Asia Pacific: Hong Kong

If you are conducting business in Hong Kong or with entities regulated under the Hong Kong anti-money laundering regime, it is important to know your obligations under Hong Kong law.

• Overview - Hong Kong anti-money laundering framework
• Statutory regime
• Industry guidelines
• Reform

Overview - Hong Kong anti-money laundering framework

Hong Kong has in place a legal and regulatory framework to deal with money laundering and terrorist financing and to bring it into line with the Financial Action Task Force's (FATF) Forty Recommendations on anti-money laundering (AML), which were revised in 2003 (the Revised Recommendations), and FATF's Nine Special Recommendations (the Special Recommendations) on counter-terrorist financing (CTF).

While a regulatory framework is in place, there is still some work to be done to ensure full compliance with the Revised Recommendations. In early 2005, the Government of Hong Kong indicated that it was continuing to work towards fully implementing the Revised Recommendations, and that it was consulting with designated non-financial businesses and professions with a view to introducing further administrative guidelines and legislation.

The impact of Australian anti-money laundering requirements

Also the anti-money laundering laws of other jurisdictions may also apply to certain entities in Hong Kong. For example, the draft Australian anti-money legislation imposes customer identification, record keeping and reporting obligations on the foreign branches and overseas subsidiaries of financial service providers that are resident in Australia (such as those in the banking, life insurance, managed funds and superannuation sectors) and on the gambling sector. Generally, these foreign branches and overseas subsidiaries will be required to comply with the Australian anti-money laundering legislation to the extent possible under Hong Kong law.

For further information on this issue, refer to Focus: Anti-money laundering.

Statutory regime

Legislation

The relevant legislation in Hong Kong dealing with AML and CTF includes the following:

Drug Trafficking (Recovery of Proceeds) Ordinance (Cap 405) and Organised and Serious Crimes Ordinance (Cap 455)

Drug Trafficking (Recovery of Proceeds) Ordinance (Cap 405) (DTROP) (enacted in 1989) and the Organised and Serious Crimes Ordinance (Cap 455) (OSCO) (enacted in 1994) (together, the Ordinances) provide for the tracing, freezing and confiscation of proceeds of drug trafficking and other indictable offences respectively. The money laundering offences are found in section 25 of each Ordinance, which provides that it is a criminal offence to deal with property knowing, or having reasonable grounds to believe, that the property is the proceeds of drug trafficking or the proceeds of an indictable offence. The offence carries a maximum penalty of 14 years' imprisonment and fine of HK$5 million.

Each Ordinance applies to property whether it is situated in Hong Kong or elsewhere. This means that a money laundering offence may be committed even if the property which is the subject of the offence is located outside of Hong Kong.

Importantly, under the OSCO the "indictable offence" which leads to the money laundering activities includes conduct which would constitute an indictable offence if it had occurred in Hong Kong.

Similarly, the 'drug trafficking' offences under DTROP include:

1. specified Hong Kong drug trafficking offences;
2. offences punishable under corresponding laws; and
3. dealing whether in Hong Kong or elsewhere with any property which directly or indirectly represents any person's proceeds of drug trafficking.

This means the proceeds of activities in other jurisdictions will constitute criminal property if those activities would constitute an indictable offence or drug trafficking offence in Hong Kong.

Section 25A of each Ordinance contains the reporting obligations. A person who knows or suspects that any property represents proceeds of drug trafficking or of an indictable offence must disclose that knowledge or suspicion to an authorised officer as soon as is reasonable. Failure to do so carries a maximum penalty of three months' imprisonment and a fine of HK$50,000. In addition, if a person, knowing or suspecting that a disclosure to an authorised officer has been made, discloses to any other person any matter that is likely to prejudice any investigation, that person is guilty of a criminal offence carrying a maximum penalty of HK$500,000 and imprisonment of three years. The Ordinances confer protection on those making statutory disclosure by providing that such disclosure will not be treated as a breach of contract or of any statutory restriction on disclosing information and will not render the person making the disclosure liable in damages for losses arising out of the disclosure.

The OSCO also requires money changers and remittance agents to be registered, to verify the identity of customers engaged in transactions of HK$20,000 or more, and to retain the verification records for a minimum period of six years.

Under the Ordinances, the Court has a number of enforcement powers including the making of confiscation, charging and enforcement orders.

Charging orders may be made in respect of:

1. land in Hong Kong;
2. shares of any company incorporated in Hong Kong;
3. shares of any company incorporated outside Hong Kong, that is registered in a register kept in any place in Hong Kong; and
4. units of any unit trust that is registered in a register of unit holders that is kept at any place within Hong Kong.

