AML/CFT update – part one
CGj spotlights the latest developments in anti–money laundering and counter–financing of terrorism (AML/CFT) discussed at the Institute’s annual AML/CFT conference held in November 2024.
- regulatory developments across jurisdictions reflect the growing need to balance robust compliance measures with professional confidentiality
- enhanced AML/CFT guidelines in Hong Kong emphasise tighter compliance timelines, as well as the importance of thorough risk assessments and detailed documentation
- advancements in eKYC, blockchain integration and custody management are playing a crucial role in strengthening compliance and cybersecurity frameworks
The AML/CFT landscape is rapidly evolving, particularly in light of technological advancements and heightened regulatory expectations. Held on 22 November 2024, the Institute’s 5th AML/CFT Conference – AML/CFT Regulations, Topical Issues and Practical Sharing – delved into critical updates in AML/CFT standards and their implications. This review highlights the salient insights shared by the speakers on navigating compliance challenges in today’s dynamic environment.
A shifting regulatory landscape
Speakers in the first session looked at the expanding horizons of AML/CFT compliance.
Evolving standards
The first speaker in Session One, Michael Lintern-Smith FCG HKFCG, Roll of Honour, Solicitor and Consultant, Robertsons, discussed the increasing complexities and developments in regulatory frameworks across key jurisdictions.
Drawing on his expertise, Mr Lintern- Smith, a past president of The Law Society of Hong Kong, stated that AML/CFT remains a ‘top priority for all governments’, with regulatory expansion being a major trend.
Mr Lintern-Smith shared updates from the region, including new anti–money laundering legislation in Australia and Singapore. Australia’s inclusion of designated non-financial businesses and professions – such as lawyers, accountants and real estate professionals – was a focal point. ‘For the very first time, these groups are coming under the regulatory net,’ Mr Lintern-Smith observed. However, he pointed out resistance from some quarters, such as Australian lawyers lobbying to preserve professional privileges.
Singapore’s AML/CFT crackdown also drew attention. Referring to a recent scandal where authorities recovered US$1.85 billion in illicit funds, Mr Lintern-Smith observed: ‘It’s an interesting outcome – they’ve seized the assets, but the offenders are free to leave.’
Turning to the Chinese mainland, Mr Lintern-Smith detailed proposed amendments to its AML/CFT laws, which will be expanded from 37 to 63 articles. He noted the introduction of extraterritorial jurisdiction and enhanced customer due diligence requirements. ‘China’s draft legislation represents a tightening of controls, aligning its standards more closely with global norms,’ he remarked.
Mr Lintern-Smith then summarised the ongoing efforts by Hong Kong’s Law Society to implement supervisory visits for legal professionals. While these inspections have been subject to internal debates about their stringency, he emphasised their importance: ‘All financial products and services must address AML/CFT concerns to ensure Hong Kong maintains its status as a leading international finance centre.’
Mr Lintern-Smith did not shy away from discussing the challenges of implementing AML/CFT measures. ‘There’s a fine line between robust regulation and overreach,’ he cautioned. He cited New Zealand’s relaxed approach to low-risk customers and China’s broadened definition of money laundering as examples of differing regulatory philosophies.
Mr Lintern-Smith also touched on the inherent tension between professional confidentiality and compliance. ‘Lawyers, for instance, often confuse confidentiality with legal professional privilege. Striking the right balance is crucial,’ he said.
“All financial products and services must address AML/CFT concerns to ensure Hong Kong maintains its status as a leading international finance centre”
Michael Lintern-Smith FCG HKFCG
Roll of Honour,
Solicitor and Consultant, Robertsons
Enhanced due diligence requirements
The second speaker in Session One, Daniel Wong FCG HKFCG, Associate Director of Compliance and Risk Management, SWCS Corporate Services Group (Hong Kong) Ltd, underlined the urgency of adaptation because of tightening global standards and enhanced local enforcement.
Mr Wong began by describing the increasing consolidation of AML/ CFT standards across jurisdictions. ‘The new Anti–Money Laundering Law of the People’s Republic of China reflects the trend of consolidating practices and aligning them with global standards,’ he explained. Drawing parallels with Hong Kong’s regulatory approach, Mr Wong noted that the convergence of practices signals a deeper integration of frameworks between Hong Kong and the Chinese mainland.
Mr Wong also pointed to the revised AML/CFT guidelines in Hong Kong, set to take effect in 2025, which emphasise consistency across financial regulators, including the Hong Kong Monetary Authority (HKMA), Securities and Futures Commission (SFC) and Insurance Authority. ‘The alignment in format and focus across these bodies is a key indicator of unified regulatory intent,’ Mr Wong remarked.
