Ahead of a critical FATF mutual evaluation next year, two significant developments in Hong Kong’s AML/CTF regime are underway. These primarily relate to corporate transparency (a G20 imperative) and the expansion of statutory controls to solicitors, accountants, real estate companies and trust and company service providers.
The changes plug important systemic gaps. They will also prove to be a shock for businesses and professions new to this degree of AML/CTF control. However, the upside is that we now have significant experience from our role in financial sector reforms and high-profile investigations, as well as smarter compliance tools at our disposal.
This article describes the key reforms and action items.
Hong Kong has undertaken two consultations this year in respect of money laundering and counter terrorism (“ML/TF”) controls. In April 2017, as a result of these consultations, The Financial Services and the Treasury Bureau (“FSTB”) released its Consultation Conclusions on Legislative Proposals to Enhance Anti-Money Laundering and Counter-Terrorist Financing Regulation in Hong Kong (“Consultation Conclusions”).
There are five key proposed reforms:
A. Hong Kong companies – enhanced transparency
In the ongoing wake of the Panama Papers, there is significant global policy support for increasing the transparency of the beneficial ownership of companies, for various reasons including stemming corruption and decreasing tax evasion. Proposals are already underway in several major markets.
In Hong Kong, the FSTB proposes that Hong Kong companies will be required to maintain a register of people with significant control of the company (“PCS Register”).
Important: access limited
While the consultation had originally envisaged a public register, the Consultation Conclusions now propose only that the PCS Register must be available to competent authorities. This was a response to significant privacy concerns, including those raised by the Privacy Commissioner for Personal Data. The FSIB has flagged that a centralised database may be launched in future (akin to the UK model), but this is off the cards for now.
Whose details must be on the PCS Register?
The PCS Register must include details of beneficial owners.
The definition of beneficial owners will capture persons with an interest of more than 25% in the company – the multi-pronged definition for determining whether a person has such an interest will take into account both direct and indirect interests in shares as well persons with certain influence or control over the company.
The following is an illustrative chart of who is caught:
Reasonable steps must be taken
Companies will be required to take proactive steps to identify beneficial ownership information – the Consultation Conclusions describe that “reasonable steps” to identify beneficial owners may include reviewing corporate documents as well as serving notices on persons to provide information.
What information must be captured?
The following details will need to be captured for each registrable individual and entity, as applicable:
|Name of registrable individual or entity||Identity document number and issuing country for passports|
|Legal form of entity and registration number||Date on which became a registrable individual or entity|
|Correspondence address and principal office address||Nature of control over the company|
Companies will also need to appoint a designated contact person for providing information about the PCS register and assisting with law enforcement enquiries.
How long must the information be kept?
Information will need to be retained for at least six years from the date a person ceases to be a registrable individual or entity.
This is a reduction from the original proposal of 10 years.
Penalties for non-compliance
Penalties will be imposed on companies that do not comply with PCS Register requirements as well any person who knowingly or recklessly makes a statement in the PSC register which is misleading, false or deceptive in any material particular.
B. Expanded scope of AML/CTF regulation
The second major reform is to Hong Kong’s customer due diligence (“CDD”) and record-keeping framework under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap.615) (“AMLO”).
Specifically, this will be expanded to capture solicitors, accountants, real estate agents and TCSPs – but only when engaged in specified transactions. These entities are referred to as designated non-financial businesses and professions (“DNFBPs”).
What are “specified transactions”?
“Specified transactions” are proposed to be broadly defined to include real estate transactions, management of client money, securities or other assets, management of bank, savings or securities accounts, company formation and management and buying and selling of business entities.
It is true that all DNFBPs are subject to general law requirements to avoid ML/TF, and some (such as solicitors) are subject to regulatory rules. However, the AMLO is a prescriptive regime that carries criminal liability (including for individuals) – it will require a significant uplift in policy and procedure for most firms.
Who is not caught?
Interestingly, the FSTB decided not to include dealers in precious metals and stones within the expanded AMLO framework, despite FATF recommendations.
The rationale was two-fold:
- industry feedback suggested that “cash transactions are no longer common in Hong Kong as in the old days”; and
- the Hong Kong Police Force had indicated that there had been no convictions for money laundering in this sector between 2010 and 2015.
Anecdotally, we understand these views have been met with a degree of scepticism, and it may well be that this will be reviewed more closely by FATF.
Risk-sensitive approach to CDD
The Consultation Conclusions also flag that the application of CDD measures should be applied in the context of DNFBPs in a risk-sensitive approach, including the application of simplified due diligence to low-risk situations. We expect that there will be further work in each relevant DNFBP sector to consider the ML/TF risks posed in relevant DNFBP’s businesses and formulating appropriate controls to address these risks.
As we know from our work on the AMLO and helping banks and other financial institutions on recent investigations, “risk-sensitive approach” does not connote as much flexibility as you think – it generally means higher standards, unless a very specific simplified due diligence scenario meets a statutory test.
AMLO at a glance
The following chart summarises the key aspects of the new regime.
C. Amended beneficial ownership test
The third key proposal takes a step in a different direction – it is a relaxation of current beneficial ownership thresholds in the AMLO.
Briefly, the AMLO currently applies a 10% threshold to beneficial ownership – this means that persons who own or control 10% or more of a company’s issued share capital, or are able to control 10% or more of the voting rights of the corporation at a general meeting, must be identified under CDD measures. Similar tests apply to other types of entities such as partnerships and trusts.
The Consultation Conclusions recognise that this 10% threshold is out of step with international standards, including FATF expectations. Accordingly, the FSTB propoies to remove the 10% threshold current and apply a 25% threshold instead. This is also consistent with the current verification threshold for low-risk clients.
This change will be welcomed by many financial institutions in Hong Kong, particularly those seeking to leverage global policies and procedures that already adopt a 25% threshold. However, interestingly, we have also heard counter-arguments from certain large financial institutions that preferred statutory backing to their (preferred) 10% approach from a risk perspective. Given that there are other AMLO amendment workstreams in play, it may be that there will be some further thought put to this
The Consultation Conclusions announce that new legislation is intended to be introduced into the Legislative Council by July 2017. However, until draft legislation is available, the timing for implementation is not clear.
Our current estimate is late Q4 2017/early Q1 2018, ahead of the FATF mutual evaluation.
There are numerous other reforms taking place in tandem with the Consultation Conclusions, including in relation to existing AMLO requirements, and enhancing practical implementation through things like KYC utilities and digital identity.
Watch this space.
What do you need to think about?
There are several key action items:
1. For all Hong Kong companies
Do you have the internal controls and procedures to:
- identify beneficial persons;
- obtain all the information required;
- create a compliant PCS Register; and
- maintain the reports?
Have you engaged with relevant stakeholders – including upstream shareholders etc – to ensure they are aware of the new rules and are prepared to provide the necessary details?
Are there any overseas data protections that you need to consider and address before implementation?
2. For financial institutions already regulated under the AMLO
- What changes will you enact to your policy and procedure to reflect the change in beneficial ownership threshold to 25% (if any)?
- Are there any new opportunities, risks or policy implications from the new regulation of DNFPBs? For example, does it change your risk assessments?
3. For business and professions to be captured under the new DNFPB rules
Start planning. The sooner the better. The critical things to consider are:
- (early) senior management buy-in;
- preparing for a licence application if you need one (TCSPs only);
- building a strong control framework, with clear policies and procedures;
- creating efficient and user-friendly systems;
- ensuring adequate resourcing;
- vendor support – for example, due diligence reports and technological tools; and
- what advice you need from your professional advisers.