Two new sets of anti-money laundering and counter-financing of terrorism (AML/CFT) legislation are due to be enacted in Hong Kong by 1 March 2018. Mohan Datwani FCIS FCS(PE), Senior Director and Head of Technical & Research, The Hong Kong Institute of Chartered Secretaries, looks at the background to, and the implications of, Hong Kong’s latest AML/CFT upgrade.

If you have been following the development of AML/CFT law and regulation, you will have noticed that wholesale changes always follow triggering events. So, for example, tougher sanctions compliance requirements followed the fateful 911 events of 2001. Similarly, the current renewed emphasis on AML/CFT compliance requirements have come in the wake of the Panama Papers leak in 2015. There were around 11.5 million documents leaked from the Panamanian law firm, Mossack Fonseca, which served as trust and corporate service provider (TCSP) to over 214,000 entities, including companies, trusts and foundations. The immediate takeaway of the Panama leak was that people were hiding their wealth and some of these must have been ill-gotten gains, including from tax evasion and other predicate offences which amounts to money laundering. The Panama Papers leak involved over 200 countries, 140 state leaders, and 29 Forbes-listed billionaires and it was followed by a mad scurry by people, especially politicians, to distance themselves from the scandal. The reaction was pronounced in Europe, where a number of prominent state leaders were named in the leaked papers. To appear whiter than white, Europe implemented new laws requiring public disclosure of beneficial ownership at more than 25% of ownership of legal entities. In this connection, there had always been the Financial Action Task Force (FATF) (the global AML/CFT agency) Recommendation 24 which requires countries to prevent the misuse of legal entities for money laundering or terrorist financing through disclosure of beneficial ownership. But prior to the Panama Paper leaks, the international community was not really focused on this particular issue. AML/CFT regulation tended to focus on financial institutions following certain large-scale money laundering scandals involving leading banks, for example laundering money in Mexico. Aside from beneficial ownership disclosure, the international community also began to consider the complementary FATF Recommendation 22, in respect of ‘designated non-financial business and professions’ (DNFBPs), inclusive of the TCSP sector. TCSPs serve to incorporate and provide services to legal entities, and as such should conduct appropriate customer due diligence before onboarding their clients. In fact TCSPs, as the first point of contact for establishing and managing legal entities, have a significant role to play in combating financial crimes. They need to engage in proper customer due diligence regarding their clients, in particular to meet bank standards and requirements as many of their clients need to establish bank accounts. Hong Kong is now playing catch up with these global trends. There is renewed urgency locally since a mutual evaluation of Hong Kong’s AML/CFT regime by FATF is scheduled for this year. Our overall standing as an international financial centre is at stake, hence the two sets of complex legislation on beneficial ownership and TCSP regulation which the government hopes to push through the legislative process in an accelerated manner to make them effective by 1 March 2018.

Beneficial ownership/significant control

To ensure compliance with FATF Recommendation 24, Hong Kong has proposed the Companies (Amendment) Bill 2017 (CO Amendments). The CO Amendments follow the UK legislation and in Hong Kong we will be creating a new Division 2A to Part 12 of the Companies Ordinance. The main difference between the Hong Kong and the UK legislation is that the disclosure of beneficial ownership would not be made to the public as is being done in the UK, but is to be retained by the company for searches by law enforcement officers as well as compliance review by the Registrar of Companies (Companies Registrar). In terms of terminology, instead of using the term ‘beneficial owner’, Hong Kong as with UK, will focus on persons who have significant control, that is ‘significant controllers’ (SCs) (see ‘The meaning of significant control’ text box) over an applicable company. An ‘applicable company’ means a Hong Kong private (and not listed) company. Further, irrespective of whether there is an SC or not, there will be a need for all Hong Kong private companies to create a significant controller register (SCR). This is because any Hong Kong private company is supposed to conduct due diligence as to whether it has an SC or not and to note this within its SCR. In accordance with emerging international practice, whether a person is an SC is in general tied to a 25% test. However, as there are other indicia of whether a person is an SC or not, the reference to an SC is potentially open ended. In practice, this makes identifying an SC especially complex with trust-using Hong Kong incorporated companies. For example, aside from the trustees, would the protector, beneficiary and settlor be an SC over a trust structure? There is no straightforward answer to this question, which means that there is scope for law enforcement officers to seek information. The right to privacy versus regulation will be an unending debate.