Enforcement orders may be made over any property:

1. held by the defendant;
2. gifted by the defendant to any person; or
3. which is subject to the effective control of the defendant.

United Nations (Anti-Terrorism) Measures Ordinance (Cap 575)

The United Nations (Anti-Terrorism) Measures Ordinance (Cap 575) (UNAMO), which was initially directed at implementing United Nations Security Resolution 1373 and some of the FATF Special Recommendations, was enacted in 2002 and subsequently amended in 2004. A substantive part of the Ordinance came into operation in January 2005 and other parts are yet to come into operation.

Section 5 of UNAMO empowers the Chief Executive of Hong Kong and the Hong Kong courts (although the section relating to the courts is not yet in operation) to specify a person as being a terrorist or terrorist associate and property to be terrorist property.

The Hong Kong Secretary for Security may direct that funds that he or she suspects on reasonable grounds to be terrorist property are not made available to any person except under licence (section 6). The Hong Kong courts may also order forfeiture of terrorist property on application by the Hong Kong Secretary for Justice (section 13 - although that section is not yet in operation).

Section 7 of UNAMO prohibits any person from providing or collecting by any means, directly or indirectly, funds:

• with the intention that the funds be used; or
• knowing the funds will be used,

in whole or in part to commit one or more terrorist acts (whether or not the funds are actually used).

A 'terrorist act' includes:

1. an action, person or property outside Hong Kong; and
2. a threat to a Government or to the public outside Hong Kong.

Further, section 8 of UNAMO (although that section is not yet in operation) provides that, except under the authority of a licence granted by the Hong Kong Secretary for Security, no person may make any funds or financial (or related) services available, directly or indirectly, to or for the benefit of a person who the first-mentioned person knows or has reasonable grounds to believe is a terrorist or a terrorist associate.

Contravention of sections 7 or 8 is a criminal offence carrying a penalty of a fine (of an unlimited amount) and imprisonment for 14 years. Also, sections 7 and 8 are specified to apply to:

1. any person within Hong Kong; and
2. any person outside Hong Kong who is:
   1. a Hong Kong permanent resident; or
   2. a body incorporated or constituted under Hong Kong law.

Section 12 of UNAMO contains the reporting obligations in relation to counter-terrorist financing. A person who knows or suspects that any property is terrorist property must report to a relevant officer the information or other matter:

• on which that knowledge or suspicion is based; and
• as soon as practicable after that information or matter comes to the person's attention.

The UNAMO also contains a 'tipping-off' offence similar to that under section 25A of DTROP and OSCO.

Similar to DTROP and OSCO, a disclosure made under the relevant section of UNAMO will not be treated as a breach of contract or of any enactment restricting disclosure of information and will not render the person making the disclosure liable to damages for losses arising out of the disclosure.

As yet, there is no clear indication as to when those sections in UNAMO that are not yet effective (as mentioned above) will become effective.

United Nations Sanctions Ordinance (Cap 537)

The United Nations Sanctions Ordinance (Cap 537) was enacted in 1997. Regulations issued under that Ordinance give effect to various United Nation Security Council resolutions. In particular, the United Nations Sanctions (Afghanistan) Regulation (Cap 537K) provides, among others for a prohibition on making funds, financial assets or economic resources available to designated terrorists.

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Industry guidelines

Hong Kong Monetary Authority

The Hong Kong Monetary Authority (HKMA) first issued a Guideline on Prevention of Money Laundering (the Guideline) in 1993. Consequential amendments were made to the Guideline in 2000 following amendments to the DTROP and the OSCO, including more detailed customer verification and record-keeping requirements. In June 2004, a Supplement to the Guideline (and accompanying Interpretative Notes) was issued to address the recommendations contained in the Basel Committee on Banking Supervision paper Customer Due Diligence for Banks and the Revised Recommendations and Special Recommendations.

The revised Guideline contains a new section requiring Authorised Institutions (AIs) (that is licensed banks, restricted license banks and deposit-taking institutions) to develop risk-based customer acceptance policies and risk-profiling procedures aimed at identifying high-risk customers. Where high-risk customers are identified, the Guideline requires that more extensive customer due diligence processes be adopted.

Customer due diligence (CDD) now includes not only identification and verification of the customer but also a requirement to identify the beneficial ownership and control of the customer and to conduct ongoing due diligence and scrutiny throughout the course of the business relationship.

