The global standard-setter on AML/CTF, the Financial Action Task Force (FATF) held its recent plenary meeting in Busan, Korea.
Coverage included the ongoing fight against terrorist financing (including the ISIL threat), information sharing and “de-risking” in respect of non-profits and correspondent banking. In this alert, we set out 8 key points covered at the Plenary Meeting and provide 8 key takeaways for financial institutions operating in Hong Kong (FIs).
Quick background: What is the Plenary?
The “Plenary” is FATF’s decision-making body. It holds three meetings, usually in October, February and June. The most recent one took place in Busan Korea on 22 to 24 June 2016.
The Plenary meetings are open to delegations from FATF members (such as Hong Kong) and observers. They are not open to the public.
8 key points and takeaways from the Plenary Meeting
Takeaways for Hong Kong FIs
Understanding the financing of ISIL
FATF is continuing to monitor the financing of Islamic State in Iraq and the Levant (ISIL) and its affiliates, and is considering an update to its 2015 report of Financing of the Terrorist Organisation Islamic State in Iraq and the Levant.
Remain vigilant, monitor lists and keep an eye out for the updated FATF ISIL report
ISIL and its associates represent one of the strongest and most influential terrorist groups in recent times, with several terrorist attacks in the Middle East, Europe and the United States conducted or inspired by the group.
FIs play a key role in disrupting ISIL’s financial flows and the importance of remaining vigilant through robust screening, transaction monitoring, and, if necessary, suspicious transaction reporting cannot be underestimated. This is vital in order to ultimately assist enforcement agencies and the global community to counter terrorist financing.
Our additional note: Recent press reports also suggests that governments and regulators are considering how to tackle “lone wolf” attacks, given the low levels of cost, sophistication and coordination involved. Expect further risk typologies to emerge.
Revision of FATF Recommendation 8 and its interpretative note to protect non-profit organisations from terrorist abuse
FATF has revised FATF Recommendation 8 and its interpretative note to take into account the evolution of non-profit organisations (NPO) and the threat environment since it was originally adopted.
Monitor and mitigate risks of NPOs
As FATF notes, NPOs provide a range of vital services, but are vulnerable to abuse by terrorists and terrorist organisations. FIs should tailor their approach to this sector with this risk borne in mind.
Importantly however, this does not mean that NPOs should be subject to wide scale de-risking. Rather FIs should adopt a risk-based approach as appropriate in the circumstance.
Our additional note: De-risking is a highly sensitive issue affecting multiple sectors. It is being considered from multiple angles, including under an upcoming paper on technology and customer due diligence.
Effective domestic coordination and international cooperation in detecting terrorist financing
FATF has developed an extensive checklist of relevant risk indicators for governments and the private sector to identify cases where terrorists abuse the financial system.
These indicators will not be made public and instead be shared with competent authorities, who will disseminate to relevant private sector entities.
Develop controls in tandem with emerging threats
As the central players in an international financial centre, we expect it is very likely that the risk indicators will be shared with the regulatory authorities of Hong Kong’s FIs, which in turn may pass on (as appropriate) to FIs.
Of course, this is entirely up to the discretion of the Financial Services and the Treasury Bureau and financial regulators.
In the meantime, FIs should ensure their controls evolve in tandem with emerging threats.
Iran’s engagement with the FATF
FATF notes that Iran has adopted and expressed a high-level political commitment to an action plan to address its AML/CTF deficiencies. Iran will remain on the FATF Public Statement until its full action plan has been completed.
Iran is not in the clear….yet
While there has been a number of recent relaxations in respect of Iran, for example in January 2016 under the United Nations Sanctions (Iran) Regulation (Cap. 537AF), FIs are reminded by FATF to continue to apply enhanced due diligence to business relationships and transactions with persons from Iran.
So for now, it’s business as usual.
Keep an eye out for further FATF Statements on Iran, which are usually published by Hong Kong regulators, including in HKMA and SFC circulars.
Improving transparency and beneficial ownership
FATF will commence conducting its 4th round of mutual evaluations shortly and will be focusing on ensuring that adequate and accurate information on beneficial ownership and control is obtained and available to authorities.
Hong Kong’s regime is at the forefront
Hong Kong’s new regime under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 651) (“AMLO”) and its associated guidelines codified requirements in relation to beneficial ownership. In 2012, these represented some of the toughest AML/CTF requirements for any international financial centre.
In this respect, Hong Kong’s AML/CTF regime has been at the forefront for a number of years already.
Our additional note: There are early indications that some of the beneficial owner requirements in Hong Kong may be adjusted to allow greater flexibility and alignment with other leading markets.
FATF standards on information sharing
FATF considers effective sharing information of information with authorities as one of the key requirements of an effective AML/CTF system. It has prepared the Consolidated FATF Standards on Information Sharing which extracts the relevant sections from existing FATF Recommendations and Interpretative Notes for easy reference.
Separately, FATF will continue developing best practices for information sharing amongst the private sector, focusing on intra-group and inter-institutional sharing.
Expect changes to the Hong Kong regime for the private sector
The Consolidated FATF Standards on Information Sharing serve as a helpful go-to reference of all the relevant principles for information sharing with authorities.
However, more relevantly for FIs, the current FATF Recommendations focus on group wide policies for information sharing. This is not currently codified in the existing Hong Kong AML/CTF regime.
Given the upcoming AMLO review schedule for later this year, we expect this is already on the radar of the relevant regulatory authorities and is likely to be addressed in the revised AML/CTF regime. Watch this space.
Mutual evaluation reports of Austria, Canada and Singapore
The Plenary discussed the key findings, priority actions and recommendations from the mutual evaluation report of Austria, Canada and Singapore. These reports will be finalised shortly after the final reviews.
Hong Kong is coming up
The Hong Kong 4th round mutual evaluation is coming up, with the FATF due to conduct its on-site visit in 2017 Q4 or 2018 Q1.
This evaluation will consider the Hong Kong AML/CTF regime post-AMLO, which will presumably include recent efforts and any additional amendments due to the review process later this year.
Our comment: We are already seeing this reflected in the high volume of AML/CTF-related examinations and investigations, although public enforcement actions remain surprisingly slow to emerge. Regulators are nonetheless extremely busy and we expect heightened activity in the coming months… we wait with baited breath.
Developments in the decline of correspondent banking
FATF is developing guidance on the correct implementation of the risk-based approach to address the recent decline in correspondent banking, also known as “de-risking”.
Look out for FATF’s upcoming guidance
We understand this guidance is imminent and will serve as useful reference for interpreting and implementing the correspondent banking and risk –based approach requirements under the AMLO and regulatory guidance.
We expect clarity on this subject will be welcomed by the banking industry. We also understand from our work with the industry that this may help expedite long-outstanding discussions on SWIFT relationships.
Please contact us anytime to discuss.
The next FATF Plenary meeting is scheduled for 16-21 October 2016, with other Hong Kong developments undoubtedly in the meantime. Watch this space.