AML Challenges Facing Hong Kong Not Unique: Senior Regulator

By Valentina Pasquali

Hong Kong lawmakers and regulators have adopted a series of measures designed to bring the jurisdiction’s anti-financial crime controls in line with global standards ahead of an evaluation by the Financial Action Task Force, or FATF, this year.

Those measures expand anti-money laundering rules to cover law firms and other nonbank businesses and professions and revise beneficial-ownership expectations for corporate accountholders, among other changes.

The Hong Kong Monetary Authority, or HKMA, is also seeking to foster innovation and reduce AML compliance costs for banks under its supervision, Stewart McGlynn, who leads the agency’s AML & financial crime risk division, told ACAMS reporter Valentina Pasquali in an interview.

What follows is an edited transcript of their conversation.

What are some of the most important recent changes to Hong Kong’s controls against financial crime?

Certain provisions applicable to financial institutions within the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, or AMLO, which is our customer due-diligence legislation, have been amended, and the scope of AMLO has been expanded to capture designated nonfinancial businesses and professions, or DNFBPs, to strengthen our regime and also meet international standards.

FATF will assess those changes in its assessment scheduled for later this year.

In terms of financial institutions, we’ve made a number of legislative changes, and subsequent supporting regulatory changes, including an amendment to the threshold for beneficial ownership requirements, an amendment to the wire transfer rules, and an amendment to the requirements on non face-to-face account openings.

There have also been technical changes to the group reliance standards, allowing financial institutions to rely upon foreign financial institutions within the same financial group to conduct CDD [customer due diligence]. These changes should enable banks to reduce some CDD practices that don’t contribute to reducing money-laundering and terrorist-financing risks.

What changes have you made to beneficial ownership requirements in particular?

Previously the threshold for controlling ownership interest in Hong Kong had been set at more than 10-percent shareholding for a decade. We amended that to bring it into line with practices in other jurisdictions.

Although FATF does not prescribe a threshold, most jurisdictions now have guidance around the 25-percent mark. The reason we made this change is that we want banks’ activities in anti-money laundering to be focused on reducing the highest risks, not just performing compliance tasks because of a difference in baseline threshold. A lower threshold, as a general rule, does not always address those.

What steps have Hong Kong authorities taken to enhance corporate transparency?

There have been a number of legislative changes this year to make sure that, from a technical compliance standpoint, Hong Kong meets international standards. One change the government has made is expanding the CDD legislation to cover DNFBPs, like lawyers, accountants and estate agents.

Additionally, the government has amended the company’s ordinance to require companies to maintain beneficial ownership information in a format that is accessible for competent authorities, such as us.

Hong Kong-based shell companies have been mentioned in negative news in connection to North Korea’s sanctions-evasion schemes and other financial crimes. What is the HKMA doing to address the problem?

Shell companies have been a feature and a challenge for anti-money laundering efforts for as long as anybody has been involved in the work, but let me address the issue as it relates to DPRK-related risks. There has been a lot of media coverage on that particular issue.

We recognize that risk and the reporting of it and the HKMA has done a lot of work with the financial sector to address it, from a couple of perspectives.

The first aspect is targeted at the entity-based approach. That is data quality in terms of the CDD performed by banks, including direct customers and counterparties etc., as well as to the ability of banks to screen that data against designation lists and other intelligence. So we’ve worked with a global firm that specializes in sanctions systems testing, and have just delivered that work over the past one or two days.

But that only addresses part of the problem, which is companies that are known and are already subject to designation or perhaps known to other intelligence sources. But from experience we know that sanctions evaders normally operate several steps in front of those designations and lists. So the question for financial institutions is: what are the unknown activities?

To address this, banks and financial institutions need intelligence around what signature activities look like, and this is something we have been working closely together with banks, there is a specific group looking at this issue led by one or two of our larger banks with strong intelligence and technical capabilities, while at the same time the HKMA has shared a lot of data with banks over the past one or two years in that regard. We are also working with the FIU and banks on increasing the quality of suspicious transaction reports.