One notable adjustment involves the processing timelines for AML/CFT compliance, with requirements being tightened from 60 to 30 working days. ‘You will have to begin early and comply with more stringent requirements,’ Mr Wong stated. Despite the stricter timelines, Mr Wong reassured attendees that regulators would remain pragmatic. The 120-working-day buffer for overall compliance shows that regulators prioritise efficiency without jeopardising business operations, he explained.
Mr Wong also outlined the importance of frequent risk assessments, proposing a two-year maximum interval as the new norm. ‘Regular assessments are critical,’ he said, adding that event-driven reviews – triggered by significant changes like a director becoming a politically exposed person (PEP) – are equally essential.
Another principal focus of Mr Wong’s speech was the heightened expectations around due diligence, particularly for PEPs. ‘Current practices in identifying and classifying PEPs are insufficient. Regulators are looking for more nuanced and consistent approaches,’ he specified. Mr Wong highlighted challenges in this area, including reliance on commercial databases that often misclassify PEPs, leading to unnecessary administrative burdens.
Mr Wong detailed upcoming requirements for more substantial documentation of clients’ wealth and funds. Regulators want to know the origin of the entire wealth base, not just fragments. This, Mr Wong admitted, is ‘very challenging but not impossible’, urging firms to bolster their asset tracing and financial analysis capabilities.
Technological innovation and regulatory frameworks
The third speaker in Session One, Jason Ho, Partner and Leader of the Financial Services Technology Risk Consulting practice of Ernst & Young, provided an in-depth analysis of the rapidly evolving landscape of digital and virtual assets, as well as prime developments in eKYC (electronic Know Your Customer) systems, blockchain technology and cybersecurity frameworks.
Mr Ho began by delineating the differences between virtual and digital assets, emphasising Hong Kong’s regulatory approach. ‘Virtual assets, such as cryptocurrencies like Bitcoin and Ethereum, fall under the SFC’s purview,’ Mr Ho explained. Meanwhile issuance of certain digital assets, including stablecoins and e-HKD, are regulated by the HKMA. This distinction typifies the government’s effort to tailor regulatory frameworks to the unique characteristics of these asset types.
One major initiative Mr Ho accentuated was Project Ensemble, led by the HKMA, which integrates blockchain-enabled financial instruments like central bank digital currencies (CBDCs) and tokenised deposits with traditional payment systems such as the faster payment system (FPS). ‘This reflects the initiative’s goal of putting all these elements into a box to establish a cohesive framework,’ Mr Ho suggested, underscoring its significance for financial interoperability.
Discussing the licensing of virtual asset trading platforms, Mr Ho traced the regulatory timeline from the SFC’s initial position paper in 2019 to the recent AML/CFT requirements. He noted that the 2023 framework ‘introduces stringent controls on custody, cybersecurity and insurance to safeguard against emerging risks’.
Addressing advancements in eKYC, Mr Ho clarified its role in remote onboarding processes, particularly for digital banks. With AI-driven technologies, eKYC verifies customer identities through biometrics and document scans, including the nearfield communication (NFC) chips embedded in modern passports. ‘Deepfake technologies pose challenges,’ he warned. ‘To counteract this, AI solutions must detect inconsistencies in manipulated images or videos.’
He stressed the importance of custody management of virtual asset trading platforms, particularly the use of hot and cold wallets. ‘Regulations mandate that no more than 2% of assets should be in hot wallets to minimise exposure to cyberattacks,’ he elaborated.
Mr Ho also urged attendees to consider the broader implications of supply chain risk management in custody systems, advocating for ownership of source codes and robust contingency plans. ‘Supply chain risks are a growing concern across industries, not just in finance,’ he concluded.
The Institute’s 5th AML/CFT Conference was held on 22 November 2024 in hybrid mode. More information
is available on the Institute’s website: www.hkcgi.org.hk.
Guest of Honour Speech
Guest of Honour Joseph HL Chan JP, Under Secretary for Financial Services and the Treasury, the HKSAR Government, gave the opening speech at the Institute’s 5th AML/CFT Conference, in which he highlighted the government’s initiatives and priorities in strengthening AML/CFT measures in Hong Kong.
Good afternoon. It is a great pleasure to join you today at the Institute’s 5th AML/CFT Conference, an invaluable platform dedicated to promoting strong governance in the fight against money laundering and terrorist financing. This conference serves as a vital forum for discussing both current challenges and emerging trends in AML/CFT practices, bringing together professionals committed to safeguarding the integrity of our financial systems.
The Institute’s significant contributions to advancing best practices for AML/CFT are widely recognised. These efforts are further amplified by the active participation of the Institute’s AML/CFT organisations and its members, many of whom hold key leadership roles within trust or company service providers (TCSPs).
