Domestic legislationDomestic law
Identify your jurisdiction’s money laundering and anti-money laundering (AML) laws and regulations. Describe the main elements of these laws.
Hong Kong’s primary anti-money laundering laws are found in:
- Organised and Serious Crimes Ordinance (Cap. 455)(OSCO);
- Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405)(DTROPO);
- Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) (AMLO); and
- United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575) (UNATMO).
OSCO, DTROPO and UNATMO criminalise money laundering. AMLO imposes requirements on financial institutions and other regulated institutions around customer due diligence and record-keeping.
In addition, various regulatory bodies, including the Securities and Futures Commission of Hong Kong (SFC) and the Hong Kong Monetary Authority (HKMA), have published their own guidelines on anti-money laundering. Although these guidelines are not binding law, they prescribe the requisite compliance standards expected of the regulated entities and non-compliance may result in disciplinary actions or use in court proceedings.
OSCO AND DTROPO
Under section 25 of OSCO and DTROPO, it is a criminal offence to deal with property knowing or having reasonable grounds to believe that it represents proceeds of, or was used or is intended to be used in connection with, drug trafficking (in respect of DTROPO) or any other indictable offence (in respect of OSCO).
The elements of the offence are the following.
A person must deal with property
What constitutes ‘dealing’ with property is defined broadly and includes receiving, acquiring, concealing, disguising, converting or moving property in and out of Hong Kong. Property includes both movable and immovable property located in Hong Kong or elsewhere. See also question 12.
Knowing or having reasonable grounds to believe
The offender must know or have ‘reasonable grounds to believe’ the process is the proceeds of crime in order to satisfy this limb.
‘Knowing’ means the defendant has actual knowledge, or has admitted to knowing, that the proceeds represents criminal proceeds.
‘Having reasonable grounds to believe’, on the other hand, requires the court to consider two points. First, the court will determine what the defendant knew at the material time. Then, the court will evaluate whether a reasonable person, knowing what the defendant knew, would have had grounds to believe that the property represented proceeds of crime.
The standard is a strict one - it does not matter whether the defendant in fact so believed; there is sufficient basis to convict as long as he or she was aware of those reasonable grounds. This is to deter any person from turning a ‘blind eye’ in dealing with property that may potentially be criminal proceeds.
The property represents proceeds of an indictable offence or drug trafficking
The offence does not require the prosecution to prove that the predicate offence occurred, but rather that the person had reasonable grounds to believe that the property was proceeds of crime. It is also not necessary to prove that the proceeds were, in fact, the proceeds of crime.
Section 8A of UNATMO makes it a criminal offence to deal with property knowing or being reckless as to whether the property is terrorist property.
Under section 5(6) of AMLO, it is an offence for a financial institution to, knowingly or with intent to defraud, contravene specified provisions of AMLO. AMLO prescribes measures that financial institutions and designated non-financial businesses and professions must take.
The SFC and the HKMA also publish guidelines on anti-money laundering that, albeit not legally binding, prescribe the requisite compliance standards expected by regulators of financial institutions.Investigatory powers
Describe any specific powers to identify proceeds of crime or to require an explanation as to the source of funds.
The Hong Kong Police Force (Police) and Hong Kong Customs and Excise Department (Customs) are the primary authorities responsible for investigation of money laundering activities under OSCO, DTROPO and UNATMO. If money laundering offences are facilitated by bribery or corruption, the Independent Commission Against Corruption (ICAC) will have jurisdiction.
There are a number of authorities responsible for investigating potential breaches of AMLO. See also question 13.
Power to search or compel disclosure
The Police have the general power to search for and seize documents or property on an arrested person, or the place at which they were arrested that, under their reasonable suspicion, may be of value to their investigation of the proceeds of crime. They also have the power to apply to court for a search and seizure warrant. The ICAC enjoys similar powers.
The authorities responsible for administering AMLO also generally have the authority to require the production of documents if there is reasonable cause to believe that an offence under AMLO has been committed.
