On 6 January 2017, the Government published a consultation paper on proposals to extend the customer due diligence (CDD) and relevant record-keeping requirements to designated non-financial businesses and professions (DNFBPs). The proposals are intended to be implemented by amending the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) (AMLO). The significance of the consultation is that currently, only specified financial institutions are required to conduct CDD measures to identify and verify their customers and keep relevant records for six years under Schedule 2 to the AMLO. However, international standards on combating money laundering and terrorist financing promulgated by the Financial Action Task Force (FATF) recommend that similar obligations be imposed upon DNFBPs when engaged in "specified transactions". Accordingly, the Government is proposing to extend Schedule 2 to the AMLO to DNFBPs in accordance with FATF recommendations.
Stakeholders are invited to submit responses to the consultation paper questions by 5 March 2017. Subject to the outcome of the consultation, the Government aims to introduce a bill to the Legislative Council in the second quarter of 2017. The timeframe is imminent as Hong Kong, being a member of the FATF, is due to undergo a mutual evaluation with other member jurisdictions in relation to their compliance with the FATF standards in 2018. For this reason, the Government also simultaneously launched a two-month consultation on proposals to enhance the transparency of beneficial ownership of Hong Kong companies (see our earlier e-bulletin for more information).
Who are DNFBPs?
It is proposed that DNFBPs include (a) solicitors, (b) accountants, (c) real estate agents; and (d) trust or company service providers (TCSPs). This expands considerably the AMLO's reach and in turn the reporting processes within such professions that may be placed on a statutory footing.
What are "specified transactions"?
The definition of "specified transactions" varies between different categories of DNFBPs. For example, with regards to solicitors and accountants, the proposed transactions include, among others, the buying or selling of real estate, the management of client money, securities or other assets, and the buying or selling of business entities. In contrast, specified transactions for TCSPs include, among other things, the forming of companies, acting as a director or secretary of a company, the provision of a registered office or business address for a company, or acting as a trustee.
Impact of proposed changes to businesses
CDD and record-keeping requirements under Schedule 2
As mentioned above, it is proposed that the requirements under Schedule 2 to the AMLO, which are currently applicable to financial institutions only, will apply to DNFBPs. This means that DNFBPs, when conducting "specified transactions", will be required to conduct CDD in the prescribed circumstances under Schedule 2, and be required to maintain those records for six years. In that regard, the extent of CDD measures required to be undertaken by DNFBPs depends on the level of risks of the transactions involved. In particular, DNFBPs will be allowed the flexibility to apply simplified CDD on low-risk cases with reference to a prescribed list of customers and products. They will be subject to enhanced CDD requirements when dealing with high-risk situations. Since many professions self-regulate taking a risk-based approach, the practical impact of the additional compliance burden may not be too onerous.
Sanctions for non-compliance
While non-compliance with the AMLO by specified financial institutions may render them liable to supervisory and criminal sanctions, the Government does not intend to propose criminal sanctions for non-compliance on DNFBPs.
For solicitors, accountants and real estate agents, the Government intends to leverage on the existing self-regulatory regimes applicable to these sectors to enforce the CDD and record-keeping requirements. Accordingly, any non-compliance will be handled in accordance with the prevailing investigation, disciplinary and appeal mechanisms applicable to each profession for professional misconduct. In that regard, the relevant regulatory bodies may impose sanctions, ranging from reprimands and orders for remedial actions, to civil fines and suspension or revocation of licence, for any non-compliance.
There is currently, however, no statutory regulatory regime for TCSPs. The Government therefore proposes the introduction of a licensing regime for TCSPs, whereby TCSPs will be required to apply for a licence from the Registrar of Companies by satisfying a "fit-and proper" test, before they can provide trust or company service as a business for the public. Anyone who provides these services without a licence will be subject to criminal prosecution. Moreover, the Registrar will be empowered to investigate any non-compliance with the CDD and record-keeping requirements by licensed TCSPs, and impose disciplinary sanctions on them in line with the maximum level of civil sanctions that may be triggered against solicitors and accountants. It is proposed that appeals can be made to a review tribunal against the decision of the Registrar in implementing the licensing and disciplinary regime.