The second and final part of our review of the Institute’s latest AML/CFT conference looks at how anti–money laundering and counter–financing of terrorism (AML/CFT) compliance standards are being reshaped in the digital age.

As the digital era introduces new complexities, the financial services sector is increasingly focused on refining its AML/CFT frameworks. The second session of the Institute’s AML/CFT conference explored these challenges, emphasising the importance of staying aligned with global standards, particularly as they relate to the virtual asset (VA) sector and fund structures.

AML/CFT compliance standards in a globalised financial landscape

Speakers in the second session looked at the changing landscape of compliance in the digital era and its application across various sectors, including virtual assets and fund structures.

Compliance in a digital age

The first speaker in the second session, Ivan So, Senior Manager, Risk Advisory Services, BDO Ltd, pointed to the Financial Action Task Force (FATF)’s evolving standards and their implications for the trust or company service provider (TCSP) sector.

Mr So began by focusing on the role of the FATF in combating financial crime, especially in the rapidly growing VA sector. ‘By staying informed, TCSPs can enhance their risk assessment processes and implement effective measures to mitigate the potential risks associated with VA transactions,’ he stated.

Mr So highlighted the FATF’s guidance on fundamental aspects such as customer due diligence and transaction monitoring. ‘Staying informed of FATF updates helps TCSPs align their practices with global standards, enabling them to cooperate with authorities and financial institutions across borders,’ he explained.

Mr So also pointed to the FATF’s 2024 report on jurisdictions’ compliance with FATF Recommendation 15. Despite incremental progress, challenges persist – 75% of jurisdictions are partially compliant or non-compliant with Recommendation 15, while only 25% are compliant or largely compliant. ‘These gaps leave room for misuse, particularly with stablecoins and decentralised finance,’ Mr So warned.

He also discussed the broader implications of FATF updates, including enhanced risk-based approaches and improved international cooperation. ‘Jurisdictions must align their frameworks with these updates to maintain global standards,’ he said, stressing the need for a comprehensive approach to risk management.

Looking ahead, Mr So flagged up the FATF’s plans to monitor implementation progress and refine evaluation processes, including stricter follow-up mechanisms for non-compliant jurisdictions. For TCSP practitioners, he recommended regular training, adopting blockchain analytics tools and engaging with regulatory bodies to stay informed.

AML/CFT compliance in fund structures

The second speaker in the second session, Daisy Chan, Director, Fund Services, Vistra, dissected the AML/ CFT requirements for common fund structures, including the Cayman Islands exempted limited partnership (ELP) fund and the Hong Kong limited partnership fund (LPF).

Ms Chan initiated her session by shedding light on the operational dynamics of funds. ‘A private fund has the freedom of contract under a limited partnership agreement,’ she noted, stressing the importance of this legal framework in defining operational roles. General partners manage the fund and appoint key operators, including investment managers and AML/CFT officers. These structures underpin compliance obligations that vary between jurisdictions.

Drawing a comparison between Cayman ELPs and Hong Kong LPFs, Ms Chan clarified the specific AML roles. ‘The Cayman ELP mandates three AML roles – compliance officer (AMLCO), reporting officer (MLRO) and deputy reporting officer (DMLRO),’ she explained. Each officer bears distinct responsibilities, from overseeing AML/CFT systems to investigating and reporting suspicious activities.

For Hong Kong LPFs, AML/ CFT compliance often falls to a Responsible Person (RP), typically a licensed entity or qualified professional. The RP’s role parallels that of the Cayman’s AMLCO, involving performing assessment, customer due diligence, regulatory reporting and inspections.

Ms Chan pointed out that customer due diligence is a critical safeguard against money laundering and financial crimes. She outlined a step-by-step due diligence process for verifying investors, portfolio companies and service providers. This includes risk assessment, identity verification and sanctions screening.

Ms Chan also underscored the importance of ongoing monitoring. ‘Funds must categorise investors by risk level and review their profiles periodically – annually for high-risk parties, biennially for medium-risk and triennially for low-risk.’ She stressed the need for detailed recordkeeping to ensure compliance and to facilitate regulatory inspections, as they are cornerstones of trust and transparency in fund services.

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.