Powers of interview
The Police have the power to stop and question persons acting in a suspicious manner or question people whom they have arrested. In addition to the Police, Customs have the power to interview witnesses and suspects generally believed to be connected to investigations into money laundering activity.
The SFC and ICAC also have the ability to compel a person to provide information.
Power to obtain evidence
The Secretary for Justice at the Department of Justice (DOJ) controls criminal prosecutions and has the power to apply to court for a witness summons to be issued to any person in Hong Kong to produce documents in court during trial.
Should assistance from authorities in other jurisdictions be required to obtain the relevant evidence, the DOJ can request such assistance under the Hague Convention on The Taking of Evidence Abroad in Civil and Commercial Matters or Mutual Legal Assistance in Criminal Matters Ordinance (Chapter 525).
There are also provisions under the OSCO and DTROPO pursuant to which a court can make an order to a person who appears to possess or control relevant material related to the investigation of proceeds of crime to produce it to an authorised officer, or grant the officer access to it.
Money launderingCriminal enforcement
Which government entities enforce your jurisdiction’s money laundering laws?
See question 2.
As the Basic Law upholds the principle of ‘one country, two systems’, save for a few ordinances related to defence and foreign affairs, the laws of mainland China do not generally apply to Hong Kong. As such, there is no parallel money laundering offence at a state or provincial level.Defendants
Can both natural and legal persons be prosecuted for money laundering?
The definition of ‘person’ in Hong Kong legislation includes corporations. A corporation can, therefore, be subject to liability for an offence.
In practice, however, prosecutions are usually against individuals. A number of offences, including financial crime offences, require human actors. It is therefore difficult in practice to hold a company liable for offences without an express offence or corporate penalty regime. Usually, companies are more likely to be subject to regulatory action or enforcement action (such as search and seizure notices).The offence of money laundering
What constitutes money laundering?
Money laundering offences
The substantive offences of money laundering are:
- under OSCO and DTROPO, it is an offence for any person to deal with any property knowing or having reasonable grounds to believe that it represents proceeds of an indictable offence (in respect of OSCO) or drug trafficking (in respect of DTROPO);
- under UNATMO, it is an offence to deal with suspected terrorist property; and
- under AMLO, it is an offence if a firm, knowingly or with intent to defraud, contravenes specified provisions of AMLO.
See question 1 for further details.
Reporting and other offences
In addition, under OSCO, DTROPO and UNATMO, a person who knows or suspects any property represents proceeds of an indictable offence, drug trafficking or terrorist activities is required to disclose that knowledge or suspicion to an authorised officer as soon as practicable. In practice, the disclosure is made by way of a suspicious transaction report (STR) to the Joint Financial Intelligence Unit (JFIU) (see question 27). Failure to make such disclosure may amount to an offence punishable by a fine of HK$50,000 and three months’ imprisonment.
Other offences including tipping-off and breaches of certain provisions of AMLO (see question 16).Qualifying assets and transactions
Is there any limitation on the types of assets or transactions that can form the basis of a money laundering offence?
There is no monetary threshold to prosecution.Predicate offences
Generally, what constitute predicate offences?
Any indictable offence can constitute a predicate offence under OSCO. Section 25(4) further clarifies that references to an indictable offence include a reference to conduct that would constitute an indictable offence if it had occurred in Hong Kong. Accordingly, infringements of laws in other jurisdictions will not constitute a predicate offence if it would not constitute an indictable offence in Hong Kong.
Offences related to foreign tax evasion, which would constitute an indictable offence in Hong Kong, would therefore also be caught.
Under DTROPO, any drug trafficking offence can constitute a predicate offence.
It is not a requirement for the predicate offence to be proven to implicate OSCO and DTROPO. Rather, the prosecution needs only to prove that the subject had a reasonable suspicion that the property represented the proceeds of an indictable offence (or drug trafficking), not that the predicate offence itself had been committed.Defences
Are there any codified or common law defences to charges of money laundering?
