- On 11 April 2017 the Hong Kong Monetary Authority (“HKMA”) revealed that it had reprimanded Coutts & Co AG Hong Kong (“Coutts”) and imposed a fine of $7,000,000 HKD (£692,000 GBP) for five separate breaches of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Chapter 615 of the Laws of Hong Kong) (“AMLO”).
- The contraventions occurred between April 2012 and June 2015 having resulted from a systemic failure to have clear and effective internal anti-money laundering and counter-terrorist financing controls. Broadly, three failures resulted from inadequate processes relating to “Politically Exposed Persons” (“PEPs”) and the remaining two resulted from inadequate due diligence and consideration of the connection between the customer and a “high risk” country.
- PEPs are defined in s1 of Schedule 2 to the AMLO as:
“(a) an individual who is or has been entrusted with a prominent public function in a place outside the People’s Republic of China and –
(i) includes a head of state, head of government, senior politician, senior government, judicial or military official, senior executive or a state-owned corporation and an important political party official; but
(ii) does not include a middle-ranking or more junior official of any of the categories mentioned in subparagraph (i);
(b) a spouse, a partner, a child or a parent of an individual falling within paragraph (a), or a spouse or a partner of a child of such an individual; or
(c) a close associate of an individual falling within paragraph (a).”
- Coutts contravened the following sections of Schedule 2 to the AMLO:
a. Section 19(3), which requires a financial institution to establish and maintain effective procedures for the purposes of carrying out its duties pursuant to sections 3, 4, 5, 9, 10 and 15 of Schedule 2 to the AMLO. A specific breach of section 10 was alleged. This requires financial institutions to suspend its business relationship with an existing customer where it becomes aware that the customer is, or has become, a PEP, and to put in place reasonable measures to verify the customer or beneficial owner’s source of wealth and the source of the funds in the transaction and obtain senior management approval once their status is known. Coutts failed to have appropriate procedures for ensuring the timely follow up of confirmed alerts regarding the PEP status of customers despite having a commercially available database to check. The HKMA found nine instances where Coutts had failed promptly to obtain senior management approval to continue the business relationship. The delay in obtaining approval or terminating the relationship varied between four and 34 months.
b. Section 19(1), which requires a financial institution to establish and maintain effective procedures for determining whether a customer or beneficial owner of a customer was a PEP. Coutts were only screening (by way of internet search for example) “high risk” customers, and this only periodically, and only where new accounts were being opened. This resulted in a lack of screening for existing customers. HKMA discovered that there were four existing PEPs who were not considered “high risk” who had used the bank for several years without being detected, despite commercial database information or information from public sources available at the time the accounts were opened which showed that they were PEPs.
c. Section 3(1), which requires a financial institution to undertake appropriate due diligence as required by s3(1) and 2(1)(b) of Schedule 2 to the AMLO. Specifically, Coutts failed to take reasonable measures to verify or understand the ownership and control structure of one particular customer. This was particularly so given the complexity of the ownership structure which involved five intermediate layers, multiple companies across a variety of jurisdictions and various trusts.
d. Section 15, which requires a financial institution to have adequate “special requirements” in place to deal with possible “high risk” situations, namely money laundering or terrorist financing. Specifically HKMA discovered that Coutts had failed to obtain senior management approval to continue a business relationship despite the fact that the customer, a charitable foundation, presented as a high risk of money laundering or terrorist financing because of its close links with a “high risk” country and the lack of clarity as to who ultimately controlled it.
- This is a clear message from the HKMA that it takes AMLO contraventions extremely seriously and it will exercise its powers to reprimand those entities which are non-compliant. The HKMA explicitly referred to the need to send a clear deterrent message about the importance of effective anti-money laundering and counter-terrorist financing controls and procedures.
- Coutts were able to improve their position by co-operating fully with the HKMA and acting in advance to remedy their concerns and no doubt this reduced the fine considered appropriate. In particular, Coutts engaged an external consultant to conduct an extensive review of its policies and procedures and to advise on remediation of client files. Coutts had also taken positive and intensive remedial measures to correct the position.
- With this in mind, it is essential that financial institutions such as Coutts do not become complacent and continue to review and update existing policies and procedures that have been adopted and apply those new policies and procedures to not only new customers, but to existing ones as well to safeguard it against HKMA intervention.