FATF finds Hong Kong AML/CTF regime to be compliant

The Financial Action Task Force (FATF) published, on 4 September, its long-awaited mutual evaluation report on Hong Kong’s level of compliance with the FATF recommendations and the effectiveness of Hong Kong’s anti-money laundering (AML) and counter-terrorist financing (CTF) system.

Overall, the report was positive and Hong Kong’s AML/CTF regime was assessed to be compliant and effective overall, making it the first jurisdiction in the Asia-Pacific region to have achieved an overall compliant result in the current round of FATF evaluation.

The report, which assessed the compliance and effectiveness of Hong Kong’s AML/CTF regime against international standards, confirmed that Hong Kong had a strong legal foundation and effective system for combating ML/TF.

“Hong Kong, China’s recent legislative amendments have significantly strengthened its response to fight money laundering and terrorist financing, but these measures have not been operational for long enough to fully demonstrate their effectiveness,” said the FATF.

It noted that the system was particularly effective in the areas of risk identification, law enforcement, asset recovery, counter-terrorist financing and international co-operation. It also recommended, however, that Hong Kong should enhance prosecution of money laundering involving crimes committed abroad, increase risk understanding and AML/CFT implementation by smaller institutions, and strengthen supervision of certain non-financial businesses.

In general, large financial institutions and those belonging to international financial groups had a good understanding of ML/TF risks and adequately applied customer due diligence (CDD) and record keeping requirements, but there was room for improvement among smaller financial institutions in some of these areas.

Hong Kong actively prosecuted money laundering from domestic offences and also prioritised the confiscation of proceeds of crime through strong action by law enforcement agencies and prosecutors. Authorities responded effectively to the large number of requests for co-operation from foreign counterparts.

However, given Hong Kong’s position as an international financial centre, and the risks it faces from crimes committed abroad, it was not making sufficient outgoing requests for co-operation. Authorities could focus more on prosecuting the laundering of proceeds from foreign offences.

To further increase the effectiveness of Hong Kong’s AML/CFT regime, the Report recommended a number of areas for further work:

• To deepen understanding of ML/TF risks – The report noted inadequacies among smaller financial institutions in their understanding of AML/CTF risks, especially in relation to cross-border financial flows, non-resident customers and politically exposed persons, and application of mitigating measures commensurate with their ML/TF risks. Licensed corporations (LCs) and associated entities (AEs) should ensure these risks are adequately considered in their risk assessment process, continuously deepen their understanding of ML/TF risks to which the firms are exposed and implement effective risk mitigating measures that can adequately manage the ML/TF risks identified.
• To strengthen implementation of AML/CFT measures – The report noted inadequacies among the smaller financial institutions in the implementation of CDD requirements (especially with regard to risks posed by non-resident customers), and enhanced due diligence measures for foreign politically exposed persons (PEPs) and targeted financial sanctions. LCs and AEs should ensure that these areas are covered in the regular review of their AML/CFT policies, procedures and controls for ensuring effectiveness in managing the ML/TF risks arising from their businesses, and take immediate actions to rectify any inadequacies identified.
• To strengthen suspicious transactions monitoring and reporting – The report found important variance in the level and quality of suspicious transaction reporting among financial sectors and there is room for improvement especially in the non-banking sector. LCs and AEs are reminded to regularly review the adequacy and effectiveness of their systems and processes for identifying and reporting of suspicious transactions to the Joint Financial Intelligence Unit as soon as reasonably practicable.

Financial Secretary Paul Chan said, “The government welcomes the international community’s recognition of Hong Kong’s efforts in combating ML/TF. The Report reinforces our reputation as an international financial centre that is safe and clean for doing business.”

The FATF and the Asia/Pacific Group on Money Laundering (APG) jointly conduct mutual evaluation to assess member jurisdictions’ AML/CTF regime against the international standards and publish reports on the outcomes. An assessment team comprising 10 experts from the two organisations undertook the mutual evaluation on Hong Kong, which lasted for over a year.

The Mutual Evaluation Report of Hong Kong was examined and adopted by the FATF membership at its June Plenary held in Orlando, USA, and the APG membership at its August Plenary held in Canberra, Australia.