CSj reviews a recent webinar promoting anti-money laundering/counter-financing of terrorism (AML/CFT) best practices for trust and company service providers.

The leadership position of The Hong Kong Institute of Chartered Secretaries (the Institute/HKICS) in the AML/CFT fight, within the trust and company service provider (TCSP) sector, was recognised by the HKSAR Government under its 2018 National Risk Assessment submitted to the Financial Action Task Force (FATF). A recent webinar held by the Institute with the subscribers to the HKICS AML/CFT Charter continued the Institute’s promotion of TCSP AML/CFT best practices.

Background

In September 2019, Hong Kong became the first Asia-Pacific (APAC) jurisdiction to achieve ‘overall compliant’ status in the current round of mutual evaluations held by FATF. FATF, the global AML/CFT standard-setter, has been conducting peer reviews of APAC jurisdictions to assess the effectiveness of their AML/CFT systems and their levels of implementation of the FATF Recommendations.

The mutual evaluation assessment of Hong Kong was carried out in 2018 by a 10-expert assessment team from FATF and the Asia/Pacific Group on Money Laundering (APG), the regional AML/CFT body. The assessment, which included onsite visits between 31 October and 15 November 2018, resulted in the publication of the Mutual Evaluation Report (the ME Report) in September 2019. The ME Report found that Hong Kong has ‘a sound regime to fight money laundering and terrorist financing that is delivering good results.’

There can be little doubt that the ME Report has boosted Hong Kong’s reputation as an international financial centre, but this achievement was only made possible by a significant strengthening of AML/CFT regulations in Hong Kong and, in particular, tighter supervision of the TCSP sector. Initially Hong Kong’s AML/CFT regime focused on financial institutions, but in recent years, particularly after the Panama Papers leak of 2015, the focus has turned to corporates and TCSPs. The services provided by TCSPs, including setting up companies, providing a registered office, acting as a director or company secretary, or acting as a trustee for a trust, can be used to create a veneer of legitimacy for ill-gotten gains via disguising the origin and ownership of assets and/or laundering the proceeds of crimes.

AML/CFT regimes around the world have therefore focused on ensuring TCSPs have procedures in place to minimise their risks in this area. In Hong Kong, under the Anti–Money Laundering and Counter–Terrorist Financing Ordinance (AMLO) (Cap 615), TCSPs need to apply for a licence from the Companies Registry, the regulator for TCSPs in Hong Kong, before they can carry on trust or company service business. To gain and maintain this licence, TCSPs need to abide by appropriate customer due diligence (CDD) requirements based on a risk-based approach.

The Institute has been assisting TCSPs in Hong Kong to comply with this expanded AML/CFT regime. Its HKICS AML/CFT Guideline sets standards that converge with those for financial institutions and are consistent with the requirements under the FATF Recommendations. TCSPs in compliance with the Guideline can be accredited by the Institute as subscribers to the HKICS AML/CFT Charter.

In addition, the Institute offers continuing professional education training to its members, as well as thought leadership articles in this journal, to assist practitioners in this complex area of practice. This article reviews a recent webinar, State and Development of TCSP Regulations with Practical Sharing held on 25 November 2020, which brought together experts in AML/CFT to provide a useful round-up of the latest developments in AML/CFT compliance for practitioners in Hong Kong.

Hong Kong’s AML/CFT scorecard

The first session of the webinar was chaired by Edmond Chiu FCG FCS(PE), Institute Council member, Membership Committee Vice-Chairman and Professional Services Panel Chairman, and Executive Director, Corporate Services, Corporate & Private Clients, Vistra Corporate Services (HK) Ltd. The first speaker, Peter Pang, Director, Risk Advisory Services, BDO Ltd, highlighted the findings of the ME Report published by FATF and APG in 2019. The ME Report, he pointed out, was not just a pat on the back for the significant tightening of Hong Kong’s AML/CFT regime since the previous FATF mutual evaluation exercise in 2008. The report highlights the need, for example, for better mitigation of risk areas such as money laundering linked to foreign tax evasion and corruption offences.

Another area of focus is Hong Kong’s ability to enforce its AML/CFT regime. Hong Kong generally has a high conviction rate in money laundering cases (convictions average 95 out of 120 prosecutions per year), but the generally low sentences imposed indicate that many money laundering cases pursued are at the lower end of the scale. ‘While sentences may be proportionate in individual cases, there is concern as to whether the sanctions being applied are effective, proportionate and dissuasive at a systemic level given the nature of money laundering risks in Hong Kong,’ Mr Pang said.

Mr Pang also discussed the number and quality of suspicious transaction reports (STRs) made by TCSPs. The Joint Financial Intelligence Unit (JFIU), the agency receiving STRs in Hong Kong, has been keen to encourage more TCSPs to make STRs and to improve the quality of the STRs filed. The overall number of STRs filed with the JFIU has risen significantly since 2013, but the majority of these are filed by financial institutions. Under-reporting by money service operators and TCSPs limits the financial intelligence the JFIU can access from these medium to high risk sectors.