Under OSCO and DTROPO, it is a defence for a person who has dealt with suspicious property to prove that they had disclosed their knowledge or suspicion to an authorised officer either before the dealing, or after the dealing on their own initiative as soon as it was reasonable for them to do so. It is also a defence to show that they intended to disclose such knowledge or suspicion to an authorised officer as soon as it was reasonable for them to do so, and they have a reasonable excuse for failing to do so earlier.Resolutions and sanctions
What is the range of outcomes in criminal money laundering cases?
On conviction upon indictment, a maximum penalty of HK$5 million fine and 14-year imprisonment applies. On summary conviction, a maximum penalty of HK$500,000 and three-year imprisonment applies (section 25(3), OSCO and DTROPO).
The decision as to whether to prosecute lies with the DOJ (section 15, Criminal Procedure Ordinance). It is also open to the DOJ to resolve the matter through plea or settlement agreements.
In considering whether to prosecute, the Secretary for Justice will consider the Prosecution Code. That Code sets out the considerations that prosecutors are to take into account when deciding whether to prosecute, not prosecute, or seek a ‘binding over’ order. These include whether there is sufficient evidence and whether it is in the public interest to prosecute.
The prosecution may, upon invitation by the defence, agree to replace charges already laid with fewer or lesser charges on the condition that the defendant would plead guilty to the replacement charges.Forfeiture
Describe any related asset freezing, forfeiture, disgorgement and victim compensation laws.
Generally, the court can make any number of orders on the treatment of property connected with any offence, including freezing assets, forfeiture, disgorgement and compensation. The statute creating the predicate offence will set out the details of any actions that can be taken in relation to property connected with the offence.
There are limited powers relating specifically to the laundered property (as opposed to the predicate offence). Where an STR has been made to the JFIU, the property cannot be dealt with until the JFIU has provided its consent. Accordingly, it is essentially frozen, pending the outcome of any investigation by the relevant authorities.Limitation periods on money laundering prosecutions
What are the limitation periods governing money laundering prosecutions?
There is no limitation period under OSCO or DTROPO. There are no formal time limits for the commencement of a prosecution for an indictable offence.
Under AMLO, the limitation period for offences other than an indictable offence is 12 months from when the offence is discovered.Extraterritorial reach of money laundering law
Do your jurisdiction’s money laundering laws have extraterritorial reach?
The offence of dealing with property applies only to dealings in Hong Kong. However, the laws apply to both citizens and non-citizens and the predicate offence can be conduct which takes place outside Hong Kong.
AML requirements for covered institutions and individualsEnforcement and regulation
Which government entities enforce your jurisdiction’s AML regime and regulate covered institutions and persons? Do the AML rules provide for ongoing and periodic assessments of covered institutions and persons?
AMLO sets out the overall AML framework in Hong Kong, and covers two types of institutions - financial institutions and designated non-financial businesses and professions.
The regulatory authority or body responsible for enforcement of AMLO will vary depending on the nature of the regulated institution, as follows:
- in relation to an authorised institution under the Banking Ordinance or a stored value facility licensee - the HKMA;
- in relation to a licensed corporation under the Securities and Futures Ordinance - the SFC;
- in relation to an authorised insurer, appointed insurance agent or authorised insurance broker - the Insurance Authority;
- in relation to a licensed money service operator or to the Postmaster General - the Commissioner of Customs;
- in relation to a trust and company services provider licensee - the Registrar of Companies;
- in relation to an accounting professional - the Hong Kong Institute of Certified Public Accountants;
- in relation to an estate agent - the Estate Agents Authority; and
- in relation to a legal professional - the Law Society.
AMLO provides for powers to conduct routine inspections in relation to complying with applicable obligations.Covered institutions and persons
Which institutions and persons must carry out AML measures?
AMLO covers the following institutions and persons:
- authorised institutions under the Banking Ordinance;
- licensed corporations under the Securities and Futures Ordinance;
- money service operators under AMLO;
- authorised insurers, appointed insurance agents, authorised insurance brokers under the Insurance Ordinance;
- the Postmaster General of Hong Kong;
- persons licensed by the HKMA under the Payment Systems and Store Value Facilities Ordinance; and
- each of the designated non-financial businesses and professions, including solicitors, accountants, real estate agents and trust and company service providers.
