Hong Kong’s financial institution regulators have announced a significant change to the customer due diligence (“CDD“) requirements for anti-money laundering and counter-terrorist financing (“AML/CTF“) purposes.
Effective immediately, financial institutions (“FIs“) are no longer required to undertake address verification procedures as required under the respective regulatory guidelines.
This is arguably the most significant change to the CDD requirements for FIs since the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) (“AMLO“) came into force in April 2012.
This article gives an overview of this major change.
Background: why FIs verify address
The AMLO requires FIs to undertake “customer due diligence measures” in respect of their direct customer, the customer’s beneficial owners and persons purporting to act on behalf the customer.
Address verification is not an express CDD measure required under the AMLO; rather it is a regulatory requirement imposed in the guidelines issued by each of the relevant authorities (“RAs“) under the AMLO.
This change affects all FIs
The change was collectively agreed by all of the relevant authorities (“RAs“) under the AMLO. That is, the Hong Kong Monetary Authority (“HKMA“), the Securities and Futures Commission (“SFC“), the Insurance Authority (“IA“) and the Customs and Excise Department (“C&ED“).
This means the change affects the CDD procedures of authorized institutions, stored value facility licensees, licensed corporations, the insurance industry (authorized insurers, appointed insurance agents and authorized insurance brokers), money service operators and the Post Master General.
Removal of address verification requirements
Each respective regulatory guidelines will remove the current address verification requirements.
This means that FIs are only required to collect address information of customers and/or beneficial owners without the need to collect address proof for AML/CTF purposes.
Can be implemented immediately…
FIs are encouraged to review and adopt the changes as appropriate immediately.
Any departure from current regulatory requirements to obtain address proof is considered justified by each of the RAs.
…and will be formally implemented in early 2018
Each respective regulatory guidelines will be amended in early 2018 alongside other revisions as a consequence of the upcoming changes to the AMLO.
A summary of the current requirements and the proposed changes are set out in the Appendix of each of the respective regulatory announcements.
Give customers reasons if address proof is still required
FIs do not operate in a regulatory vacuum and may still be required to obtain address proof due to other requirements, such as group AML/CTF requirements or other local or overseas legal and regulatory requirements.
In such circumstances, the FI should communicate clearly the reasons of requiring address proof to the customer.
This change is very important
We have previously reported on the HKMA clarifying its AML/CTF expectations to ensure requirements imposed by banks are not “disproportionate to the likely risk level”. Address proof was recognised as a common potential barrier to account opening. You can read our client alert here.
This change is one step further: it represents a clear collective decision by all RAs to formally amend (and simplify) CDD procedures for FIs. It will undoubtedly be welcomed all round by FIs and customers.