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Allens Arthur Robinson

Focus: Hong Kong Banking – July 2004

Revised anti-money laundering guidelines

In brief: In June 2004 the Hong Kong banking authorities issued revised money laundering policies and procedures. Partner Matthew Barnard(view CV) and Senior Associate Daniel Yeo look at the changes and their implementation.

HKMA Supplement to the guideline on Prevention of Money Laundering

On 8 June 2004 the Hong Kong Monetary Authority (the HKMA) issued a revised supplement (the Supplement) to its guideline on the Prevention of Money Laundering (the Guideline).

The Guideline and the Supplement apply to all Hong Kong authorised institutions (ie licensed banks, restricted licence banks and deposit taking institutions) (AIs) and the HKMA expects all relevant subsidiaries and branches of an AI incorporated in Hong Kong to have effective anti-money laundering measures.

The money laundering prevention measures set out in the Supplement take into account the recent recommendations made by the Basel Committee on Banking Supervision and the Financial Action Task Force on Money Laundering (the FATF).

A failure by an AI to comply with the measures contained in the Guidelines and the Supplement may result in the HKMA considering that the AI does not meet the criteria for authorisation under the Hong Kong Banking Ordinance (Cap 155).

Interpretative notes to the Supplement have also been issued by the HKMA that have been developed with the Hong Kong Association of Banks and the DTC Association. The interpretative notes provide practical guidance for AIs on how to develop a 'risk-based approach' to anti-money laundering policies and procedures.

The HKMA requires that AIs will implement the anti-money laundering measures contained in the Supplement 'as soon as possible' and not later than 31 December 2004.

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New and revised anti-money laundering measures

The Supplement provides for the following new anti-money laundering measures:

  • implementation of customer acceptance policies;
  • measures for dealings with politically exposed persons;
  • correspondent banking procedures;
  • on-going monitoring procedures;
  • measures for dealings with persons in or operating from non-cooperative countries and territories; and
  • anti-terrorist financing procedures.

The Supplement contains the following revised anti-money laundering measures which supersede or reinforce those contained in the Guideline:

  • customer due diligence procedures;
  • due diligence procedures for corporate customers, trusts and nominee accounts;
  • reliance on certification of customer due diligence by intermediaries;
  • client account procedures;
  • non-face-to-face customer requirements;
  • remittance procedures;
  • requirements relating to existing accounts; and
  • risk management procedures.

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Overview of main aspects

Set out below is a brief description of the main aspects of the Supplement.

Compliance officer and staff training

AIs must appoint a compliance officer for identifying and reporting suspicious money laundering transactions.

The compliance officer must ensure that the AI complies with all anti-money laundering laws and requirements and undertakes regular compliance audits. Regular staff training and updating of policies and procedures must also be carried out.

Customer acceptance policies and risk profiling procedures

AIs must develop 'risk based' customer acceptance policies and risk profiling procedures to identify customers who are 'likely to pose a higher than average risk of money laundering'. The 'know your customer' principles for corporate customers and trust and nominee accounts have also been enhanced.

In order to implement risk-based profiling, AIs will need to ensure customer questionnaires and agreements provide for sufficient detail about a customer's background, business and ownership structure.  For high risk customers, further due diligence inquiries may need to be conducted before a banking relationship can be established. Front-line bank staff will also need to be trained to conduct risk profiling of customers.

Also, before opening a customer account in the name of a 'professional intermediary' (eg. unit trust, mutual fund or investment scheme), AIs will need to ensure that their due diligence procedures and customer agreements require relevant intermediaries to provide details of all underlying clients and beneficiaries.

Additionally, AIs are expected to conduct 'face-to-face interviews' with all new customers and if this is not possible, AIs will need to implement alternative customer identification and on-going monitoring procedures.

Politically exposed individuals

Enhanced due diligence must be conducted by an AI when dealing with a 'politically exposed person' or his or her associate or related company. Also, senior management must approve an AI's dealings with politically exposed persons.

A 'politically exposed person' is a person 'entrusted with prominent public functions' including heads of state, public and government officials, military officials, senior executives, and judicial officers and senior political party officials.

In particular, publicly available information and the relevant source of funds must be checked to determine whether a person is a politically exposed person before establishing a business relationship with that person. The checks that are required to be made and the consideration of the relevant risk factors will be time consuming and AIs will need to have sufficient resources to ensure that the required inquiries are made.

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Remittances and correspondent banking services

AIs are required to adopt a risk-based approach when determining whether a remittance may be a suspicious money laundering transaction. This means that an AI must check the beneficiary name, amount, destination and whether the remittance has been carried out for or on behalf of a third party.

AIs that provide correspondent banking services (including credit, deposit, collection, clearing payment or similar services) must conduct due diligence on all respondent banks and be satisfied that each respondent bank is effectively regulated and supervised by the relevant regulatory authorities. It is not clear whether the HKMA will give any guidance on which regimes might be deemed to be acceptable.

An AI must not establish or continue a correspondent banking relationship with an offshore 'shell bank' that is incorporated in a jurisdiction where the AI has no presence and is unaffiliated with a regulated financial group.

On-going monitoring and NCCT countries

AIs must have adequate information and administrative systems to identify and report suspicious transactions and to provide timely and sufficient information to its managers and compliance officers to detect unusual or suspicious transactions and activities. The HKMA also expects AIs to have a 'good understanding of what is normal and reasonable activity' for various types of customers.

This means that AIs will need to have account alert and transaction monitoring systems to track the activity levels of accounts and to detect unusual or suspicious transactions and patterns of activity.

In particular, AIs will need to give 'special attention' to business relationships and transactions with parties from Non-Cooperative Countries and Territories (NCCTs) that 'do not or insufficiently apply' the FATF recommendations in relation to money laundering.

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Terrorist financing

Each AI must take steps to ensure compliance with all relevant regulations and laws relating to terrorist financing and to report all transactions that are suspected to involve terrorist financing.

'Terrorist financing' is defined widely and means the carrying out of transactions involving funds that are owned by terrorists, or have been, or are intended to be used to assist the commission of terrorist acts.

This means that AIs will need to check customer and transaction details against a database of terrorist suspects and organisations.

Reliance on intermediary due diligence

The Supplement enhances the requirements to be satisfied before an AI can rely on the customer due diligence performed by another financial intermediary. In particular, the AI must:

  • assess and be satisfied that the relevant intermediary has adequate due diligence and anti-money laundering procedures;
  • obtain a certificate signed by the intermediary that contains relevant declarations concerning the customer;
  • conduct periodic reviews to ensure that the intermediary maintains adequate customer due diligence procedures; and
  • establish that the intermediary is incorporated or operating from a jurisdiction that is a member of the FATF and is regulated by a relevant supervisory authority or has adequate anti-money laundering procedures.
Updating customer records and periodic reviews

AIs must take steps to ensure that its customer records are up-to-date and relevant. This will require AIs to undertake periodic reviews of existing customer records, for example when:

  • a 'significant transaction' is to take place;
  • there is a material change in the way an account is operated;
  • the AI's customer documentation standards change substantially; and
  • the AI is aware that it may lack sufficient information about the customer.

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Taking on board the changes

It is difficult to know how readily AIs will embrace the new anti-money laundering regime as set out in the Supplement. It will entail certain costs and not just financial ones. The level of change a company may have to effect will depend on the level of current compliance. It is also likely that some of the terms mentioned in the Supplement will be open to debate as AIs attempt to more clearly define their responsibilities under the new guidelines. If you have any questions in relation to issues dealt with here or would like to discuss any other related matter please feel free to contact those listed below.

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For further information, please contact:

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