New developments in “know-your-customers” requirements

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 (the “Bill”) was recently published by the Government. The Government proposes to implement the amendments to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (“AMLO”) on 1 March 2018.

This Note will first discuss the substantive provisions in the Bill, and then its background.

The Bill would:

1. apply statutory customer due diligence (“CDD”) and record-keeping requirements to solicitors, foreign lawyers, accountants, real estate agents, trust and company service providers (“TCSPs”) when these professionals engage in “specified transactions”; and
2. introduce a licensing regime for TCSPs to require them to apply for a licence from the Registrar of Companies and satisfy a “fit-and-proper” test before they can provide trust or company services as a business in Hong Kong.

Specified transactions include real estate transactions; management of client money, securities or other assets; management of bank, savings or securities accounts; company formation and management; and buying and selling of business entities.

The Ordinances regulating solicitors, accountants and real estate agents have already put in place a set of disciplinary and sanction measures ranging from reprimands, orders for remedial action, civil fines (up to HK $500,000), and suspension from practice or revocation of licences (as appropriate). The Government believes that this should provide sufficient and proportionate deterrent effect in these three sectors, and therefore does not propose to impose criminal sanctions for non-compliances with the requirements under the AMLO in view of the lesser risks concerning these sectors when compared with financial institutions.

It may be recalled that the maximum criminal sanctions under the AMLO for a contravention by a financial institution and its employees of the requirements in Schedule 2 of the AMLO are a fine of HK$1 million and imprisonment of 7 years. Alternatively, the relevant authorities may take a range of disciplinary actions, including public reprimand, remedial orders, a civil penalty not exceeding HK$10 million or three times the amount of profit gained or costs avoided as a result of the contravention (whichever is higher).

Excluded non-financial businesses

Dealers in precious metals and stones are not covered by the Bill. The Government understands from the trade that cash transactions are no longer so common in Hong Kong as in the old days. According to the Hong Kong Police Force, no dealer has been found linked to or convicted for money laundering offences over the five years between 2010 and 2015. The Police’s assessment is that the sector does not pose insurmountable risks in the overall anti-money laundering and counter-terrorist financing (“AML/CTF”) institutional framework in Hong Kong requiring immediate mitigation. It will also take time to prepare the sector to undertake statutory AML responsibilities, given the absence of a sector-specific authority. Therefore, on a proportionate and pragmatic response in light of the risk-based approach advocated by the Financial Action Task Force (“FATF”), these dealers are not covered in the current legislative exercise.

Impact on the banking sector

The changes relevant to the banking sector include:

• Relaxing the threshold of defining beneficial ownership from the current “not less than 10%” to“more than 25%”, having regard to the prevailing FATF standard and international practice

  The definition of “beneficial owner” would be amended, for example, in relation to a corporation, to mean an individual who:

• owns or controls, directly or indirectly, including through a trust or bearer share holding, more than 25% of the issued share capital of the corporation;
• is, directly or indirectly, entitled to exercise or control the exercise of more than 25% of the voting rights at general meetings of the corporation.
• Introducing flexibility to measures permitted to be taken for verifying a customer’s identity, in the light of technological development in the methods used by financial institutions to obtain information relating to customers

  This is said to be achieved by amending section 9 of Schedule 2 of the AMLO which relates to special requirements to be taken when the customer is not physically present for identification purposes. The amendment seems to be replacing the requirement to take supplementary measures to verify “all the information provided by the customer” with the words “information relating to the customer that has been obtained by the financial institution”.  It would be helpful if a clearer amendment, and, indeed, if further amendments, to facilitate technological developments will be enacted.

• Reflecting the current criteria relating to wire transfers in the FATF recommendations by requiring the recording of basic information about a recipient and, where applicable, an intermediary institution involved in a transaction

  The Bill would require the following additional information to be recorded by a financial institution that is an ordering institution before carrying out a wire transfer involving an amount equal to or above HK$8,000 or an equivalent amount in any other currency:

• the recipient’s name;
• the number of the recipient’s account with the beneficial institution to which the funds are paid or, in the absence of such an account, a unique reference number assigned to the wire transfer by the beneficial institution.

   The ordering institution must include in the message or payment form accompanying the
   wire transfer:

• if the wire transfer involves an amount equal to or above HK$8,000 or an equivalent amount in any other currency, the information that is required to be recorded by it;
• if the wire transfer involves an amount below HK$8,000 or an equivalent amount in any other currency, the same information as above, except the originator’s address or, in the absence of an address, the originator’s customer identification number or identification document number or, if the originator is an individual, the originator’s date and place of birth.
• Enabling a financial institution (“FI”) to carry out CDD measures through its related foreign financial institution

  The term “related foreign financial institution” means an institution that:

• carries on outside Hong Kong a business similar to that of an authorized financial institution, a licensed corporation (e.g., a securities broker), an authorized insurer, an appointed insurance agent, or an authorized insurance broker;
• is within the same group;
• if the FI is incorporated in Hong Kong, is a branch of the FI;
• if the FI is incorporated outside Hong Kong, is the head office or a branch of the head office.

   Further, the related foreign financial institution must be required under group policy to:

• have measures in place to ensure compliance with requirements similar to those under Schedule 2 of the AMLO; and
• implement programmes against money laundering and terrorist financing.

The related foreign financial institution must also be supervised for compliance with the above at a group level by a relevant authority (e.g., the Monetary Authority or the Securities and Futures Commission), or by an authority in an equivalent jurisdiction that performs similar functions.

The FI is still required to take reasonable measures to mitigate the risks of money laundering or terrorist financing involved.

• Removing a sunset clause in the AMLO so that financial institutions will have the flexibility to rely on solicitors, accountants, TCSP licensees as well as other financial institutions (including a foreign financial institution in the same parent group) as intermediaries to carry out CDD measures.

  The AMLO in its current form only allows a financial institution to carry out customer due diligence measure by means of a solicitor, accountant, member of The Hong Kong Institute of Chartered Secretaries and trust company until 31 March 2018. This time limit would be removed.

Background

Member jurisdictions of the FATF take turns to evaluate the AML/CTF regime of each other to assess the extent to which the relevant FATF recommendations are observed, both in terms of technical compliance and effectiveness of implementation.

Hong Kong is scheduled to undergo a mutual evaluation in 2018/19. A gap analysis suggests that there are certain deficiencies in the AML/CTF regime of Hong Kong as against the FATF recommendations. If remedial action is not taken to deal with the deficiencies in the run-up to 2018, it is almost certain that Hong Kong will receive adverse ratings. Hong Kong will then have to face an “enhanced follow-up” process. This will affect Hong Kong’s reputation as an international financial centre and a safe and clean city for doing business.