On 6 January 2017, the HKSAR Government issued a consultation document, seeking views on a legislative proposal to expand the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap 615) (AMLO) to prescribe statutory customer due diligence (CDD) and record-keeping requirements for solicitors, accountants, real estate agents and trust or company service providers (TCSPs) when they engage in specified transactions. The concern is that criminals use such practitioners to conceal the origins of proceeds of crime, legitimise accounts and add layers of anonymity when laundering proceeds of crime or arranging illicit transactions. Also proposed, is the introduction of a licensing regime for TCSPs. The aim is to meet prevailing international standards for combating money laundering and terrorist financing so as to safeguard the integrity of Hong Kong’s financial markets and reinforce its reputation as an international financial centre. This article looks at the main proposals.
Under the current AMLO, only specified financial institutions are obliged to conduct CDD and keep records on customer identification and transactions for a specified period (6 years). The Financial Action Task Force (FATF), an inter-governmental body that sets standards for combating money laundering and terrorist financing (of which Hong Kong is a member) considers that designated non-financial businesses and professions (DNFBPs) which engage in specified transactions, should also be subject to similar CDD and record keeping requirements.
What are DNFBPs?
It is proposed that DNFBPs be defined to cover:
- Real Estate Agents; and
when they engage in the “specified transactions”, as stipulated by FATF.
What are Specified Transactions?
Specified transactions are as follows:-
For real estate agents: transactions for clients concerning the buying and selling of real estate.
For solicitors and accountants: preparation for or carrying out of transactions for their clients, concerning:-
- buying or selling of real estate;
- managing client money, securities or other assets;
- management of bank, savings or securities accounts;
- organisation of contributions for the creation, operation or management of companies;
- creation, operation or management of legal persons or arrangements; and
- buying or selling of business entities.
For TCSPs: preparation for and carrying out of transactions for a client concerning:-
- the forming of companies or other legal persons;
- acting or arranging for another to act, as a director or secretary of a company, partner of a partnership or similar position in relation to other legal persons;
- providing a registered office, business address, correspondence or administrative address or related services for a company, partnership or any other legal person or arrangement; and
- acting or arranging for another person to act as a trustee of an express trust or similar legal arrangement, or a nominee shareholder for a person, other than a listed company.
It is proposed that the conduct of CDD measures should operate in a risk-sensitive manner whereby the extent of such measures should depend on the types of customers, business relationship or transactions and the associated risks. Unless otherwise provided in the AMLO, it is proposed that (as with financial institutions) DNFBPs should undertake the following customary CDD measures in usual circumstances-
- identifying the customer or any person purporting to act on the customer’s behalf;
- verifying the customer’s identity using documents, data or information from a reliable, independent source;
- identifying the beneficial owner where there is one, and take reasonable measures to verify the identity of the beneficial owner;
- understanding the ownership and control structure of those customers who are legal persons or trusts or similar arrangements; and
- obtaining information for the purpose and intended nature of the business relationship.
As in the case under the AMLO for financial institutions, it is proposed that that simplified CDD measures be permitted in respect of specified categories of business considered to be low-risk. It is also proposed that there be enhanced CDD requirements when dealing with high-risk situations.
DNFBPs will be required to conduct CDD measures when (i) establishing a business relationship; (ii) carrying out occasional transactions above a stated threshold (HK$120,000); (iii) there are suspicions of money laundering and/ or terrorist financing; or (iv)there are doubts about the veracity and adequacy of previously obtained customer identification data.
Record Keeping Requirements
The proposal is to require DNFBPs to maintain identification data, account files, business correspondence and records of transactions for a period of 6 years, which is in line with what is currently required of financial institutions under the AMLO.
Enforcement and Sanctions
It is proposed that the following regulatory bodies enforce the statutory CDD and record-keeping requirements under the AMLO:
- The Law Society – for solicitors;
- Hong Kong Institute of Certified Public Accountants (HKICPA) – For accountants;
- Estate Agents Authority (EAA) – For estate agents;
- The Registrar of Companies – for TCSPs.
It is proposed that the Legal Practitioners Ordinance, Professional Accountants Ordinance and Estate Agents Ordinance be amended, such that any non-compliance by solicitors, accountants and estate agents with the CDD and record-keeping requirements prescribed by the AMLO will trigger the prevailing investigation, disciplinary and appeal mechanisms under those three Ordinances governing professional misconduct. Accordingly, the measures and sanctions under those Ordinances ranging from reprimands and orders for remedial action, to civil fines and suspension from practice or revocation of licence (as the case may be) will apply.
Under the AMLO, financial institutions may be liable to supervisory and criminal sanctions for non-compliance. In view of the lesser risks concerning DNFBP sectors, vis-a-vis financial institutions, the Government does not intend to impose criminal sanctions for non-compliance by DNFBPs.
For TCSPs which are not currently regulated, it is proposed to introduce a licensing regime to enforce the statutory CDD and record-keeping requirements. TSCPs will be required to apply for a licence from the Registrar of Companies by satisfying the licencing requirements, which mainly include the “fit and proper” test, before they can provide trust or company services as a business. The Registrar of Companies will be empowered to investigate any non-compliance by licensed TCSPs, including non-compliance with the statutory CDD and record keeping requirements. It is proposed that a person who operates as a TCSP without a licence would commit a criminal offence.
Hong Kong will undergo a mutual evaluation conducted by other member jurisdictions of the FATF in 2018, in relation to its efforts to combat money laundering and terrorist financing and to comply with the FATF’s recommendation. The Government aims therefore to give priority to this proposed bill in order to avoid Hong Kong’s overall rating being adversely affected in the evaluation. The Government invited Stakeholders to submit their comments on the proposals by 5 March 2017 and it remains to be seen whether they will support them .We shall report updates in our future newsletters.