Do the AML laws in your jurisdiction require covered institutions and persons to implement AML compliance programmes? What are the required elements of such programmes?
AMLO imposes on covered institutions a number of obligations contained in its Schedule 2, supplemented by industry specific guidelines. Covered institutions are required to undertake an institutional risk assessment and then develop and implement policies, procedures and controls relating to:
- customer due diligence (CDD) measures;
- ongoing monitoring of customers;
- suspicious transactions reporting;
- record-keeping; and
- staff training.
As part of the CDD measures, covered institutions are required to identify customers and verify their identities using reliable documents, data or information from an independent source. Another important element is sanctions and designated party screening. Covered institutions should maintain an updated database of names and particulars of terrorist suspects and designated parties.
In addition, appropriate compliance management arrangements, such as oversight by senior management and appointment of a compliance officer and money laundering reporting officer are also required.
It should be noted that, although industry specific guidelines impose requirements to have in place suspicious transaction reporting processes, the obligation to report such suspicious transactions under OSCO, DTROPO and UNATMO rather than AMLO, which only provides for an obligation to monitor.Breach of AML requirements
What constitutes breach of AML duties imposed by the law?
Relevant authorities can take disciplinary action for breach of one of a number of Schedule 2 requirements by a covered institution.
Failure to comply with AML requirements under AMLO may amount to a criminal offence. For example:
- A financial institution commits an offence if it contravenes a specified provision in Schedule 2 to AMLO either knowingly or with intent to defraud any relevant authority. The maximum penalty for this offence is a fine of HK$1 million and seven years’ imprisonment.
- An employee, or a person who is concerned in the management of a financial institution, commits an offence if he or she (i) knowingly causes or knowingly permits the financial institution to contravene a specified provision; or (ii) causes or permits such a contravention with intent to defraud the financial institution or any relevant authority. The maximum penalty for (i) is a fine of HK$1 million and two years’ imprisonment; and for (ii) is a fine of HK$1 million and seven years’ imprisonment.
- A failure to comply with a provision in any guideline published by a relevant authority or body does not by itself render the person liable to any judicial or other proceedings but, in any proceedings under AMLO before any court, the guideline will be admissible in evidence. If any provision set out in the guideline appears to the court to be relevant to any question arising in the proceedings, the provision must be taken into account in determining that question.
- Tipping-off (ie, disclosing to any person any matter that is likely to prejudice an investigation into that matter) is a criminal offence under sections 25A of DTROPO and OSCO and section 12 of UNATMO. The maximum penalty for the offence is imprisonment for a term of three years and a fine of HK$500,000. Tipping-off includes circumstances where a suspicion has been raised internally within the covered institution but has not been reported to the JFIU. However, making enquiries to customers will not constitute tipping-off when conducted properly and in good faith. If the covered institution has reasons to believe that performing CDD measures will tip off the particular customer, it may stop pursuing the process and file an STR to the JFIU.
Describe due diligence requirements in your jurisdiction’s AML regime.
Covered institutions are required to carry out CDD prior to entering into a business relationship with a customer. This process will include a risk assessment of the customer. The specific measures that must be applied will depend on the type of covered institution, the type of customer being on-boarded and the outcome of the risk assessment of that customer. Enhanced due diligence obligations will attach where a customer is considered high risk. A process for simplified due diligence is also available in particular situations.
The main requirements for customer due diligence are:
- identify and verify the customer’s identity;
- where applicable, identify and verify the beneficial owner’s identity;
- obtain information on the purpose and intended nature of the business relationship; and
- if a person purports to act on behalf of the customer, identify and verify the agent’s identity and verify their authority to act.
Schedule 2 of AMLO defines what constitutes beneficial ownership. In respect of a company, a beneficial owner is an individual who owns or controls, directly or indirectly, more than 25 per cent of the shares or voting rights of the company, or exercises ultimate control of the management of the company (Schedule 2, section 1).
Verification of identity must take place by reference to information provided by a reliable and independent source, such as a governmental body or a relevant authority.
