Following the recommendations of the Financial Action Task Force ("FATF") the Hong Kong Government produced a report detailing their analysis of the Money Laundering ("ML") and Terrorist Financing ("TF") risks facing Hong Kong. The report examines the ML/TF threats and vulnerabilities facing various sectors in Hong Kong and the city as a whole. Set out below are a summary of the findings in relation to trust or company service providers ("TCSPs").
There is a strong demand for TCSPs in Hong Kong given its open economy and status as an international financial centre. Apart from the growing fund management industry, this is also reflected by the number of new companies registered in Hong Kong every year: around 160,000 in 2017. Hong Kong also sees a steady flow of investment to and from offshore financial centres, and is an active market for forming and operating offshore companies.
Some segments of the TCSP sector (e.g. providing trustee and administrative services to unit trusts and mandatory provident fund schemes) face minimal ML risks due to the nature of their clientele, the mode of the businesses (e.g. as retirement schemes), and the transparency and regulatory requirements of the products concerned. The major focus of the ML risk for TCSPs is the abuse of shell companies and their bank accounts as repositories of crime proceeds.
Services provided by TCSPs, such as selling shelf companies and assisting in new incorporations, may be misused for ML purposes. In 2015, 16 out of 97 ML conviction cases involved the use of TCSPs’ services in incorporating shell companies. In 2016, 10 out of 85 ML conviction cases involved the TCSP sector. Cases of TCSPs being complicit in illegal activities were detected but isolated.
The ML threat posed to TCSPs has a noticeable cross-border element. The report concludes that it is not uncommon for shell companies engaged in ML to be under the direct or indirect control of transnational or regional syndicates and used to launder proceeds of predicate crimes (e.g. fraud schemes) committed outside Hong Kong. In the 22 Suspicious Transaction Reports filed by TCSPs in 2015, nearly two-thirds of the persons reported as suspicious were non-Hong Kong residents from more than 10 jurisdictions.
Whilst the legal requirements for TCSPs to undertake Customer Due Diligence ("CDD"), record-keeping and other ML/TF preventive measures only commenced operation in March 2018, Anti-Money Laundering/Counter-Financing of Terrorism ("AML/CFT") controls by the sector are improving.
The Hong Kong Trustees Association ("HKTA") also issues 'Best Practice Guides', covering corporate trusts, pension schemes, private trusts and charitable trusts, which include AML/CFT principles to educate its members and raise industry standards in relation to trustee activities. HKTA members are asked to confirm their adoption of the Best Practice Guides as minimum standards of practice on joining or renewing their membership. The HKTA has also issued sample CDD forms for corporate and pension trustees, which serve as 'Practice Guidelines' on how the Guide’s principles may be met by trustees. Practice Guidelines for CDD procedures for private client trustees (which follow international requirements and standards as prescribed by the Organisation for Economic Co-operation and Development and the FATF) will be issued soon. In addition, the HKTA has been working with the Hong Kong Securities and Investment Institute to launch a training and accreditation programme in 2018 to raise professional standards.
A substantial number of TCSPs' employees are professionals such as solicitors, Certified Public Accountants ("CPA") or experienced Chartered Secretaries qualified with the Hong Kong Institute of Chartered Secretaries, particularly at the senior management level. These professionals generally exercise caution to mitigate reputational risks and adhere to a good level of professionalism and integrity. TCSPs associated with law firms, CPA practices and Financial Institutions commonly follow stringent CDD rules and procedures prescribed in relevant practice directions and regulatory requirements, non-compliance with which may lead to heavy disciplinary penalties and serious reputational consequences. Further, some TCSPs in Hong Kong are subsidiaries or associates of TCSPs in other jurisdictions subject to mandatory licensing and regulation and comply with the statutory rules and regulations of their parents’ or associates’ home jurisdictions in the conduct of their businesses in Hong Kong.
To enhance AML/CFT regulation of the TCSP sector, the Anti-Money Laundering Ordinance was amended, through an amendment bill enacted by LegCo in January 2018, to subject TCSPs to statutory CDD and record-keeping requirements starting from 1 March 2018. Meanwhile, a licensing regime has been instituted requiring any person aspiring to carry on trust or company service as a business in Hong Kong to obtain a licence from the Registrar of Companies, subject to the fulfilment of a fit-and-proper test for the applicant and any beneficial owners. Guidelines have been published to facilitate compliance with the statutory requirements.
The level of ML risk for TCSPs is assessed to be medium-high, comprising a medium level of ML threat and a medium-high level of ML vulnerability.