CSj highlights the key takeaways of the annual forum organised by The Hong Kong Chartered Governance Institute (the Institute), updating practitioners on all the latest developments in anti–money laundering and counter–terrorist financing (AML/CTF).

The Institute’s AML/CFT thought leadership for the trust and company services provider (TCSP) sector, supported by the Institute’s AML/CFT Charter subscribers, was recognised by the HKSAR Government under its 2018 Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report. These subscribers, as leading TCSPs, came together to support the Institute on 25 November 2021, in the second series of the annual forums under the theme – TCSP Regulations, Topical Issues and Practical Sharing.

The big picture

Guest of Honour at the forum, Joseph Chan JP, Under Secretary for Financial Services and the Treasury, the HKaSAR Government, launched the conference with an overview of Hong Kong’s current AML/CFT regime. In September 2019, Hong Kong became the first Asia-Pacific jurisdiction to achieve ‘overall compliant’ status in the mutual evaluation process of the global AML/CFT standard-setter – the Financial Action Task Force (FATF). Mr Chan stressed, however, that Hong Kong must stay vigilant to the downsides of its own success. ‘Hong Kong is not immune to the threats of money laundering (ML) and terrorist financing (TF),’ he said. ‘Hong Kong’s competitive advantages can also make it attractive to criminals seeking to hide or move funds.’

He added that criminal elements have become more sophisticated in the digital era, making the ML/TF threat more difficult to combat. He reiterated, however, that the HKSAR Government will keep its AML/CFT regime under continuous review so that it can keep ahead of the fast-changing market developments.

Similarly, he welcomed the commitment of professional practitioners to making Hong Kong a safe and clean place to live, work and do business, while urging continued vigilance. Three years after the launch of Hong Kong’s licensing regime for TCSPs, Mr Chan welcomed the fact that TCSPs have a better understanding of ML/TF risks and are better able to exercise sound judgement. He applauded their commitment to AML/CFT best practice, but urged practitioners to continue to build their expertise through experience and training.

‘TCSPs have become a strong partner in defending the integrity of our financial system, but we can never be complacent,’ he said.

Onsite inspections

Samuel Lung, Partner, Ernst & Young, focused his Session 1 presentation on the lessons to be learned from the onsite inspections of TCSP licensees carried out by the Companies Registry. Between April 2020 and March 2021, the Companies Registry carried out 420 onsite inspections and issued 605 summonses for breaches of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). In addition, the Companies Registry has issued 213 warning letters for non-compliance. 

In the years ahead, Mr Lung emphasised that practitioners should prepare for increased scrutiny and disciplinary actions by the Companies Registry. He added that two key lessons to learn from the disciplinary actions to date were the crucial importance of having both effective internal controls in place to handle ML/TF risks and the relevant documentation to demonstrate to regulators that the necessary costumer due diligence (CDD) is being carried out.

Mr Lung emphasised that it is not enough to claim that you know a client very well informally. ‘You need to have crystal clear documents to support your CDD,’ he said. ‘It is not sufficient to provide WeChat and SMS messages showing the closeness of your relationship with a client – in the eyes of the regulator, that is not a proper record.’ 

Politically exposed persons 

Mr Chan mentioned in his Guest of Honour presentation that the HKSAR Government plans to amend the definition of politically exposed persons (PEPs) in the AMLO. Peter Pang, Director of Risk Advisory, BDO, focused his presentation on the implications of this proposed change in definition. 

The change to the AMLO, which is being made to implement a FATF recommendation, will essentially mean that PEPs in the Mainland will be included within the definition of foreign PEPs. Financial institutions and designated non-financial businesses and professions (DNFBPs) – a category including TCSPs – will need to conduct enhanced CDD on any PEPs, as well as their family members and close associates, ‘outside Hong Kong’.

Before establishing a business relationship with these PEPs, or before continuing a business relationship with individuals who become PEPs, financial institutions and DNFBPs will need to obtain approval from senior management. Moreover, they will need to take reasonable measures to establish the customers’, and any beneficial owners’, sources of wealth and the source of the funds that will be involved in the proposed business relationship. These enhanced CDD measures will also apply to the PEPs’ spouses, children and close associates.

This task may not always be easy since such information may not be publicly available. Nevertheless, TCSP licensees should retain a copy of their assessments for inspection by the Companies Registry, other authorities and auditors, and should regularly review their assessments.

