Skip to content.

Home

Allens Arthur Robinson

Focus: Hong Kong - Banking & Finance – April 2008

Countering money laundering in Hong Kong

In brief: The Securities and Futures Commission recently issued a circular to licensed corporations and associated entities on anti-money laundering and combating terrorist financing. The circular provides some answers on identification and handling of high-risk customers and politically exposed persons. Partner Matthew Barnard (view CV) and trainee solicitor Brian Chen look at what the circular says and it implications.

How does it affect you?

  • Licensed corporations should review their anti-money laundering and combating terrorist financing procedures against the SFC guidance note and the circular to see if they meet the SFC's requirements.
  • Licensed corporations should ensure they have adopted specific enhanced client due diligence measures when dealing with politically exposed person, as the SFC has laid down particular requirements.
  • While the SFC provides some guidance, licensed corporations are still expected to use their judgement, knowledge and expertise to develop an appropriate risk-based approach.

Background

Like many other regulators, the Securities and Futures Commission (the SFC) focuses on controlling anti-money laundering activities. While hard and fast rules are not seen as appropriate, the SFC has attempted to provide some practical guidelines and policies to define the possible scenarios and suggest appropriate measures to tackle money laundering. Prior to this recent circular, the SFC had issued a comprehensive guidance note on the prevention of money laundering and terrorist financing in April 2006 (the 2006 Guidance Note) pursuant to section 399 of the Securities and Futures Ordinance. The 2006 Guidance Note and the circular are intended for use primarily by licensed corporations (LCs) and associated entities (AEs) that are not authorised financial institutions (ie banks) as they are already subject to the Hong Kong Monetary Authority's guidelines on prevention of money laundering (the HKMA's guidelines).

The 2006 Guidance Note and circular do not have the force of law and do not override the provisions of any law, codes or other regulatory requirement applicable to LCs, AEs or registered institutions covered. Failure to comply with any requirements of the guidelines and circulars may, however, reflect adversely on the LCs' or AEs' fitness and properness and may lead to revocation of their licence.

Under Hong Kong law, there are three main pieces of legislation that deal with money laundering, namely, the United Nations (Anti-Terrorism) Measures Ordinance (Cap. 575), the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405) and the Organised and Serious Crimes Ordinance (Cap. 455). The latter two were substantially amended in July 1995 to introduce new criminal offences designed to prevent those who seek to launder the proceeds of drug trafficking or indictable offences from being able to use legitimate professional services for these purposes.

Return to top

Requirement and commentary

The circular states that when dealing with a politically exposed person (PEP), LCs should adopt enhanced client due diligence measures. In particular, the SFC requires the LCs to:

  • obtain senior management approval for the relevant transaction or account establishment;
  • ascertain the source of wealth and funds of the PEP;
  • conduct ongoing monitoring of transactions of the PEP; and
  • keep a list of all PEP customers.

There are still grey areas as to what would constitute acceptable compliance with these requirements, as the SFC maintains that it is up to the LCs to determine the extent of work to be done, especially in relation to senior management review and approval processes, and the means used to ascertain the source of wealth and funds, as the risk presented by different PEPs may vary.

Similarly, in paragraph 6 of the circular, LCs are advised to use their judgement, knowledge and expertise to develop an appropriate risk-based approach. Although there is no agreed set of risk categories, the SFC suggests some commonly used risk criteria, such as the location of customer's country of residence, the type of business conducted by the customer, the nature of the products and services provided by the LC, and whether these services are more or less vulnerable to money laundering.

To reassure LCs and the compliance officers when faced with broad and ambiguous guidelines and requirements, the SFC has reiterated that when considering a person's failure to comply with the 2006 Guidance Note (and presumably including relevant circulars), staff of the SFC will adopt a pragmatic approach, taking into account all relevant circumstances.

Even though the risk factors and measures suggested by the SFC are not exhaustive, they do give LCs some insight as to what factors and measures the SFC will expect as LCs enhance their client due diligence.

In addition, the 2006 Guidance Note and the circular issued by the SFC for LCs and AEs largely mirror the HKMA's guidelines for the authorised financial institutions as far as PEPs are concerned and more detailed discussion by the HKMA in its guidelines and published material may assist LCs and other interested parties.

The guidelines, codes and circular mentioned above are available for download on the SFC website at http://www.sfc.hk.

Return to top

For further information, please contact:

Return to top

Bookmark with

What are these?

Recent Asia publications