The impact of these contributions is clearly demonstrated in Hong Kong Money Laundering and Terrorist Financing Risk Assessment Reports for 2018 and 2022, which were submitted to the Financial Action Task Force (FATF), the global standard-setting body. These reports highlight Hong Kong’s firm commitment to strengthening AML/CFT measures and underscore the pivotal role played by the Institute and its members in supporting this mission.
This year, the Institute has taken its commitment a step further with the launch of its AML/CFT Certification Course. Designed to meet the growing demands of the industry, this programme provides comprehensive training in AML/CFT practices, with a specialised focus on the TCSP sector. Its success is evident, with over 300 participants enrolled to date, reflecting the industry’s recognition of the importance of such tailored, high quality training.
Beyond the local stage, Hong Kong continues to strengthen its regional and international collaboration in combating money laundering and terrorist financing. Recently, representatives from the Financial Services and the Treasury Bureau, alongside financial regulators and government bureaus and departments, participated in the Tripartite Anti–Money Laundering Cooperation Meeting for Mainland China, Hong Kong SAR and Macao SAR. This brought together policymakers, financial regulators and law enforcement agencies from all three jurisdictions to exchange views and share updates on the latest AML/CFT developments.
As a staunch supporter of the FATF, Hong Kong is committed to preventing money laundering and combating terrorist financing. We have developed a robust, mature and effective AML/CFT regime over the years, fully aligned with the FATF recommendations.
Hong Kong’s progress is evident in its successful completion of the fourth round mutual evaluation (ME) conducted jointly by the FATF and the Asia-Pacific Group on Money Laundering (APG) in 2018–2019, as well as of FATF’s regular follow-up assessment, published in February 2023. Hong Kong’s AML/CFT system has been assessed to be compliant and effective overall, making us the first jurisdiction in the Asia-Pacific region to have achieved an overall compliant result. Our AML/CFT system is considered particularly effective in the areas of risk identification, law enforcement, asset recovery, counter–terrorist financing and international cooperation, while the FATF follow-up report further recognised our efforts in implementing risk-based AML/CFT supervision for most designated non-financial business and profession sectors, including TCSPs, real estate agents and accountants.
Importantly, the FATF also acknowledged Hong Kong’s compliance with its requirements for virtual asset (VA) service providers and dealers in precious metals and stones (DPMS). At the time of assessment in 2022, Hong Kong was in the process of introducing a regulatory regime for these sectors. These regimes have since taken effect – 1 June 2023 for VA service providers and 1 April 2023 for DPMS – marking another milestone in our efforts to enhance AML/CFT oversight.
Proactively following up on FATF recommendations, in July 2022 the government published its latest ML/TF and proliferation financing risk assessment report. This report, covering data from 2016 to 2020, provides updated insights into ML/TF threats and vulnerabilities, from both territorywide and sectoral perspectives. It has been instrumental in informing the government, regulators and supervisors, law enforcement authorities and the private sector of the latest typologies and emerging risks, enabling us to prioritise AML/CFT measures based on risk levels. Building on this foundation, we are now working on the next Money Laundering and Terrorist Financing Risk Assessment Report to ensure our measures remain effective and up-to-date.
The government continues to pursue legislative exercise to strengthen the AML/CFT capability of Hong Kong. In view of the important roles played by stablecoins in the Web3 and VA ecosystem, and the rising interconnectedness between the traditional financial system and the VA market, we are working on legislative proposals to implement a regulatory regime for stablecoin issuers and will introduce the relevant legislation by the end of December 2024. Regarding the Legislative Proposals to Regulate Over-the-Counter Trading of VAs, as announced in the Policy Address in October 2024, we are adjusting our proposals based on the results of the public consultation conducted earlier this year, and aim to conduct the second round of public consultation in 2025.
Going forward, we will continue to monitor both local and international developments to ensure that Hong Kong maintains a robust AML/CFT regime that aligns with global standards while addressing the ever-evolving challenges of ML/TF. This includes reducing vulnerabilities across both financial and non-financial sectors, and adapting to emerging risks. To achieve this, your continued support and commitment to advancing best practices in AML/ CFT remain essential.
On this note, I would like to extend my gratitude to the Institute for organising this annual conference. By bringing together governance professionals, senior management personnel and others eager to deepen their knowledge of AML/CFT practices, the Institute provides an invaluable platform for delving into current and emerging issues in this critical area. Your efforts strengthen not only the governance landscape, but also Hong Kong’s leadership in AML/CFT on the global stage.
This is an extract of Mr Chan’s opening speech at the Institute’s annual AML/CFT conference held in November 2024.
