A TEMPERATURE RISE IN ANTI-MONEY LAUNDERING REGULATION
In recent months there has been a steady temperature rise in the approach to combatting money laundering and terrorist financing in Hong Kong. Although Hong Kong already maintains strict anti-money laundering (‘AML’) compliance in line with other financial capitals, the scope and intensity of the approach to enforcement is growing.
In 2016 the Securities and Futures Commission (‘the SFC’) appointed a new Executive Director of Enforcement, Tom Atkinson: an individual with a strong track record in regulation. Around this time, the SFC also carried out a strategic review of the Enforcement Division. Anti-money laundering and corporate fraud and misfeasance were pinned as items high on the agenda, and permanent teams were set up to address the core areas of concern.
If there was any speculation that the new bark might be worse than the bite, the SFC’s recent action confirmed otherwise. In March 2017 the SFC reprimanded and fined BOCOM International (Asia) HK$15 million for a failure to fulfil its duties, in particular due diligence in advance of the attempted listing of a Chinese company that it sponsored.
This increased appetite for AML enforcement has been further confirmed by the conclusion on the “Consultations on Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong” (‘the Consultation Conclusion’), published on 13 April 2017.
WHAT DOES THE CONSULTATION CONCLUDE?
In a nutshell, the Consultation Conclusion has confirmed that the reach of the Anti-Money Laundering Ordinance will be extended beyond financial institutions to include Designated Non-Financial Businesses and Professions (‘DNFBPs’).
The proposed amendments will extend statutory customer due diligence (‘CDD’) obligations and record keeping requirements to DNFBPs. DNFBPs include solicitors, foreign lawyers and real estate agents.
The Consultation Conclusion confirmed they will aim to introduce amendment bills reflecting the proposed changes into the Legislative Council as soon as July 2017.
WHAT IS THE DRIVING FORCE BEHIND THE CHANGES?
There are two driving forces behind the proposed amendments.
The first and most apparent factor is the looming figure of ‘FATF’: the Financial Action Task Force, an inter-governmental body set up to combat money laundering. As part of its work FATF makes recommendations and conducts peer reviews of members’ implementation. It also analyses each country’s system for preventing abuse of their own financial system.
Hong Kong is due to undergo the peer review process, known as a ‘mutual evaluation’, in 2018. This is explicitly acknowledged as a driving force behind the proposed changes in the Consultation Conclusion:
“As a matter of priority, we need to address the gaps identified in our AML/CTF regime by enhancing transparency of beneficial ownership and supervision of DNFBPs, so as not to adversely affect the overall rating of Hong Kong in the mutual evaluation…”
It also cannot go unnoticed that the Consultation Conclusion includes the observation that “Singapore received unfavourable ratings in the mutual evaluation” and that the “US also failed the FATF test due to the absence of statutory CDD requirements for DNFBPs”. The Hong Kong Government is keen to stay ahead of the curve.
The second and related driving force is reputational. The proposals are partly motivated by a desire to maintain the integrity of Hong Kong’s financial markets and its status as an international financial centre. The Consultation Conclusion closes with a reiteration of the importance of Hong Kong remaining “a safe, clean and trusted place for doing business”.
WHAT WILL THE IMPACT OF THE CHANGES BE?
Until the proposed changes are solidified into amendment bills (due in July 2017), it is difficult to definitively say what effect they will have. In fact, the full impact of the changes may well not be revealed for some time after that.
Many DNFBPs already have strong AML requirements in place, as well as robust professional regulatory bodies to oversee them, such as the Law Society of Hong Kong (‘LSHK’).
On the one hand, the changes may add little to the existing AML mechanisms, captured for example in Practice Direction P, guidance issued in 2008 by the LSHK. DNFBPs may take comfort in the Consultation Conclusion’s expressed commitment to minimising the “compliance burden” on affected sectors by tasking their existing professional regulatory bodies with oversight of the new regulations.
The Consultation Conclusion also promises a degree of “flexibility”, allowing DNFBPs to apply “simplified CDD… in low-risk situations”.
On the other hand, bringing DNFBPs within the statutory regime at all is a notable step, the significance of which should not be underestimated. The Consultation Conclusion firmly rejects any suggestion that existing regimes are sufficient to meet FATF requirements, sending a strong signal that there will be a step-up in the approach to enforcement.
Many questions about the likely impact of these changes remain as yet unanswered. For example, it remains to be seen how the diversity of the industries affected by the proposal will be reflected (if at all), and how the resource implications for professional bodies charged with oversight and enforcement will be addressed.
WHAT STEPS SHOULD DNFBPS TAKE NOW?
It is clear that there is an increased appetite for AML enforcement in Hong Kong, although the precise practical implications for DNFBPs may not be known for some time.
In the meantime, and in anticipation of a sea-change, bodies likely to affected may be wise to begin preparing. For lawyers practising in Hong Kong, it may be helpful to refresh on the existing guidance set out in Practice Direction P. All bodies under the DNFBP umbrella should also look out for “sector specific guidelines”, due to be issued by their own regulatory authorities, a provision which will be included in any amendment to the Anti-Money Laundering Ordinance.