A covered institution must continuously monitor any existing business relationship by:
- reviewing and ensuring documents and information of the customer are up to date;
- conducting appropriate scrutiny of transactions carried out for the customer; and
- identifying transactions that are complex, unusually large or of an unusual pattern that have no apparent economic purposes.
Do your jurisdiction’s AML rules require that covered institutions and persons conduct risk-based analyses? Which high-risk categories are specified?
Covered institutions should adopt a risk-based approach in determining the extent of customer due diligence measures and ongoing monitoring. An effective risk-based approach should involve the identification and categorisation of money laundering or terrorist finance (ML/TF) risks at the customer level, establishing reasonable measures that allow effective management of the identified risks.
There are certain business relationships that may carry higher ML/TF risks. This includes customers with residence in or connection with high-risk jurisdictions, and those with a public profile indicating involvement with politically exposed persons (PEP). Where there is high ML/TF risk involving PEPs, a covered institution should:
- obtain approval of senior management to commence or continue the relationship;
- take reasonable measures to establish the relevant customer’s or beneficial owner’s source of wealth and funds; and
- conduct enhanced ongoing monitoring on that business relationship.
Special requirements are imposed for correspondent banking relationships and relationships with shell banks are prohibited under AMLO. Otherwise, particular scenarios are generally addressed in the regulatory specific guidelines or through specific circulars addressing those issues.Record-keeping and reporting requirements
Describe the record-keeping and reporting requirements for covered institutions and persons.
Covered institutions are required to retain records relating to customer due diligence and customer transactions, such as the information obtained in the course of identifying a customer and verifying its identity. These records should be kept for at least five years after the end of the particular business relationship. Likewise, for wire transfers equal to or exceeding HK$8,000 and any other transactions equal to or exceeding HK$120,000, all relevant records should be kept for at least five years after the date of the occasional transfer (Schedule 2, section 20).
In relation to reporting requirements, it is a statutory obligation under sections 25A(1) of DTROPO and OSCO and section 12(1) of UNATMO, to disclose where a person knows or suspects that any property represents proceeds of an indictable offence, drug trafficking or terrorist activities. The person shall, as soon as it is reasonable for him or her to do so, file an STR with the JFIU. A failure to report knowledge or suspicion carries a maximum penalty of imprisonment for three months and a fine of HK$50,000. Examples of situations that may give rise to suspicion include transactions that involve unnecessary complexity and those that do not appear to have a commercial rationale and legitimate purpose.Privacy laws
Describe any privacy laws that affect record-keeping requirements, due diligence efforts and information sharing.
The Personal Data (Privacy) Ordinance sets out six data protection principles (DPPs) that a data user should comply with unless exempted. Of particular relevance in the context of ML/TF compliance are:
- DPP1, which regulates the collection of personal data;
- DPP2, which requires, among other things, that personal data is not kept longer than is necessary;
- DPP3, which prohibits the use, disclosure and transfer of personal data for any purpose other than the purpose for which the data was collected, or a directly related purpose, unless the data subject has expressly and voluntarily consented to it. The personal data in question may be exempted, for instance, where complying with the requirements under DPP3 would likely to prejudice the prevention or detection of crime, or where the use, disclosure or transfer is required by a court order; and
- DPP6, which provides for a data subject’s right to access his personal data. In circumstances where a covered institution has a suspicion relating to a customer, an exemption (for prevention or detection of crime) will apply.
Sharing of information among covered institutions is challenging. The Fraud and Money Laundering Intelligence Taskforce, a public-private intelligence sharing mechanism led by the police and involving the HKMA and the banking industry, was launched in May 2017. It aims to improve the collective understanding of current and emerging fraud and ML threats, and thereby enhancing the detection, prevention and disruption of fraud, ML and other financial crimes.Resolutions and sanctions
What is the range of outcomes in AML controversies? What are the possible sanctions for breach of AML laws?