The significant controller register

A Hong Kong incorporated private company must have an SCR whether it has an SC or not. That is, all companies are required to conduct due diligence and verification as to whether the company has an SC or not. The process would be a continuous one. Where the company has an SC, it would be obliged to enter in the SCR the SC’s related registrable person as well as the registrable legal entity. In most cases, the registrable person is a natural person. But a registrable person could include a specified entity, namely a corporation, a government, international organisations and/or a local entity. For example, where Government A holds more than 25% interest in a Hong Kong company through Government A Company, then Government A is a registrable person and Government A Company is a registrable legal entity. The Institute made clear in its submission to the Legislative Council Bills Committee considering the draft legislation, that we believe that where in the chain of ownership leading to a registrable person there is a listed company, the due diligence should end. Under the current draft legislation, only where in the chain of ownership the registrable legal entity is a Hong Kong listed company, is it exempt from the obligation to identify the registrable person. As there is the obligation upon a Hong Kong private company to identify whether it has an SC, and for the SC to confirm the relevant entry in the SCR, there are potentially nine case scenarios ranging from there being no SC to a company not being sure as to whether there is an SC or not (see ‘SCR compliance’ text box), in addition to the plain vanilla case where readily available and confirmed information is entered into the SCR.

Penalties and other matters

There are many technical aspects to the CO Amendments which require detailed study by Institute members. The Companies Registry website is a good starting point, the draft amendments and the Institute’s comments have already been circulated to Institute members. Just as a reminder, the CO Amendments Bill is riddled with penalty provisions. If a company fails to keep an SCR, it and its responsible person faces a Level 4 fine (HK$25,000). Where particulars are not updated, the fine would be at Level 4 plus HK$700 per day. The steepest penalty is where a person knowingly or recklessly makes a misleading statement which is false or deceptive in a material particular. This will incur a fine of up to HK$300,000 and two years’ imprisonment. The company must appoint a designated representative for complying with the CO Amendments. This must be a natural person who is a director or employee of the company, or a licensed TCSP (under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) Amendments discussed below). Therefore, by studying the CO Amendments well, there is potential scope for Institute members to become designated representatives for companies and this represents a business opportunity to those willing to invest the time and effort for a detailed understanding of the CO Amendments Bill.