Mr Pang noted that, given the number of Mainland companies operating in Hong Kong, and bearing in mind that PEPs would include senior executives of state-owned enterprises, this change of definition would seem to have potentially a big impact. However, he added that, since most firms already apply enhanced CDD to PEPs from the Mainland, in practical terms this revised definition may not make much difference. Nevertheless, he recommended TCSPs review their current practices and close any gaps to ensure that they remain in compliance with the AMLO. They should assess whether their existing processes are able to identify all Mainland PEPs, including their close associates, and determine whether any changes are required to their enhanced CDD measures.

Global trends to watch

A key trend in AML/CFT in recent years has been the gradual convergence towards internationally accepted standards, and Desmond Ko, Head of Client Acceptance, North Asia, Vistra, focused his presentation on the way the FATF AML/CFT recommendations have become accepted as the global minimum standards. 

Across the globe, financial institutions and DNFBPs recognise the need to provide an increasing amount of Know Your Client (KYC) and CDD information relating to the nature of business, ultimate beneficial ownership and source of funds when opening a bank account, transferring funds, engaging in other transactions for clients.

More than 200 countries and jurisdictions have now committed to implementing FATF standards, and as these standards become ever more widely accepted, there has been increasing pressure on high-risk jurisdictions on the FATF ‘black list’, and those ‘grey list’ jurisdictions subject to increased monitoring by FATF, to address strategic deficiencies in their AML/CFT defences.

There are currently 23 jurisdictions on the FATF grey list, including some common incorporation jurisdictions of Hong Kong companies. Both the Cayman Islands and the British Virgin Islands, for example, have brought in beneficial ownership regimes requiring companies to submit their beneficial ownership information to government databases. In February 2021, the Cayman Islands made a high-level political commitment to get tougher on those who fail to file accurate, adequate and up-to-date beneficial ownership information in line with the requirements. 

Mr Ko also highlighted some global trends to watch in the future. For example, the increasing level of cooperation and exchange of information among regulators within regions and globally. ‘Regulators want to be cooperative and flexible to account for the digital economy while preventing money laundering and promoting transparency,’ he said. Another trend has been for the implementation of tax regulations to be combined with the implementation of AML/CFT regulations. In addition, he predicted an increasing trend of promoting transparency and risk assessments towards ultimate beneficial owners and Significant Controllers in the KYC process.

Beneficial ownership and trusts

Hong Kong, like many jurisdictions globally, has been under pressure to improve transparency regarding the beneficial owners of trusts. The first speaker in the second session of the forum, Michael Shue, Managing Director of Trust Services, Tricor Services Ltd, pointed out that trusts can take many different forms, many of which are highly complex, and drilling down to find who are the beneficial owners is rarely easy.

Mr Shue provided some examples of complex trust structures highlighting the difficulties involved in identifying beneficial owners. The basic principles involved are not hard to grasp. The ultimate goal is to ensure that law enforcement officials have access to reliable information on the beneficial owners so that criminals cannot hide illicit activities behind trust structures. In common law and trusts a beneficial owner is a person who enjoys the benefits of ownership, even though the title may be in another party’s name – for example that of the trustee or an underlying entity such as a company. 

In practice, however, beneficiaries may not have legal rights to trust funds or assets. This is the case, for example, in discretionary trusts where the trustee may exercise their discretion with regard to the timing and amounts of assets distributed to the beneficiaries. Moreover, in revocable trusts, the trust can be revoked by the settlor, who can take back the trust fund assets that he/she settled into the revocable trust. Mr Shue said he looks forward to further law reform measures to provide a common standard for trustees seeking to identify beneficial owners.

Regulating VASPs 

Daniel Wong FCG HKFCG, Associate Director – Compliance and Risk Management, SWCS Corporate Services Group (Hong Kong) Ltd, focused his presentation on the latest developments relating to virtual assets service platforms (VASPs).

He started by updating attendees on the evolution of the regulatory AML/CFT regime for virtual assets (VAs) and VASPs. Trading in VAs often carries high levels of risk. Most digital currencies, for example, are not backed by physical assets or guaranteed by issuing banks or government. Moreover, the digital token market has been plagued by scams. For example the ‘Squid’ digital token, inspired by the popular South Korean Netflix series Squid Game, quickly turned out to be a ‘rug pull’ scam. The promoters of the token drew buyers in, but then abruptly stopping trading and made off with an estimated US$3.38 million.

