to update the high risk country list during the assessment

• Third party deposits
  • Identification – insufficient review by looking only into third-party deposits which exceed the pre-determined monetary threshold
  • Evaluation – no enquiries made as to why the deposits are necessary (for example, a deposit from a third party was transferred into a client’s trading account and without any trading activities the same amount was subsequently transferred to that client’s bank account)

• Sanction screening
  • Ineffective automated system for name screening

• Ongoing monitoring
  • Failure to check the veracity and adequacy of CDD information during review (e.g. only conducting a negative news screening)