What has changed in terms of remote onboarding of clients?

The law as it stood had three very prescriptive controls that you had to choose to perform when the customer was not before you. Now with changes in technology, we wanted to make sure we applied the risk-based approach to that. So we’ve made some amendments that allow banks to perform further actions based on risk of the product, the customer, etc.

How common is remote onboarding in Hong Kong?

It’s becoming a more popular option, but at the moment it represents a minority of accounts that are opened and most customers will still appear before the bank, though it’s an area that many banks are interested in. That’s not just in Hong Kong, but globally. We see a number of our international banks that already practice this and so at the moment we’re working with them.

Can you tell us more about the HKMA’s various ‘Smart Banking’ initiatives?

There are a number of components under the new Smart Banking initiatives. We have a FinTech Supervisory Sandbox [FSS] where banks and their partnering technology firms can conduct pilot trials of fintech initiatives in a controlled environment without the need to achieve full compliance on supervisory requirements.

The mechanism that my team is most commonly engaged in is a new feature under FSS, the FinTech Supervisory Chatroom, which is an effort to provide regulatory feedback to banks and technology firms at an early stage when new technology applications are still being contemplated.

The idea of the chatroom is to bring together the right people within the HKMA into a single platform so that banks and technology firms can be provided with feedback from different perspectives, e.g. technology and anti-money laundering, at the same time, thereby reducing abortive work and expediting the rollout of new technology applications.

At the same time, we’ve been closely working with the Hong Kong Association of Banks on a project exploring the use of a know-your-customer utility. The plan for that at the moment is to have a more concrete roadmap in place by the end of the year.

Is there any other legislative or regulatory objective the HKMA hopes to achieve before the mutual evaluation by FATF?

There’s nothing for the HKMA in terms of legislation on AML/CFT for banking sector. We have reviewed guidance, together with industry, to support changes to beneficial ownership, non-face-to-face onboarding, wire transfers and the group reliance standards.

Hong Kong’s information-sharing pilot project, the Fraud and Money Laundering Intelligence Task Force, or FMLIT, is coming up for renewal. What are the next steps in that process?

The 12-month pilot is up in the middle of the year. The HKMA has been a strong supporter of FMLIT, and we believe that although the results have been to date comparatively limited in terms of overall efforts, they still have significant potential in terms of what public-private partnerships may be able to achieve.

So it’s really about what the next stage will look like and how that needs to be resourced, the types of technology that it might need and how we might need to work together. Whether it will be a short extension while we finalize all of that or whether we go straight to a permanent model will be discussed in May. But I see FMLIT going forward, I see the scope being potentially enlarged, and it’s really a matter of how and at what speed.

The proceeds of public corruption in jurisdictions like Brazil and Malaysia have allegedly moved across the world, including through Hong Kong. Is that also an area of concern for the HKMA?

Hong Kong, like all other international financial centers, whatever the scandal, is affected, because that’s the way the global economy works. So it’s no surprise that Hong Kong’s mentioned.

We recognize high-end money laundering, corruption and tax evasion as a risk, and we’ve done thematic work on private banks and wealth managers looking at the controls they have. We’ve also looked at how banks collect source of wealth information and have provided industry guidance on those issues.

We obviously share information with overseas authorities.

I understand that certain financial institutions here handle pools of U.S. dollars that are not cleared through New York, and so they remain outside of the direct jurisdictions of the United States. Are they treated in any particular way?

There is a U.S.-dollar interbank settlement system here, one of several that we operate. This is a payment system that has the purpose of reducing settlement risk between the banks that use it. The U.S. authorities are well aware of it and it’s operated by Hong Kong Interbank Clearing Ltd., which is 50-percent owned by the HKMA, and settles through HSBC.

All participants in the system are banks supervised by the HKMA. A robust monitoring system is implemented, and includes real time screening against a comprehensive set of sanction lists including those adopted by the U.S. authorities.

Topics : Anti-money laundering , Counterterrorist Financing
Source: Hong Kong
Document Date: May 1, 2018