Counter-financing of terrorism

When it comes to AML/CFT compliance, the former part of the formula generally receives more attention than the latter part. Daniel Wong FCG FCS, Associate Director – Compliance and Risk Management, SWCS Corporate Services Group (Hong Kong), focused his presentation on ‘CFT’ compliance.

Both ‘AML’ and ‘CFT’ compliance focus on the internal controls needed to ensure that the services provided by financial institutions and TCSPs are not, knowingly or unknowingly, put to illegitimate use. While ‘AML’ focuses on the risks associated with providing services to criminal organisations in general, ‘CFT’ focuses on the risks associated with providing services to terrorist organisations – and in particular weapons proliferation financing.

Mr Wong highlighted the three stages of terrorist financing – sourcing funds, disguising the funds and procuring weapons, or the materials and technology necessary to manufacture weapons. Of most relevance to TCSPs will be the need to guard against the risk of becoming involved in the second stage of ‘proliferation financing’ – like other criminal organisations, terrorists often require financial services to disguise their links to their funding sources.

Mr Wong urged practitioners to remain vigilant for ‘red flags’ regarding proliferation financing. Some of these red flags will be reasonably easy to spot – transactions involving countries listed under the United Nations (UN) sanctions designed to combat weapons proliferation, for example, will be high risk. However, high risk may also be attached to transactions involving countries or jurisdictions with known ties to sanctioned countries.

Similarly, providing services to customers linked to a military body would be high risk, but determining whether they are actually involved in the supply, sale and/or delivery of weapons (or technologies and dual-use goods that might be linked to weapons) might not be immediately obvious – weapons are unlikely to be conveniently labelled as such. Practitioners should therefore be on guard where any description of goods is deliberately non-specific – this is a red flag in itself.

Mr Wong also discussed the legislative regime, both global and local, regarding the counter-financing of weapons proliferation. Practitioners will probably be most familiar with the AMLO (Cap 615) and Drug Trafficking (Recovery of Proceeds) Ordinance (Cap 405), but Mr Wong also highlighted Hong Kong’s Weapons of Mass Destruction (Control of Provision of Services) Ordinance (Cap 526). Under this law, it is an offence for a person to provide any services where he/she believes or suspects, on reasonable grounds, that those services may be connected to weapons of mass destruction.

Compliance burden or strategic advantage?

The final speaker in the first session, Judy Wong, Group General Counsel & Chief Compliance Officer, Tricor Group, provided a cost benefit analysis of AML/CFT compliance.

As mentioned earlier, the achievement of overall compliant status in the FATF mutual evaluation exercise has not been without cost for TCSPs in Hong Kong. In fact, the CDD requirements now in place have significantly raised compliance costs for TCSPs. They are required to identify, and verify the identity, of the persons purporting to act on behalf of customers, the customers themselves and the beneficial owners. They need to obtain information on the purpose and intended nature of their business relationships and to keep records of customers and transactions. In addition, they need to comply with the statutory requirements relating to financial sanctions, and to terrorist and proliferation financing. They are also expected to file STRs with the JFIU and keep records of the same.

Ms Wong pointed out that ensuring that TCSP firms stay on the right side of these requirements can be an unenviable task and colleagues can get fed up with the ‘never ending questions from the compliance side’. In this context, she emphasised the importance of highlighting the ‘bright sides’ of AML/CFT compliance. ‘There are two sides to every coin,’ she pointed out. ‘While on one side AML/CFT compliance is very time consuming and tedious, on the other side it helps to raise firms’ reputations.’

She emphasised that meeting AML/CFT compliance requirements is part of the TCSPs’ responsibility to the entire ecosystem – Hong Kong’s regime is based on international standards in the prevention of money laundering and terrorist financing – but this also contributes to the long-term viability of TCSP firms. Any failure to identify clients involved in criminal activities, for example, could constitute a reputational disaster waiting to happen.

Ms Wong also addressed the challenges of meeting know your customer (KYC) requirements in the context of COVID-19. The restrictions in place as a result of COVID-19 have meant that it is often impossible to have face-to-face meetings with clients. In this context, TCSPs are seeking more clarity from the Companies Registry on which digital KYC practices are deemed acceptable for remote client onboarding.

Ms Wong pointed out that the willingness of different regulators around the world to accept digital KYC solutions has varied enormously. ‘Overseas, some regulators have issued guidelines on this issue,’ Ms Wong said. ‘I urge the Companies Registry to do the same. We have to assess whether particular KYC practices are sufficient, but we also need our regulator to give guidelines.’

She added that virtual banks have been permitted to use digital KYC systems to set up new accounts – can TCSP licensees do the same? Moreover, can TCSPs rely on facial recognition technology during live video conferencing with clients for identity verification? ‘We hope for guidance on this issue,’ Ms Wong said. ‘This will help the practitioner, the client and the business world to comply with AML/CFT requirements.’

