The Financial Action Task Force (FATF) assessed Hong Kong’s regime for dealing with money laundering (ML) and terrorist financing (TF) as “compliant and with a substantial level of effectiveness overall,” making it the first jurisdiction in the Asia-Pacific region to have achieved an overall compliant result in the fourth round of FATF evaluations. This accomplishment recognises the efforts of the government and market participants in the battle to combat ML/TF. But, similar to the results of Mutual Evaluations Reports (MER) of other major financial markets, the Hong Kong MER released 4 September 2019 highlighted a number of areas that require additional focus and enhancement. These are the areas where we can expect to see activity in the coming years.
Hong Kong, China (HKC) is the third largest financial market globally and is ranked by the International Monetary Fund as one of 29 systemically important global financial centres. It is also a trade and transport hub with established links across the Asia-Pacific region and well beyond. HKC’s economy is closely linked to Mainland China: HKC is Mainland China’s third largest trading partner, accounts for 31% of Mainland China’s offshore investments and 20% of HKC’s private banking accounts are from Mainland China.
The financial services market in HKC is diverse with a broad array of financial institutions (FI), dominated by multinational FIs. It has sizeable foreign exchange, securities, futures, and insurance markets and is one of the largest asset and wealth management centres in Asia. HKC also has an active Designated Non-Financial Businesses and Professions (DNFBP) sector and large transactions in the real estate and Dealers in Precious Metals and Stones (DPMS) sectors. In addition, HKC is a jurisdiction with significant company formation activities. The sheer scale of its financial market poses high/moderate risk to many of the predicate crimes for ML, but thus far TF does not appear to present a material threat and risk to TF is, therefore, low. Domestic crime has also been low.
HKC is an active member of international anti-money laundering/counter terrorist financing (AML/CTF) organisations, having been a member of FATF since 1991 and a founding member of the Asia/Pacific Group on Money Laundering (APG) in 1997. Over the years, HKC has implemented a number of laws that underpin its AML/counter financing of terrorism (CFT) regime, with the most recent enacted in 2018.
The HKC legislation has addressed issues in prior MERs and has contributed overall to strengthening the local AML/CFT regime. Clear proof of HKC’s efforts over the last decade is evidenced by the results of the current and previous (2008) MERs, the latter which resulted in HKC’s being placed in a regular follow-up process through 2012 at which time FATF deemed progress to be satisfactory.
Comparison of 2019 and 2008 MER Results
The four non-compliant areas in 2008 involved lack of requirements/framework for DNFBPs (covered by three recommendations) and issues related to the disclosure and declaration of cross-border movement of funds (one recommendation).
Without intending to minimise HKC’s commitment and accomplishments, the purpose of this report is to identify the areas for continued improvement that may impact all, or select sectors, within the market. The Hong Monetary Authority’s (HKMA) letter to Chief Executive Officers of Authorised Institutions (AI) dated 4 September 2019 highlighted what it views as a few major themes on which it would be focusing its efforts in the coming years:
- Continued evolution of the regulatory understanding and responses to ML/TF risks.
- Importance of quality and timeliness in suspicious transaction reporting, with noted opportunities for improvement by the smaller AIs.
- Approaches and toolkits for AML/CFT efforts, including how technology can be used to improve the efficiency and effectiveness of compliance efforts.
Please download the Full Report from below to learn about the specific Priority Actions that the MER suggests HKC should take.