Takeaways from the SFC’s AML seminars

On 3 December 2019, the SFC posted the slides of its recent anti-money laundering and counter-terrorist financing (AML) seminars (Parts 1 and 2). These slides are instructive – we encourage senior management, and especially the Manager-in-Charge for AML, to consider them when formulating the 2020 AML compliance plan.

The following is a summary of some key issues covered by the seminars.

What needs to be improved?

Based on the recent Mutual Evaluation Report of Hong Kong (September 2019) (the HK Report) by The Financial Action Task Force (FATF), the following areas need work:

1. 

A deeper understanding of money laundering and terrorist financing risks.

2. 

A stronger implementation of AML measures.

3. 

An enhancement of suspicious transaction monitoring and reporting (also one of the deficiencies of licensed firms which the SFC highlighted in Part 2 of the seminar).

4. 

A resolution to the inconsistency in Hong Kong’s customer due diligence (CDD) requirements for taking on foreign politically exposed persons (PEPs) versus domestic PEPs from Mainland China and other parts of China. Currently, the mandatory requirement to adopt enhanced CDD applies only to foreign PEPs.

New regulatory developments

5. 

New FATF standards for virtual assets and virtual asset service providers: FATF has issued new standards applicable to these assets and providers. In response, the SFC issued guidance on the licensing framework which includes a statement (1 November 2018), proforma licensing conditions which would typically be imposed on virtual asset fund managers (4 October 2019), and a position paper (6 November 2019).

6. 

Risk-based approach for the securities sector: the SFC emphasised that it may amend the SFC’s AML Guideline to provide further guidance on the risk-based approach, in light of FATF’s Guidance for a Risk-based Approach for the Securities Sector.

7. 

Remote client onboarding: the SFC reiterated the reason why the SFC’s requirement for licensed firms to verify the identity of individuals is limited to those without a Hong Kong bank account. The SFC considers it may be difficult for it to conduct an investigation when verification is performed by an overseas bank. For further details on non-face-to-face account opening, please visit the SFC’s dedicated page here.

SFC inspection findings

8. 

Control failures over third-party deposits and payments.

9. 

Use of “nominees” and “warehousing” arrangements for market misconduct purposes.

Other major supervisory observations

10. 

Ineffective senior management oversight.

11. 

Inadequate compliance monitoring.

12. 

AML systems were not subject to independent review by the internal audit team.

13. 

Failures in conducting an institutional risk assessment in light of FATF’s HK Report.

14. 

Failures in conducting customer risk assessments (both initial and ongoing).

15. 

Insufficient customer due diligence when identifying PEPs.

16. 

Ineffective screening – not screening Chinese names and names in reverse order.

Senior management can initiate a self-assessment by reference to the SFC’s AML / CFT Self-Assessment Checklist (updated in April 2019), keeping in mind the HK Report and the above SFC observations.