Other new areas covered by the revised Guideline include:

• Politically exposed persons (PEPs). AIs should adopt enhanced CDD for business relationships with PEPs and persons or companies clearly related to PEPs. Before an AI establishes a business relationship with a PEP, it should identify that person (and people and companies that are clearly related to the PEP) fully, and ascertain the PEP's source of funds. The decision to open an account for a PEP should be made at the senior management level.
• Correspondent banking. AIs should only establish or continue a correspondent relationship with a foreign bank if they are satisfied that the correspondent bank is effectively supervised by the relevant regulatory authorities. Before establishing a new correspondent banking relationship, approval from senior management should be obtained. AIs should not establish or continue correspondent banking relationships with shell banks.
• On-going monitoring. AIs should have in place systems to monitor and identify suspicious transactions and patterns of unusual or suspicious activity such that timely reports to the relevant authority can be made.
• Non-Cooperative Countries and Territories. When dealing with persons or businesses from jurisdictions that have been listed by FATF as Non-Cooperative Countries and Territories, AIs should take extra care. The business rationale for opening an account or applying for banking services should be clearly ascertained and AIs should satisfy themselves as to the legitimacy of the funds.
• Terrorist financing. AIs should have measures in place to ensure compliance with the relevant Hong Kong legislation on terrorist financing. AIs should maintain a database of names and particulars of terrorist suspects so that terrorist suspects may be identified effectively and that reports to the relevant authorities may be made promptly. Alternatively, an AI may use a database maintained by a third-party provider.
• Compliance officers. Compliance officers of an AI should not only act as a central reference point for reporting suspicious transactions but should also be responsible for checking, on an ongoing basis, that the AI's AML/CTF policies and procedures are in compliance with legal and regulatory requirements and for testing that compliance. A compliance officer should be of sufficient status within the organisation and have adequate resources to enable him or her to perform his or her functions.

All AIs were urged to comply with the revised Guideline by 31 December 2004. In order to monitor compliance within the banking industry the HKMA required AIs to submit a structured self-assessment by September 2005. HKMA has stated that, after reviewing the results of those self-assessments it will inform the industry of its general findings and identify any particular compliance issues.

The implications of the revised Guideline are discussed in the Focus: Hong Kong Banking - July 2004.

The Guideline, Supplement and Interpretative Notes can be downloaded from: http://www.info.gov.hk/hkma/eng/guide/index.htm

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Securities and Futures Commission

The Securities and Futures Commission (SFC) issued a Guidance Note on Prevention of Money Laundering and Terrorist Financing in April 2003. Recently, a proposal to revise the Guidance Note was submitted by the SFC with a view to bringing the Guidance Note in line with the FATF Revised and Special Recommendations and the International Organisation of Securities Commissions paper Principles on Client Identification and Beneficial Ownership for the Securities Industry. The Consultation Conclusions on the Revised Guidance Note were released in October 2005 and the revised Guidance Note will come into operation in April 2006.

The revised Guidance Note, which is intended for use primarily by corporations licensed under the Securities and Futures Ordinance (Cap 571) and associated entities that are not authorised financial institutions and, where relevant, licensed representatives, sets out the new standards expected of those licensed corporations and associated entities. It is primarily principles-based and adopts a risk-based approach giving licensed corporations and associated entities flexibility to decide on the risk category of customers using specific criteria. Higher-risk customers will be subject to enhanced CDD procedures while lower-risk customers are eligible for simplified measures.

Major new provisions in the revised Guidance Note include:

• Customer acceptance. Licensed corporations and associated entities should develop customer acceptance policies and procedures that aim to identify the types of customers likely to pose a greater risk of money laundering and terrorist financing. The revised Guidance Note provides some examples of factors that should be taken into account in assessing whether a customer is high risk, including the background or profile of the customer, the risks associated with non-face-to-face business relationships and the use of an unduly complex structure of ownership for no good reason.
• Customer due diligence. The revised Guidance Note suggests that, generally, identification of customers and beneficial owners should be verified before a business relationship is established. However, where transactions need to be performed very rapidly because of market conditions or, where it is essential not to interrupt the normal conduct of business, the revised Guidance Note allows verification to be conducted after the business relationship has been conducted, provided this takes place as soon as is reasonably practicable. If verification cannot be established within a reasonable time, the relationship should, if possible, be discontinued and consideration given as to whether a suspicious transaction report should be filed. Licensed corporations and associated entities should also take reasonable steps to ensure that records of existing customers remain up-to-date and relevant, for example undertaking periodic reviews of existing customer records to reclassify customers as high or low risk.
• Due diligence for specific types of customers. The revised Guidance Note sets out detailed guidance for specific types of customer. These include:

  Corporate customers. In the case of corporate customers, CDD should generally entail identifying and verifying substantial shareholders, directors and authorised persons and following through the ownership structure to the ultimate beneficial owner (whose identity should be verified). The type and amount of identification documentation to be obtained will depend on the risk category of a particular customer. As an example, listed companies and regulated investment vehicles that are subject to regulatory disclosure requirements or AML controls can be regarded as low risk.

