The Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (“Bill”) has been passed by the Legislative Council on 7 December 2022.
The passage of the Bill brings into law changes to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“AMLO”) to give effect to Hong Kong’s new virtual asset licensing regime (“VASP Licensing Regime”). We previously detailed what changes were proposed to the AMLO under draft law and how the VASP Licensing Regime would work in our extensive alert, Lift off: A close look at Hong Kong's virtual asset exchange licensing regime and the IOSCO crypto roadmap.
In this alert, we provide a summary of the key changes that have been made to the draft Bill in the now confirmed AMLO amendments and procedural timeline for those changes to come into effect.
We are working closely with several clients on their applications, SFC engagement and structuring. Please contact us if you would like to discuss.
1. Changes to the timeline
In short, the timeline of the Bill and the VASP Licensing Regime has been pushed back by three months. The following summarises the new timetable – further detail follows.
(a) Transition arrangements
The VASP Licensing Regime is currently scheduled to commence on 1 June 2023.
The key dates of the transition period for existing exchange operators have been updated as below (marked in bold):
A person will not contravene the requirement to hold a VA Service licence for the period until 1 June 2024 if the:
- operator is a corporation;
- operator has been carrying on business of a VA Service in Hong Kong immediately before 1 June 2023; and
- regulated act is done within the grace period (between 1 June 2023 to 31 May 2024).
Deemed licence –conditions applicable to corporate applicants
The conditions that a virtual asset exchange needs to satisfy to be eligible to be a deemed licensed VASP are as follows:
- The corporate applicant must provide, and must confirm it has provided, a VA Service in Hong Kong immediately before 1 June 2023.
- The corporate applicant must confirm that it will, upon being deemed licensed, comply with, and have arrangements in place to comply with the regulatory requirements under the VA Licensing Regime.
- Before 1 March 2024 (ie on or before 28 February 2024), the corporate applicant must lodge a compliant application for a VA Service licence. This requirement is only satisfied once the SFC acknowledges receipt of the application.
Deemed licence –conditions applicable to licensed representatives or responsible officers
There are similar deeming provisions that apply to licensed representative (“LR”) and responsible officer (“RO”) applications.
The conditions that an LR or RO needs to satisfy to be eligible to be a deemed LR or RO are as follows:
- LR and RO applicants must be providing, and must confirm that they have been providing, a VA Service in Hong Kong on behalf of the corporate applicant at the time that they make their application. This means that LRs and ROs must be in Hong Kong at the time of their application.
- RO applicants must have been providing, and must confirm that they have been providing, the VA Service in Hong Kong on behalf of the corporate applicant immediately before 1 June 2023. This requirement does not apply to LRs.
- LR and RO applicants must confirm that they will, upon being deemed licensed, comply with, and have arrangements in place to comply with the regulatory requirements under the VA Licensing Regime.
- Before 1 March 2024 (ie on or before 28 February 2024), LR and RO applicants must lodge a compliant application for a VA Service licence. This requirement is only satisfied once the SFC acknowledges receipt of the application.
(b) Commencement date relating to offences
The effective dates of some of the offences have also been updated.
The following offences will take effect on 1 April 2023:
- Fraud and deception in a virtual asset transaction (Section 53ZRF)
- Fraudulently or recklessly induce others to invest in virtual assets (Section 53ZRG)
The following offences will take effect on 1 June 2023:
- Carrying on a VA service business without a licence (Section 53ZRD)
- Issuing advertisements in respect of unlicensed persons’ provision of a VA service (Section 53ZRE)
2. Other key changes to the draft Bill
Other key changes to the Bill include the following.
- Customer due diligence under section 4 of Sch 2 to the AMLO applies to licensed VASP before carrying out for the customer an occasional transaction (whether in a single operation or in several operations that appear to be linked) that:
- involves an amount equal to or above HK$8,000 or an equivalent amount in any other currency; and
- is not a wire transfer or a virtual asset transfer.
NB. Other financial institutions will also be required to conduct customer due diligence as required under section 4 of Sch 2 to the AMLO before carrying out for the customer an occasional transaction that is:
• a wire transfer involving an amount equal to or above $8,000 or an equivalent amount in any other currency; or
• a virtual asset transfer involving virtual assets that amount to no less than HK$8,000.
- Specifying that the licensing decisions made by the SFC are “specified decisions” - such that the Anti-Money Laundering and Counter-Terrorist Financing Review Tribunal has jurisdiction to review the licensing decisions. Other requirements relating to “specified decisions” under the AMLO will apply to the VASP licensing application decisions, eg the appeal process (see section 54 of the AMLO).
- Additional provision relating to “client assets” (section 53 ZRSA) - Any client assets of a licensed VASP are not liable to be taken in execution against the licensed VASP or an associated entity of the licensed VASP under an order or process of a court.
- Clarifying the SFC disciplinary powers - A number of provisions relating to SFC’s disciplinary powers has been updated to make clear of the SFC’s scope of powers.
- Clarifying that the deemed licence arrangements does not apply during the closing-down period where the applicant withdraw its application or the application is refused.
3. Other key changes to the AMLO
A number of other changes to the AMLO were put forward in the draft Bill that have not been amended, meaning they will come into effect. These are detailed in our prior alerts, Lift off: A close look at Hong Kong's virtual asset exchange licensing regime and the IOSCO crypto roadmap and Hong Kong's proposed pathway to fully licensing virtual asset exchanges - what, why and what's next? Other key changes to come into effect include the following:
- All other requirements for VASPs to become licensed that are not referenced above as having changed, as outlined in our previous alerts, including scope and key concepts, key jurisdictional triggers, applicant entity requirements, personnel requirements, ongoing requirements and ancillary offences.
- Amending the definition of politically exposed persons (“PEPs”): the proposed change is to make clear that a PEP captures any person outside the jurisdiction of Hong Kong rather than the current position of a PEP being any persons outside the People’s Republic of China (including Hong Kong).
- Introducing the concept of a “former” PEP such that a more flexible risk-based approach can be taken for those who are no longer entrusted with a prominent public function, this deviates from the current higher standard of “once a PEP, always a PEP”.
- Aligning the “beneficial ownership” definition of trusts to the concept of “controlling person”: this is to ensure consistency with FATF standards, other international guidance and Hong Kong ordinances.
- Greater flexibility regarding CDD in non-face-to-face situations to permit reliance on a “recognized digital identification system”
- Increase sanctions for unlicensed money service operators: this involves making it an indictable offence to operate an unlicensed MSO.
What you should do – key tips
1 Keep an eye out for any further developments
The SFC will conduct its consultation on the further guidance regarding the licensing criteria and other operational or system requirements before the commencement of the VASP licensing regime. There are a few outstanding points which are of interest to market players, such as:
- to what extent retail investors can trade virtual assets via a licensed VASP;
- whether virtual assets derivatives will be allowed; and
- whether group entities of a licensed VASP can provide liquidity or trade on a proprietary basis.
We anticipate that these requirements will be set out in the SFC guidance.
We encourage existing VA market players to actively participate in the regulatory consultation process. It is important to provide the regulators with objective information on market realities.
Our team maintains strong and long-standing working relationships with regulatory bodies such as the SFC. We support the industry on consultation responses, as well as individual clients on their feedback. It is also possible to provide responses on a no-names basis if preferred.
2 Speak to us
We are uniquely placed as one of the largest fintech-focussed teams globally, with particular strength in financial services regulation and blockchain.
Please contact us anytime if we can assist you.
*Any reference to “Hong Kong” or “Hong Kong SAR” shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China".
