Anti-Money Laundering and Counter-Terrorist Financing Requirements in Hong Kong
Overview
Money laundering and/or terrorism financing (“ML/TF”) are serious problems that must be addressed throughout the world. Recent global efforts have increased awareness of risks as well as levels of adoption of controls to combat. The Financial Action Task Force on Money Laundering (“FATF”) is an inter-governmental body who sets international standards, develops and promotes policies against the money laundering. Hong Kong has been a member of FATF since 1991.
As a member of FATF, Hong Kong is required to implement a credible Anti-Money Laundering and Counter-Terrorist Financing (“AML/CFT”) regime. Effective on 1 March 2018, the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Ordinance 2018 (Cap. 615)(“AMLO”) which extend to cover “designated non-financial businesses and professional” (“Professionals”) which include Accountants, Trust and Company Service Providers in Hong Kong. AMLO require, not only the Financial Institutions, but also the Professionals to put in place AML/CFT programme which include conducting customer due diligence, record keeping and suspicious transaction reporting to fulfil the legal obligations.
In addition to AMLO, the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405), the Organised and Serious Crimes Ordinance (Cap. 455) and the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575) are the other existing Ordinances in Hong Kong that are concerned with AML/CTF.
- ML/TF Threats and Objective of AML/CFT
As per the Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report issued by Hong Kong Government on April 2018, Hong Kong is exposed to money laundering threats arising from both internal and external predicate offences. It rated Hong Kong's overall money laundering risk, threat and vulnerability as "medium-high", though it said the banking sector specifically faces a "high" risk. The number of Suspicious Transaction Report (“STRs”) received has been rising between 2013 and 2017 that the total number is 92,115. 
The money laundering prosecutions is around 100 cases per year since 2013. 
A well-established system and policy of AML/CFT can help us to combat ML/TF. The objectives are protecting the integrity and stability of the international financial system, cutting off the resources available to terrorists, and making it more difficult for those engaged in crime to profit from their criminal activities.
If there is a lack of effective regime in accordance with the international standards, we are providing a platform for such illegal activities who will all suffered as a result.
- Definition of Money Laundering & Terrorist Financing
Money Laundering is defined as an act intended to have the effect of making any property:
- that is the proceeds obtained from the commission of an indictable offence under the laws of Hong Kong, or of any conduct which if it had occurred in Hong Kong would constitute an indictable offence under the laws of Hong Kong; or
- that in whole or in part, directly or indirectly, represents such proceeds, not to appear to be or so represent such proceeds.
Money Laundering covers all kinds of methods used to change the identity of illegally obtained money that appear to have a legal source. The money obtained from illegal activities include Fraud, Tax evasion, Drug trading and Corruption. The common tools for the money launder include use of shell companies, bank accounts and remittance services.
There are generally three stages in the process:-
Placement: Placing the fund derived from illegal activities in the financial system
Layering: creating complex layers to disguise the source of fund
Integration: placing the laundered proceeds back in the financial system
These stages are always overlapping with each other and repeated which make difficulties for tracing.
Terrorist Financing is defined as:-
(a) the provision or collection, by any means, directly or indirectly, of any property –
(i) with the intention that the property be used; or
(ii) knowing that the property will be used,
in whole or in part, to commit one or more terrorist acts (whether or not the property is actually so used); or
(b) the making available of any property or financial (or related) services, by any means, directly or indirectly, to or for the benefit of a person knowing that, or being reckless as to whether, the person is a terrorist or terrorist associate; or
(c) the collection of property or solicitation of financial (or related) services, by any means, directly or indirectly, for the benefit of a person knowing that, or being reckless as to whether, the person is a terrorist or terrorist associate.
Terrorist Financing can be financial support, in any form, of terrorism or those who support in terrorism.
- Compliance and Responsibility
AML/CFT is everyone’s responsibility under the Laws in Hong Kong. A person commits the offence of ML/TF if he deals with any property, including money, which he knows or has reasonable grounds to believe to be proceeds of crime and will be used to commit terrorist act.
When someone aware of any activity which believe related to ML/TF no matter in Hong Kong or oversea, he should make a suspicious report to authorized officer of Government. In Hong Kong, The Joint Financial Intelligence Unit (“JFIU”)[i] is the authorized officer who manages the suspicious transaction reporting regime for Hong Kong. Its role is to receive, analysis and to disseminate them to the appropriate law enforcement agencies.
Some business industries face a greater risk than others from their nature of business which may provide a gateway to use for laundering. Those businesses included Banks (Financials Institutions), accountants, estate agents and trust and company service providers (“Professionals”). Therefore, those companies are subject to the statutory requirement under the Laws which must include the policy of conducting customer due diligence, record keeping and suspicious transaction reporting.
(a) Customer Due Diligence
To form a reasonable belief that Professionals knows the true identity of each customer and, with an appropriate degree of confidence, knows the type of business and transactions the customer is likely to undertake. In general terms, the Professionals must gather the information about the identification of ultimate owner, business nature, sources of funds involved for all its clients. It also required to identify, assess and take effective action to minimize the risks. Depends on the risk rating of each client, the Professionals may decide the level of information and ongoing monitoring required. The factors in determining the risk rating included
Geographic Risk, Customer Risk, Product/Service Risk and Distribution Channel Risk.
(b) Record Keeping
Record keeping is an important part which can show the trail for the use of criminal or terrorist property or funds. Professionals should maintain all relevant records of customers and transactions at least 5 years in accordance with legal requirements.
(c) Suspicious Transaction Reporting
Once the Professionals identify or suspect that a transaction related to ML/TF activity, there are statutory requirements for Professionals to report the transaction to authorized officer JFIU at a reasonable period of time.
- Conclusion
Professionals act as gatekeepers to fight against the ML/TF activity with the range of professional skills they have. In practice, when clients set up a bank account or register a new company, banks and company service providers are required to obtain relevant information about the business owners and intended business activities of the Company and they should investigate the correctness of those information. Ongoing monitoring are always required that the Professionals must review the files from time to time and request additional information from clients when needed.
If you wish to obtain more information or assistance, please visit the official website of Kaizen CPA Limited at www.kaizencpa.com or contact us through the following and talk to our professionals:
Tel: +852 2341 1444
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