Future regulatory trends

The webinar also addressed the likely future trends in AML/CFT regulation. The second session of the webinar was chaired by Natalia Seng FCG FCS(PE), Institute Past President, current Council member, Education Committee Chairman and Professional Services Panel Vice-Chairman. The first speaker, Benjamin Cheung CAMS FRM CPA (Aust.), Director, Compliance, Vistra Corporate Services (HK) Ltd, pointed out that the ME Report published by FATF and APG in 2019, provides practitioners with a useful indicator of AML/CFT regulatory trends. The report makes specific mention of perceived gaps in Hong Kong’s AML/CFT regime relevant to trust service providers:

• there are no specific requirements for trustees to hold basic information on service providers to the trust
• there is no explicit requirement for non-professional trustees to keep the information held accurate and up-to-date, and
• there is no obligation for trustees to disclose their status to regulated entities.

Mr Cheung added that lessons can be learned from the AML/CFT regulatory journey of other sectors, in particular the financial sector that has been subject to a more mature AML/CFT regulation and supervision regime for a longer period. Key lessons here, he suggested, are the need to:

• make more use of technology in the KYC process
• learn from other leading jurisdictions, for example Singapore and the UK
• leverage global networks in applying a consistent financial crime risk management governance framework, and
• promote continuous training and sharing among the regulatory/ industry bodies.

The above will enable TCSP practitioners to develop an effective risk-based approach in combating money laundering and terrorist financing.

Future enforcement trends

Regulation is only as good as a jurisdiction’s ability to enforce it. Manhim Yu, Partner, Forensic & Integrity Services, Ernst & Young Advisory Services Ltd, focused his presentation on AML/CFT enforcement trends in Hong Kong.

Since 2018, TCSPs have been subject to regulatory supervision by the Companies Registry, which has shown itself to be an active and determined regulator of Hong Kong’s AML/CFT regime. Mr Yu emphasised that the enforcement trend is on a decidedly upward arc and practitioners should expect increased scrutiny and enforcement actions. He highlighted some enforcement statistics to bear this out. Between April 2019 and March 2020, for example, the Companies Registry conducted 1,236 onsite inspections of TCSPs, and issued 665 summonses, seven advisory letters and 293 warning letters regarding instances of non-compliance. Moreover, TCSPs have paid a total of HK$100,000 in fines over this period.

Mr Yu also highlighted the lessons to be learned from these enforcement actions. In particular, TCSPs need not only have effective internal controls in place to ensure AML/CFT compliance, but they also need to have the right documentation relating to these controls. The documentation the Companies Registry will typically be looking for during onsite inspections includes:

• AML/CFT policies and procedures
• KYC profiles of customers showing that the firm has verified their identities, and
• documents showing that the firm has taken reasonable measures to verify the identity of their customers’ ultimate beneficial owners.

Being able to show such documents will be the best defence when facing a regulatory investigation, Mr Yu said. Looking ahead, he expects the pressure from FATF to continue to push Hong Kong towards more rigorous enforcement of its AML/CFT regime. Accordingly, the Companies Registry is expected to enhance its supervisory actions and to raise penalties for non-compliance.

Both sessions of the webinar were followed by panel discussions where the speakers were joined by the following panellists who contributed practical AML/CFT best practices on the topics raised for the TCSP sector:

• Wendy Ho FCG FCS(PE), Institute Council member, and Executive Director, Corporate Services, Tricor Services Ltd
• Teresa Lau, Director and Head of Company Secretarial Services, BDO Ltd
• Dr Maurice Ngai FCG FCS(PE), Institute Past President, and Director and Group CEO, SWCS Corporate Services Group (Hong Kong) Ltd, and
• Alberta Sie FCG FCS(PE), Director and Company Secretary, Reanda EFA Secretarial Ltd.

The State and Development of TCSP Regulations with Practical Sharing webinar was held on 25 November 2020. The Institute hopes to make this webinar an annual forum.

 

CREDITS

The Institute would like to thank everyone involved in the webinar reviewed in this article. Participants are listed below in alphabetical order of surname.

• Edmond Chiu FCG FCS(PE), Institute Council member, Membership Committee Vice-Chairman and Professional Services Panel Chairman, and Executive Director, Corporate Services, Corporate & Private Clients, Vistra Corporate Services (HK) Ltd
• Benjamin Cheung CAMS FRM CPA (Aust.), Director, Compliance, Vistra Corporate Services (HK) Ltd
• Wendy Ho FCG FCS(PE), Institute Council member, and Executive Director, Corporate Services, Tricor Services Ltd
• Teresa Lau, Director and Head of Company Secretarial Services, BDO Ltd
• Dr Maurice Ngai FCG FCS(PE), Institute Past President, and Director and Group CEO, SWCS Corporate Services Group (Hong Kong) Ltd
• Peter Pang, Director, Risk Advisory Services, BDO Ltd
• Natalia Seng FCG FCS(PE), Institute Past President, current Council member, Education Committee Chairman and Professional Services Panel Vice-Chairman
• Alberta Sie FCG FCS(PE), Director and Company Secretary, Reanda EFA Secretarial Ltd
• Daniel Wong FCG FCS, Associate Director – Compliance and Risk Management, SWCS Corporate Services Group (Hong Kong) Ltd
• Judy Wong, Group General Counsel & Chief Compliance Officer, Tricor Group
• Manhim Yu, Partner, Forensic & Integrity Services, Ernst & Young Advisory Services Ltd