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Regulatory Risk

Hong Kong financial firms take heed: regulators taking aggressive AML/CTF enforcement

Tiffany Robertson

19 Sep 2016

The Hong Kong skyline is seen from the Peak June 18, 2013. Snowden reportedly flew to Hong Kong on May 20. He checked out of a luxury hotel on June 10 and his whereabouts remain unknown. Snowden has said he intends to stay in Hong Kong to fight any potential U.S. moves to extradite him. REUTERS/Bobby Yip (CHINA - Tags: POLITICS CRIME LAW SCIENCE TECHNOLOGY) - RTX10RRC

According to the latest annual report from Hong Kong’s Securities and Futures Commission (SFC), fiscal year 2015 saw a 91% increase in the number of violations of anti-money laundering/counter-terrorist financing (AML/CTF) rules, as well as a 58% increase in total SFC fines.

As the global community cracks down on cross-border flows of illegal money, organizations face significant consequences for inadequate internal AML/CTF controls. An important step in compliance is an astute workforce on the lookout for red flags of high-risk activities or suspicious transactions.

Thomson Reuters online AML Training course provides employees with the tools needed to prevent, spot and/or address money laundering and other financial crimes.

SFC investigations reveal inadequate AML/CTF controls

Last year’s surge in breach incidents from 117 in FY 2014 to 223 incidents and 58% increase in fines — totaling HK$87.1 million (US$11.2 million) — may have something to do with the SFC’s 306 risk-based, on-site AML/CTF inspections of major financial firms.

A image shows the latest version of a Hong Kong dollar note launched by HSBC during an exhibition organized by the Hong Kong Monetary Authority in Hong Kong September 14, 2011. Foreign assets in Hong Kong's Exchange Fund stood at HK$2,177.4 billion ($279 billion) at the end of August 2011, up HK$32.9 billion from the end of July 2011, the Hong Kong Monetary Authority said on Wednesday. The Exchange Fund backs the local currency, which has been pegged to the U.S. dollar since 1983. REUTERS/Bobby Yip (CHINA - Tags: BUSINESS) - RTR2RA6D

These investigations identified AML/CTF deficiencies in many firms, including inadequate systems for:

  • Evaluating transactions
  • Reporting suspicious transactions
  • Performing customer due diligence
  • Monitoring transactions.

While the total number of SFC enforcement actions declined last year — as did the number against individuals — there was more than a 57% increase in enforcement actions taken against firms.

Hong Kong Monetary Authority (HKMA) augments AML/CTF resources and enforcement efforts

The central banking authority — the HKMA — also has intensified its focus on AML/CTF compliance, with bank reports of suspicious transactions doubling since 2011 to nearly 35,000 and its first action under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance in July 2015.

Furthermore, in the last four years, the regulator has tripled its AML/CTF specialist resources, enhanced supervision and engagement with the banking sector and offered firms additional guidance.

(L-R) Chief Executive of the Hong Kong Monetary Authority Joseph Yam, Hong Kong Financial Secretary John Tsang and Chief Executive Officer of the Hong Kong Deposit Protection Board Raymond Li attend a news conference in Hong Kong October 14, 2008. The Hong Kong government said on Tuesday it will use the city's Exchange Fund to provide deposit guarantees to banking customers and set up a contingent fund to inject capital into local banks, if necessary, to ensure calm amid the global financial crisis. REUTERS/Bobby Yip (CHINA) - RTX9J0Z

Motivating factors in Hong Kong’s enforcement efforts

Several factors contribute to Hong Kong’s heightened AML/CTF scrutiny, including:

  • Hong Kong’s role as a major offshore market. Every day, Hong Kong financial institutions process hundreds of thousands of complex cross-border transactions, as well as establish a significant number of relationships that go with them. The country’s lax control over these transactions makes it an attractive destination for those with illegal money.
  • Money flows from mainland China. The People’s Republic of China’s (PRC) growing economy and consequent wealth creation in the last 15 years, followed by the stock market crash last year, led to outflows of money from the PRC. Much of this money relates to tax evasion, crime, money laundering, corruption and other illicit activities. One example is the HKMA’s recent crackdown on the use of fake trade invoices misrepresenting the value of imports into or exports from the PRC as a means of circumventing China’s strict capital controls.
  • Repercussions of the Panama Papers. When documents were leaked pertaining to the use of secret offshore entities by clients of a Panama law firm to evade taxes, launder money and carry out other illicit purposes, it turned out that almost one-third of the clients were in Hong Kong and the People’s Republic of China (PRC). These revelations placed a spotlight on the internal controls in offshore financial centers and have regulators under pressure to clamp down on financial crime and continue to meet global FATF requirements.
  • Upcoming FATF Mutual Evaluation. Expected in 2018, Hong Kong hopes to bolster its reputation by bringing its AML/CTF regime on par with other international financial centers. In the current atmosphere, that means giving more than lip service to international/FATF AML/CTF standards.
Chinese 100 yuan banknotes are seen in this picture illustration taken in Shanghai January 17 , 2011. China's President Hu Jintao urged an end to a
REUTERS/Carlos Barria

Regulators expect compliance and prepare to impose harsh penalties

In a September 2015 speech, Stuart McGlynn, the HKMA’s Head of Anti-Money Laundering and Financial Crime Risk, made it clear the regulator will expect financial institutions to have strong and effective AML/CTF controls in place, particularly those for identifying high-risk customers, addressing risks and reporting suspicious transactions.

He also emphasized that Hong Kong’s position as a payment hub makes customer screening and transaction monitoring systems vitally important.

Whatever stance taken in the past, Hong Kong’s financial regulators clearly are prepared to enforce AML/CTF requirements using, according to McGLynn, “every available part of our toolkit,” including hefty fines — up to HKD10 million, or three times the profits gained or costs avoided per violation — on those who flaunt the rules.

Hong Kong is yet another player in the global push against money laundering and terrorist financing activities.

This heightened regulatory environment makes it crucial that all employees understand what money laundering is, how to detect it and what to do about it. Thomson Reuters addresses these issues and more in its online AML Training course.


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