Under AMLO, if a person who is working for a covered institution knowingly contravenes a specified provision of AMLO, he or she is liable to a maximum term of imprisonment of two years and a fine of HK$1 million. If that person does so with the intent to defraud the covered institution or any relevant authority, he or she is liable to a maximum term of imprisonment of seven years and a fine of HK$1 million. These criminal actions are generally resolved and settled through the judicial process.
In addition, relevant authorities have the power to take disciplinary actions against covered institutions. These actions include:
- public reprimands;
- orders to take remedial actions; and
- orders to pay pecuniary penalty. The penalty for each contravention is up to HK$10 million or three times the amount of profit gained or costs avoided as a result of the contravention.
In recent years, the SFC and the HKMA have leveraged fines in the millions of dollars through agreed enforcement outcomes that have also regularly contained requirements to appoint independent experts to assist with remediation.Limitation periods for AML enforcement
What are the limitation periods governing AML matters?
See question 11.Extraterritoriality
Do your jurisdiction’s AML laws have extraterritorial reach?
See question 12.
In relation to AML obligations applicable to financial institutions, Hong Kong incorporated institutions with overseas branches or subsidiary undertakings that carry on the same business are required to implement group-wide ML/TF systems to apply the requirements set out in the relevant guideline to all of its overseas branches and subsidiary undertakings in its financial group, wherever relevant.
The AML obligations under AMLO apply to those institutions specified in question 14 regardless of whether they are part of a foreign group.
Enumerate and describe the required elements of a civil claim or private right of action against money launderers and covered institutions and persons in breach of AML laws.
A victim of money laundering may bring a civil claim against money launderers and/or those who assisted in the laundering process. Potential causes of action include deceit, money had and received and unlawful means conspiracy. Other causes of action (such as breach of fiduciary duty, dishonest assistance or knowing receipt) may be available where there is a fiduciary relationship between the parties.
Claims are generally for damages and other relief (eg, recovery of property), and should be brought in the District Court (if below HK$3 million) or the High Court (if over HK$3 million). A claimant is required to prove the case on balance of probabilities.
The limitation period is six years from the accrual of the cause of action, but it may not start running until a later time in the case of fraud, concealment or mistake and could be overridden by the court in special circumstances.
International money laundering effortsSupranational
List your jurisdiction’s memberships of supranational organisations that address money laundering.
Hong Kong is a member of the Financial Action Task Force (FATF), the Asia Pacific Group, INTERPOL and the Egmont Group of FIUs (through the JFIU). Mechanisms are in place for providing assistance internationally, including mutual legal assistance agreements, financial intelligence exchanges and cooperation among FIUs and financial regulators.
Hong Kong’s legal framework converges with international standards, including relevant provisions of the Vienna Convention, the Palermo Convention, the Terrorist Financing Convention, applicable UNSCRs and the FATF Recommendations.Anti-money laundering assessments
Give details of any assessments of your jurisdiction’s money laundering regime conducted by virtue of your membership of supranational organisations.
Hong Kong’s FATF mutual evaluation took place in late October 2018. The FATF plans to conduct a plenary discussion in June 2019 and publish its evaluation report in the fall of 2019. The last FATF mutual evaluation report was published in 2008.FIUs
Give details of your jurisdiction’s Financial Intelligence Unit (FIU).
The JFIU investigates money laundering and terrorist financing activities through STRs and disseminates them to the appropriate law enforcement agencies. It is jointly run by officers from the police and Customs and is a member of the Egmont Group.
The JFIU’s details are:
Mail: GPO Box 6555 Hong Kong
Tel: +852 2866 3366
Fax: +852 2529 4013
www.jfiu.gov.hk/en/Mutual legal assistance
In which circumstances will your jurisdiction provide mutual legal assistance with respect to money laundering investigations? What are your jurisdiction’s policies and procedures with respect to requests from foreign countries for identifying, freezing and seizing assets?
Hong Kong can provide mutual legal assistance in criminal matters, including criminal investigations, prosecutions, and other ancillary criminal matters that deal with the proceeds of crimes. This assistance is provided either pursuant to an existing bilateral or multilateral agreement or based on the principle of reciprocity where the requesting jurisdiction undertakes to provide similar assistance to Hong Kong in the future.