The AMLO Amendments

In addition to the focus on the FATF Recommendation 24 requirements relating to the disclosure of beneficial ownership, the international community, together with the Institute, have recognised the equal importance of the FATF Recommendation 22 requirements relating to the customer due diligence obligations of DNFBPs. The main focus has been on the client onboarding process of TCSPs. The Institute’s late Professional Services Panel chairman, Paul Moyes, began to implement a long-standing idea of formalising the Institute’s AML/CFT Guidelines for the TCSP sector in collaboration with Past Presidents of the Institute Natalia Seng FCIS FCE(PE), Edith Shih FCIS FCS(PE), and Samantha Suen FCIS FCS(PE) – who is also the Institute’s current Chief Executive – and the author as draftsman. The Guidelines took some two years to muster up support and buy-in from the government and stakeholders. Part of the support came from the fact that Hong Kong was going to be subject to the FATF mutual evaluation. The government realised that to maintain Hong Kong’s international reputation as a leading financial centre, there was a need to regulate beneficial ownership disclosure and DNFPBs. The AMLO Amendments extend financial institution standards relating to customer due diligence, record keeping and training to DNFPBs. Compliance with these standards will be less of a challenge for Institute members since they have been familiar with the Institute’s AML/CFT guidelines first issued in 2008 and added to most recently in 2016. The effect of the AMLO Amendments are to make the Companies Registrar the regulator of TCSPs, and to require all TCSPs to obtain a licence before being permitted to act as a corporate service provider in matters such as incorporating companies and providing nominee directors and shareholders, as well as other services detailed under FATF Recommendation 22. This means that all Institute members who desire to provide TCSP services to clients (and not only to their own companies), need to have a licence. The exception would be where the Institute members are also either a legal professional and/or certified public accountant, where they could choose to be regulated instead by their professional body. All those working in the TCSP sector should familiarise themselves with the AMLO Amendments, along with the three sets of guidelines when issued by the Companies Registrar. The issue to flag is that the AMLO Amendments are pitched at the lowest standards in terms of TCSP licensing. The current draft legislation is that anyone over 18 and who has not committed certain crimes under AMLO and/or other specified Ordinances (the fit and proper test) would be permitted to register themselves as a TCSP. This contrasts with the standards in The Grand Cayman, BVI and Singapore. In Singapore’s case, in addition to legal professionals, certified public accountants, Chartered Secretaries, and other professionals, there are provisions for those persons that have three years relevant experience over the last five years to be registrable as a filing agent subject to similar fit and proper test as with Hong Kong. At a LegCo Bills Committee meeting in November 2017, which the Institute attended and at which the author spoke, the government made it plain that the new AML/CFT legislation was designed to improve Hong Kong’s score at the upcoming 2018 mutual evaluation. It remains to be seen whether standards will have to be raised further. For now, Institute members should study the new legislation and the Companies Registry guidelines, and implement their own compliance programmes. TCSPs should also consider joining the Institute’s AML/CFT Charter to demonstrate to the market their serious commitment to combat financial crimes. The Institute will also be offering training to its members and thought leadership articles in this journal to assist compliance with the new and complex AML/CFT regime. Mohan Datwani FCIS FCS(PE) Senior Director and Head of Technical & Research, The Hong Kong Institute of Chartered Secretaries More information on the Institute’s AML/CFT Charter can be found at: www.hkics.org.hk.  

SIDEBAR: The meaning of significant control

• A person has significant control if one or more of the following conditions are met – if the personholds, directly or indirectly, if the company has a share capital, more than 25% of the issued shares in the company, or, if the company does not have a share capital, a right or rights to share in more than 25% of the capital, or, as the case requires, profits of the company
• holds, directly or indirectly, more than 25% of the voting rights in the company
• holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company, and/or
• has the right to exercise, or actually exercises, significant influence or control over the company.

SIDEBAR: Significant controller register compliance

• Case 1 – where there is no significant controller. The company needs to state in the SCR that it knows, or has reasonable cause to believe that there is no significant controller.
• Case 2 – where there is an unidentified registrable person. The company needs to register in the SCR that it knows or has reasonable cause to believe that there is a significant controller; and to make a separate note in respect of each person that the company has not been able to identify.
• Case 3 – where particulars of an identified registrable person are not confirmed. The company needs to register in the SCR that it has identified a registrable person but not all the particulars of the person have been confirmed and make a separate note in respect of each person whose required particulars the company has not been able to confirm.
• Case 4 – where a company’s investigations are ongoing. The company must note in its SCR that the company has not yet completed taking reasonable steps to ascertain whether it has a significant controller.
• Case 5 – where matters have ceased to be true. The company must note in its SCR the matter that has ceased to be true and note in the register the date on which the matter ceased to be true.
• Case 6 – where notice requirements have not been complied with within the specified period. The company must note in its SCR that the company has given a notice under Section 653P(2) or 653P(3) in respect of which a requirement made under Section 653Q or 653R has not been complied with within the specified period (one month) and make a separate note in the register in respect of each such notice.
• Case 7 – where notice requirements have been complied with after the specified period. The company must note in its SCR that the company has given a notice under Section 653P(2) or 653P(3) in respect of which all of the requirements made under Section 653Q or 653R have been complied with after the specified period and make a separate note in the register in respect of each such notice.
• Case 8 – where the change notice requirement is not complied with within specified period. The company must note in the entry for the addressee in its SCR that the company has given the notice to the addressee and note in the register that the addressee has failed to comply with the requirement within the specified period.
• Case 9 – where the change notice requirement is complied with after specified period. The company must note in the entry for the addressee in its SCR that the addressee has complied with all of the requirements after the specified period and note in the register the date of the compliance.