Mr Wong added that VA transactions are prohibited in the Mainland. The People’s Bank of China, Cyberspace Administration of China and other government departments issued a Notice in September 2021 prohibiting VA trading and speculative activities. He added that VAs transacted or held anonymously carry high ML/TF risks. He gave an overview of the FATF standards relating to VAs and VASPs. FATF member jurisdictions, Hong Kong included, have subsequently been implementing regulatory regimes for VASPs. 

In May 2021, the Hong Kong Financial Services and Treasury Bureau (FSTB) confirmed that Hong Kong will adopt a new licensing regime for VASPs. The new regime, which is likely to be implemented in 2022, will require mandatory licensing for all VA exchanges, whether they are trading security or non-security VAs. Mr Wong urged attendees to prepare themselves for the new VASP licensing era and to stay alert to crime trends and provide appropriate training for the board, senior management and operational level staff. Practitioners should also keep up to date with the latest legal developments and be proactive in providing suspicious transaction reports to law enforcers and regulators. 

SIDEBAR: Keeping the dialogue open

The Institute’s annual AML/CFT conference is designed to promote an open dialogue among practitioners working in AML/CFT. The panel discussions and Q&As that conclude each session of the conference provide the opportunity for attendees, presenters and panellists to discuss specific issues of interest or concern.

The first session panel discussion was chaired by Edmond Chiu FCG HKFCG(PE), Institute Council member, Membership Committee Vice-Chairman, Professional Services Panel Chairman and AML/CFT Work Group member, and Managing Director, Corporate Services, Vistra Corporate Services (HK) Ltd. The panel comprised the three Session 1 speakers, along with Michael Lintern-Smith, Consultant, Robertsons, and Jenny Choi FCG HKFCG(PE), Associate Partner, Ernst & Young Company Secretarial Services Ltd.

One question discussed related to issues involved in regulating lawyers engaged in TCSP work. Mr Lintern-Smith, a lawyer by training and a former President of the Law Society of Hong Kong, pointed out that lawyers have an unbreakable duty of client confidentiality. ‘According to the principle of legal professional privilege, which is embedded in common law and Hong Kong law, the information clients give to their lawyer is protected. Lawyers cannot be made to disclose it – not even to a court. For that reason, solicitors approach the “checklist” approach to regulating AML/CFT with some suspicion,’ he said. He welcomed the trend towards a risk-based approach to AML/CFT. Firms should be encouraged to make their own assessments of the risks posed by new clients, he suggested, rather than taking a ‘box-ticking’ approach to regulating them.

The Session 2 panel discussion and Q&A was chaired by Wendy Ho FCG HKFCG(PE), Institute Council member, Professional Development Committee Vice-Chairman, Professional Services Panel Vice-Chairman, AML/CFT Work Group member and Rebranding Working Group member, and Executive Director, Corporate Services, Tricor Services Ltd. The panel comprised the two Session 2 speakers and Teresa Lau ACG HKACG, Director and Head of Corporate Secretarial Services, BDO Ltd, Dr Maurice Ngai FCG HKFCG(PE), Institute Past President, Professional Services Panel member, Mainland China Focus Group member; Chief Executive Officer, SWCS Corporate Services Group (Hong Kong) Ltd, and Alberta Sie FCG HKFCG(PE), Director and Company Secretary, Reanda EFA Secretarial Ltd.

One question discussed related to client resistance to the more elaborate CDD processes made necessary by Hong Kong’s expanded AML/CFT regime. Firms need to emphasise that CDD processes are required by Hong Kong law, Mr Ngai said. ‘We are TCSPs under the Companies Registry’s licencing regime and have no choice but to comply,’ he said. 

Michael Shue, Managing Director of Trust Services, Tricor Services Ltd, agreed with this point. As long as everyone within the industry maintains the same standards, he said, then wherever clients go they will be subject to the same CDD processes. ‘We complain about the increase in regulations, and the TCSP licensing regime is very onerous on us, but I think there is a silver lining. In some ways it makes life easier for us because it means we apply the same standards to all of our clients and clients are now becoming accustomed to having to meet these high standards,’ he said. 

Ms Sie concluded the panel session, and the conference, with the observation that, given the increasing complexity of AML/CFT compliance, getting together to share expertise and views on AML/CFT issues has become all the more valuable. ‘I recommend all members of the Institute working in this area to participate in the dialogue and welcome you to join the next conference,’ she said.