The types of assistance available include taking and producing evidence, issuing and executing search and seizure warrants, obtaining materials under production orders, enforcing confiscation and restraining orders, and service of process.
A request for mutual legal assistance should be made to the Secretary for Justice by an ‘appropriate authority’ in the requesting jurisdiction. This is defined as the person who the Secretary for Justice is satisfied has authority under the law of the requesting jurisdiction.
Further details can be found in the Guidelines for Making Applications under the Mutual Legal Assistance in Criminal Matters Ordinance (Chapter 525).
Update and trendsEnforcement and compliance
Describe any national trends in criminal money laundering schemes and enforcement efforts. Describe any national trends in AML enforcement and regulation. Describe current best practices in the compliance arena for companies and financial institutions.29. Enforcement and compliance
Describe any national trends in criminal money laundering schemes and enforcement efforts. Describe any national trends in AML enforcement and regulation. Describe current best practices in the compliance arena for companies and financial institutions.
National trends in criminal money laundering schemes
As an international financial centre, Hong Kong is regarded as a potential regional centre for illicit fund flows, particularly from mainland China. Increasingly sophisticated methods have been deployed to launder money, particularly through technological innovations and virtual currencies.
The government’s risk assessment report published in April 2018 found that internal money laundering risk is posed most frequently by fraud and drug-related crimes. Externally, fraud, drug crime, corruption and tax evasion present the greatest risks.
National trends in AML enforcement and regulation
In light of FATF’s evaluation, money laundering enforcement has been an area of focus.
There has been a sharp uptick in the number of STRs filed with the JFIU in Hong Kong. Since 2015, between 70,000 and 90,000 STRs have been filed per year (the number almost doubled between 2014 and 2015). However, it is widely felt that the JFIU is unable to deal effectively with the number of reports filed.
We have seen a marked increase in enforcement by Hong Kong’s financial regulators and law enforcement authorities over the past few years. This has left financial institutions in little doubt of their requirements under the law.
Breaches found in recent SFC/HKMA cases relate primarily to the processing of third-party transactions for clients and conducting of due diligence when establishing or continuing business relationships. These are mainly attributable to:
- failures in communicating and enforcing ML/TF policies;
- deficiencies in internal controls and processes;
- lack of proper documentation; and
- lack of senior management supervision or oversight.
As a matter of best practice, companies and financial institutions should undertake the following:
- Conduct an institutional risk assessment of the businesses’ inherent ML/TF risk, such that adequate and appropriate systems can be put in place to mitigate these risks where necessary. This risk assessment should be refreshed on a periodic basis.
- Ensure that documented policies and procedures are in place that are tailored to comply with all applicable legal and regulatory requirements as they apply in Hong Kong. For regulated industries, this is a movable feast and regulatory guidance should be kept under review. The HKMA and the SFC, as well as the Insurance Authority, are proactive in alerting relevant institutions to the changing regime and are sensitive to compliance programmes being transposed into Hong Kong from other jurisdictions without regard to local requirements.
- Ensure staff have sufficient guidance on how to conduct customer risk assessments and that ongoing CDD measures ensure that periodic reviews are carried out appropriately by reference to the risk posed by that customer. In particular, effective sanctions screening systems and mechanisms should be in place, which include ongoing screening of existing customers against new or updated terrorist and sanctions designations.
- Report and escalate any suspected breach of policy to the money laundering reporting officer and consider whether any regulatory self-reporting requirements are triggered.
- Implement adequate systems to identify, or make follow-up enquiries about, potentially suspicious customer transactions for timely evaluation. Where an STR has been made to the JFIU, but a decision has been made to continue the business relationship, systems should be in place to monitor that ongoing relationship and ensure that risk mitigation measures are taken where appropriate.
- Ensure that staff training in anti-money laundering compliance is ongoing. This may extend to relevant third parties.
- Consider investing in technology to ease the compliance burden and assist in better detecting and preventing money laundering and other financial crime.