  If, however, there is any doubt about the identity of the beneficial owner, shareholders, directors or authorised person and company searches do not provide this information, additional CDD should be carried out. Special care should be exercised when dealing with corporate customers that have nominee shareholders or a significant amount of capital in bearer shares.

  Omnibus accounts of financial or professional intermediaries. Where an account is established in order that an intermediary can engage in securities, futures or leverage foreign exchange transactions (an omnibus account) identification and verification of the intermediary is required. Identification of the underlying customers is not required.

  However, enhanced due diligence will be required except where the omnibus account is established by an financial intermediary that is authorised and supervised by the HKMA, the SFC, the Commissioner for Insurance, or an equivalent authority in a FATF member or equivalent jurisdiction.

  PEPs. Licensed corporations and associated entities should have appropriate risk management systems to determine if a customer is a PEP and, if so, perform enhanced due diligence on a risk sensitive basis. A customer who is suspected of being a PEP (and people or entities who are clearly related) should be fully identified. The source of wealth or of funds of customers and beneficial owners identified as PEPs should be ascertained.

  Reliance on introducers for CDD. The revised Guidance Note requires that, before relying on a third-party introducer, licensed corporations and associated entities must satisfy themselves that it is reasonable to rely on the introducer to apply a CDD process and that the CDD measures applied are as rigorous as those which the licensed corporation or associated entity would have conducted.

  The revised Guidance Note suggests it is advisable that an introducer should be incorporated in, or operating from, a jurisdiction that is a FATF member or its equivalent and should be regulated by an appropriate authority. Licensed corporations or associated entities should generally not rely on introducers from jurisdictions considered high-risk unless the introducers can demonstrate that they have adequate AML/CTF procedures.

• Designated compliance officers. Licensed corporations and associated entities should appoint a designated compliance officer to act as central reference point within the organisation for suspicious transaction reporting and to play an active role in the identification and assessment of potentially suspicious transactions.
• Employee screening. Appropriate employee screening and training procedures should be put in place having regard to the risks of money laundering and terrorist financing and the size of the business.

A copy of the Consultation Paper, Consultation Conclusions and the revised Guidance Note can be obtained from the SFC website: www.sfc.hk.

Office of the Commissioner of Insurance

The Office of the Commissioner of Insurance issued a Guidance Note on Prevention of Money Laundering to insurance companies and brokers in July 2005.

This Guidance Note provides detailed guidelines on customer acceptance, customer due diligence, record keeping, suspicious transaction reporting and staff training and screening in the context of insurance business, in accordance with the Revised Recommendations. In addition, it gives examples of common money-laundering schemes involving insurance companies and provides indicators of suspicious transactions to assist insurance companies and brokers in identifying those transactions that should be reported to the relevant authority.

A copy of the Guidance Note may be downloaded from: http://www.info.gov.hk/oci/framework/index04.htm

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Reform

The Hong Kong Government has indicated a draft Bill will be submitted to the Hong Kong Legislative Council to tighten AML laws in Hong Kong. New measures to be proposed in this draft Bill are understood to include:

• authorising officials to stop visitors at random border checks and require them to declare the amount of cash and travellers' cheques in their possession;
• making other sectors, such as real estate agents, dealers in precious metals and stones, trust and company service providers, lawyers and accountants and the Hong Kong Jockey Club, subject to AML measures in line with the FATF Revised Recommendations; and
• prescribing a minimum period for the retention of transaction records for those sectors.

The Hong Kong Commissioner for Narcotics, Rosanna Ure, indicated in February 2005 that, as FATF is scheduled to carry out an evaluation of Hong Kong's compliance with the AML initiatives in 2007, it was hoped that the draft Bill would be passed quickly.

For other articles on the Hong Kong AML and CTF regime, see Focus: Financial Services - May 2005 and Focus: Hong Kong Banking - July 2004.

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