06 August 2019

New guidance for banks on AML/CFT

This alert was written by Urszula McCormack, Leonie Tear and Richard Mazzochi.

The Hong Kong Association of Banks (“HKAB”) has just published 28 new frequently asked questions (“FAQs”) tackling some of the thornier issues in relation to anti-money laundering and counter financing of terrorism (“AML/CFT”), with input from the Hong Kong Monetary Authority (“HKMA”).

This article summarises the key aspects of the FAQs and other major AML/CFT developments, and provides 6 action steps.

Why the FAQs matter

HKAB’s FAQs form an integral part of the banking industry’s “rule book” for AML/CFT, which comprises four key components.

faq-1

The HKMA and other regulators also periodically issue circulars on thematic issues such as remote account opening and financial inclusion.  HKAB also publishes thematic guidance, such as on trade-based money laundering controls.

The FAQs do not have the force of law.  However, they provide interpretations of complex AML/CFT issues that carry the input of both the banking industry and its regulator.  This means that they are likely to carry weight in any examination of a bank’s conduct and the reasonableness of steps it undertook to comply with the otherwise principles-based regime.

What the FAQs cover

The FAQs cover a significant array of practical issues that banks face on a day-to-day basis, including providing guidance on terms that are open to broad interpretation (more on this below). 

Collectively, the FAQs address the following key topic areas:

  • AML/CFT systems
  • Identification and verification of identity of natural and legal persons
  • Identification and verification of identity of trust or other legal arrangements
  • Beneficial owners
  • Ownership and control structure
  • Persons purporting to act on behalf of the customer (“PPTAs”)
  • Connected parties
  • Reliability of documents, data or information
  • Simplified due diligence
  • Enhanced due diligence
  • Politically exposed persons (“PEPs”)
  • Intermediaries
  • Correspondent banking
  • Private banking
  • Customer due diligence reviews
  • Wire transfers
  • Issues relating to financial groups

Key focus areas for the industry

Five areas that have generated considerable debate, and that merit banks’ focus, are as follows.  We would welcome the opportunity to share our insights on market practice with our clients at a more granular level.

  1. PPTAs
  1. Who should be treated as a PPTA remains a hot topic.  Noting that “no one-size fits all” in relation to different products and services, there are four new FAQs aimed at grappling this issue and developing a harmonised approach.
  1. In particular, one of the most challenging scenarios involves the situation where multiple people (traders, administrative staff etc) are involved in initiating and executing a transaction.  Not all staff need to be treated as a PPTA, but the FAQs make clear that generally, each legal person customer should have at least one PPTA, and that there may be multiple PPTA, who act jointly or alone.  Of course, there may be exceptional scenarios where this is not the case.  AIs are therefore required to have an appropriate framework in place to ensure they can assess who is a PPTA, with the approach consistent across the organisation.  In our experience, a decision matrix can significantly assist this process.
  1. We expect questions about PPTAs will continue around areas still awaiting industry and HKMA consensus and further guidance / FAQs are likely to be issued in future.
  1. Helping banks decipher the terminology
  1. The FAQs tackle some of the interpretation issues around phraseology used in the Guideline, for example the answers to “who is a person…”
  2. faq-2
  1.  …are not the same.  These terms are particularly relevant to how customer due diligence measures are undertaken in relation to beneficial owners.
  1. Unwrapping trusts
  1. The nature of trusts has always led to questions around who the customer is and how far unwrapping needs to go.  New FAQs set out guidance in relation to steps required to be taken regarding the trustee depending on whether the trust, or the trustee is the customer and when dealing with a trust as part of an intermediate layer in the customer structure.
  1. PEPs
  1. New FAQs in relation to PEPs have been published.   Amongst other topics, these address the requirements for dealing with “former” PEPs noting a divergence between those previously regarded as “foreign PEPs” and those previously regarded as “domestic” or “international organisation” PEPs.
  1. Establishing source of wealth
  1. Arguably one of the most challenging issues for the banking industry has been establishing source of wealth (particularly in the areas of wealth management and private banking).
  1. Appended to the FAQs is a three-page guidance note setting out what is deemed to be good practice in relation to source of wealth, what is considered poor practice and practical source of wealth examples in different scenarios.

Other key developments relevant to banks

Banks should also be aware of the following developments:

  • AML/CFT investigations are continuing. Even regular inspections typically involve questions regarding AML/CFT compliance.  Areas of interest continue to include customer identification (“who is your customer?”), customer due diligence measures, screening, periodic reviews, transaction monitoring and cross-border arrangements.
  • Virtual banks and online banking are in focus. Remote onboarding and data-related controls (including record-keeping, cybersecurity and appropriate use of AI/machine learning) are a focus for the HKMA and the Privacy Commissioner for Personal Data.  See our alert on Virtual Banking in Hong Kong and China and remote onboarding developments for further detail.
  • Blockchain sector guidance is now available. The Financial Action Task Force (“FATF”) has been very focussed on building an AML/CFT regime for the virtual asset industry and has published a significant range of recommendations and guidance for this sector.  This is relevant to any banks seeking to understand how to onboard customers who are involved in virtual assets, and even those looking to establish such a business themselves.
  • Hong Kong’s FATF Mutual Evaluation Report is coming. The first signals suggest that Hong Kong’s banking sector has performed well, but it will be important for banks to see the outcomes of the report to understand emerging risk areas and where further regulatory focus may come.  Some areas for improvement have already been identified, including prosecution and implementation of rules by smaller institutions.  Our interim report provides further details.
  • Fintech companies have new guidance on bank account opening. We were delighted to work with the Fintech Association of Hong Kong and a number of banks and other industry participants to produce a guidance note on “Opening a bank account in Hong Kong” (“FTAHK Bank Account Opening Guidance Note”).  This addresses a significant pain point for the fintech industry, and will help bridge the awareness gap between institutions and customers.  A copy is available on the Fintech Association’s website.

What banks should do next

  • Update your controls. First and foremost, AIs must prioritise a review of their controls to ensure that they are aligned with the FAQs.  They are expected to be “fully conversant” with all of the FAQs and have regard to them in meeting their legal and regulatory obligations.
  • Address gaps. Don’t wait for an audit or investigation.  Consider if there are gaps that need to be addressed, or event reported.    
  • Address blockchain. We strongly recommend considering how FATF’s guidance for the virtual asset sector can be incorporated in bank policies and procedures.  Given the HKMA’s focus on financial inclusion, it is important not to simply “de-risk” this sector entirely, especially having regard to the wealth of information and advanced analytical tools that are now available to help understand and mitigate the risk.
  • Keep an eye on FATF. Hong Kong’s mutual evaluation report is coming soon.  Consider what impacts it will have to your business and see if certain improvements should be prioritised.
  • Consider user experience. Based on our experience, the most common complaints about bank account opening involve unclear procedures and poor communication (not just rejection itself).  Consider how the FTAHK Bank Account Opening Guidance Note might be useful to enhancing the user experience for your prospective customers.  You can also provide that note (or other information) to help those customers know what to expect.
  • Engage. If you have ideas for further FAQs or industry guidance, speak to your contacts at HKAB, the Fintech Association or us.

Please contact us if we can help.  We lead industry consultations on this topic, and have assisted in preparing AML/CFT guidance over the years as well as the new FAQs.

We support financial institutions on audits, and regulatory investigations when things go wrong, as well as benchmarking actual practice against regulatory expectations.  We can offer unique insight into market approach; best, good and poor practice.

Key contacts

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