On 31 July 2015, the Hong Kong Monetary Authority (HKMA) issued a press release announcing that it has taken disciplinary action against the State Bank of India, Hong Kong Branch (Bank) under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) (AMLO).  This is the first reported case in which the HKMA has taken disciplinary action against a bank under the AMLO, which came into effect on 1 April 2012.

Disciplinary Action

The HKMA ordered the Bank to submit a report prepared by an external advisor assessing the sufficiency and effectiveness of a remedial plan devised by the Bank, fined the Bank HK$7.5 million and reprimanded the Bank.

In summary, the HKMA founded that the Bank had contravened some specified provisions of Schedule 2 to the AMLO in that it failed to:

  1. take measures to identify or verify the identifies of the beneficial owners of some corporate customers that opened accounts, in the account opening process (contravened s.3(1) of Sch. 2);
  2. identify transactions that were complex, unusually large in amount or of an unusual pattern as a result of relying on system generated reports which were ineffective (contravened s.5(1) of Sch.2);
  3. update or review periodically or timely the customer’s money laundering and terrorist financing risk ratings (contravened s.5(1) of Sch. 2);
  4. determine whether the customers were politically exposed persons (contravened s.19(1) of Sch. 2); and
  5. develop detailed procedures for some important AML/CFT control areas, whose policies and procedures were more or less a copy of the relevant parts of the HKMA’s AML Guideline (contravened s.19(3) of Sch. 2).

Brief Overview of AMLO

The main charging provision is set out in section 5 of the AMLO.

In relation to financial institutions, it is a criminal offence if a financial institution:

  1. knowingly contravenes a specified provision (which refers to some provisions set out in Schedule 2 of the AMLO) (s.5(5) of AMLO).  The maximum penalty is a HK$1 million fine and imprisonment for 2 years.
  2. with intent to defraud a relevant authority (meaning the HKMA, SFC, Insurance Authority or Commissioner of Customs and Excise), contravenes a specified provision.  The maximum penalty is a HK$1 million fine and imprisonment for 7 years.

“Financial institution” is defined in the AMLO to mean:-

  1. an authorized institution;
  2. a licensed corporation;
  3. an authorized insurer;
  4. an appointed insurance agent;
  5. an authorized insurance broker;
  6. a licensed money service operator; or
  7. the Postmaster General. 

In relation to individuals, it is criminal offence if a person who is an employee of or is employed to work for or is concerned in the management of a financial institution:

  1. knowingly causes or knowingly permits the financial institution to contravene a specified provision.  The maximum penalty is a HK$1 million fine and imprisonment for 2 years.  It is a defence if the individual can prove that he or she acted in accordance with the policies and procedures established and maintained by the financial institution.
  2. with intent to defraud the financial institution or any relevant authority, causes or permits the financial institution to contravene a specified provision.  The maximum penalty is HK$1 million fine and imprisonment for 7 years.

HKMA’s Powers under AMLO

The HKMA has broad investigative powers under the AMLO, similar to those available to the SFC under the Securities and Futures Ordinance (SFO).

An authorized person of the HKMA can enter the business premises of the financial institution, inspect and make copies of the relevant record or document and make inquiries of the financial institution concerning any record or document (s.9 of AMLO, which may be compared to s.180 of SFO).

An investigator appointed by the HKMA may require a person to produce, within the time and at the place specified in the requirement, any record or document that is relevant to the investigation and in the person’s possession, to attend an interview and answer any question relating to the investigation (s.12 of the AMLO, which may be compared to s.183 of SFO).

It is a criminal offence if the person fails to comply with HKMA’s request without reasonable excuse (ss.10 and 13 of AMLO).

A person is not excused from complying with the HKMA’s requirement only on the ground that to do so might tend to incriminate the person (s.13(11) of AMLO, which may be compared to 184(4) of SFO).

However, if an investigator requires a person to give an answer and the answer might tend to incriminate the person and the person makes a claim before giving the answer, then the question and the answer are not admissible in evidence against the person in criminal proceedings (s.15 of AMLO, which may be compared to s.187 of SFO).

An investigator appointed by the HKMA may also apply to the magistrate for search warrants to search for or seize relevant records or documents (s.17 of AMLO, which may be compared to s.191 of SFO).

The AMLO expressly provides that it does not affect any claims and rights for legal professional privilege (s.81 of AMLO, which may be compared to s.380(4) of SFO).

The HKMA has power to take disciplinary action against the financial institution, which includes a public reprimand, taking of remedial action, pecuniary penalty not exceeding HK$10 million or 3 times the profit gain or costs avoided.  However, before doing so, the HKMA must give the financial institution a reasonable opportunity to be heard (ss. 21 and 22 of AMLO, which may be compared to ss.196 and 198 of SFO).

The HKMA has issued the “Guideline on Exercising Power to Impose Pecuniary Penalty” dated 29 June 2012 which sets out the factors for determining whether to impose and if so the amount of the pecuniary penalty.

Conclusion

The disciplinary action taken by the HKMA against a bank serves as a good reminder to banks and financial institutions that they must have in place policies, procedures and internal controls to combat money laundering and terrorist financing, including conducting customer due diligence and monitoring suspicious transactions.  They must also ensure that the policies, procedures and internal controls are effective and properly implemented.