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1. What is money laundering and terrorist financing?
2. Money laundering activities
3. Doing your duty
4. The legislation against money laundering and terrorist financing
5. Does the law protect you?
6. Effective AML/CTF risk management
7. Risk-based approach and customer acceptance policy
8. Methods for identifying and reporting suspicious activities
9. What happens to suspicious transaction reports?
10. Record keeping
11. International initiatives and standards
Appendix I - Laws and regulations
Appendix II - Useful websites
References to penalties in this guide are current as at the date of publication.
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1.1 Money laundering is the process of disguising the illegal origin of the proceeds of crime. This enables the proceeds to appear as having a legitimatesource and be openly used.
1.2 The sums involved can bevery large and include proceeds generated as a result of predicate crimes such as:(a)(b)(c)(d)(e)
(f)
(g)(h)(i)(j)(k)(l)
(m)
drug traffickingtax evasiontheft or burglarysmugglingcriminal deception or forgeryillegal gambling or bookmakingblackmailextortionloan sharkingillegal arms salesbribery and corruptioninsider dealing or market manipulationcopyright piracy
1.3 Directly or indirectly, thesecrimes affect everyone. The social and law enforcementcosts can be very high. If not dealt with seriously, crime can infiltrate financial institutions, damaging the reputation of Hong Kong as an international financial centre and affecting foreign direct investment. It may promote bribery, allowingcorrupt persons to tarnishgood business practicesand the economy.
1.4 The Hong Kong regulatoryregime is not only limitedto crimes committed in Hong Kong. The Hong Kong money laundering legislationapplies to conduct outsideof Hong Kong which would constitute a crime had it occurred in Hong Kong.
What is money laundering and terrorist financing?
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1.5 Terrorist financing refers tothe provision or collectionof funds to be used to committerrorist acts or makingfunds or financial servicesavailable to a terroristor terrorist associate. This includes carrying outtransactions involving fundsowned by terrorists, usedto fund terrorists or assistin the commission of terrorist acts.
1.6 In money laundering, the focusis to turn “dirty” money into “clean” funds (i.e. legitimize the criminal proceeds). In terroristfinancing, the focus is on the successful distribution of the funds. The source of funds to support terrorism may come from legitimate sources(e.g. donations, legitimatebusiness earnings), or from the proceeds of crimes.
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2.1 Many criminals use thebanking system to disguisethe source of cash,instruments and other valuablesillegally obtained. Their aim is to avoid raising suspicion.
2.2 While the techniques for laundering funds vary considerably and are oftenhighly intricate, there aregenerally three stages in the process: placement, layeringand integration.
A. Placement
2.3 Cash gives anonymity tomany forms of criminalactivity and is the normalmedium of exchange in theworld of drug trafficking.
Placement involves placingthe crime proceeds (usuallybanknotes) into a bank account,which means getting it acrossthe counter. This stage - when money enters Hong Kong’s banking system - offers the bestopportunity for bank staff torecognise and report moneylaundering.
2.4 Examples:(a)
(b)
(c)
Depositing a large amount of cash in numerous small denominations.
Setting up a cash businessas a cover for banking criminal proceeds.
Exchanging money intoother currencies.
Money laundering activities
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B. Layering
2.5 ‘Layering’ separates the illicitproceeds from their source bycreating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. This is usually done by using monetaryinstruments (such as cashier’s orders) and electronic funds transfers. Taken individually,the transactions may seemperfectly innocent.
2.6 Examples:(a)
(b)
(c)
A company passes moneythrough its accounts undercover of bogus invoices,merely to generate additional transactions.
A customer raises a loan on the security of a depositin another bank to help break the connection withcriminal proceeds.
A customer pays large credit card debts from an account funded by criminal proceeds.
C. Integration
2.7 After the layering process, an integration scheme brings the laundered proceeds back into the legitimate economy,so that the proceeds appearto be normal business funds,arousing no suspicion.
2.8 Example: Gaining control of a privatecompany by investing moneyin it. The company appears to trade normally, but it is using criminal proceeds as its capital.
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3.1 Sound money laundering andterrorist financing (“ML/TF”)risk management plays an important role in the overallsafety and soundness of banksand the banking system,in that it:(a) supports the integrity of
the international financialsystem and the work of governments in their anti-money laundering/ counter- terrorist financing(“AML/CTF”) initiatives (including for example, anti-corruption efforts); and
(b) contributes to protecting the bank’s reputation and Hong Kong’s reputation as a leading international financial centre bypreventing and detecting attempts to use the bankingsystem for ML/ TF.
Doing your duty
3.2 As such, all bank employeeshave an important role to play, in conducting customer due diligence(“CDD”) as well as the identification and reportingof suspicious activity.
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3.3 Efforts in combating moneylaundering by bank staff can help to fight crime and reduce its impact. Law enforcement investigations often reveal the connectionsmade through financialtransaction records that allow hidden assets to belocated (and subsequentlyreturned to victims) andestablish the identity of criminals and the criminalorganisations.
3.4 Most importantly, targetingthe money laundering aspectof criminal activity anddepriving the criminal of their ill-gotten gains means hitting them where they are vulnerable. Without a usable profit, the criminal activitywill not continue.
3.5 Adhering to the requirementsrelating to CDD and record-keeping has becomea statutory obligation. Furthermore, assisting money laundering in any way, failing to report suspicious transactions or tipping off any persons regarding such suspicions are criminal offences. If you fail to meet your obligations, whether deliberately or negligently,you may find yourself subject to internal disciplinary procedures, which may adversely affect your career, and in the worst case, you could also face criminal charges.
3.6 Failure to establish and maintain sound AML/CTF risk management can expose banks to serious risks, includingreputational, operational and compliance. These risks are illustrated by the increased willingness of regulatorsglobally to take enforcementaction where AML/CTFcontrol failures are identified.
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A. Anti-money laundering
4.1 Hong Kong has effective legalsystems in place to countermoney laundering and terrorist financing. The four mainordinances for counteringmoney laundering and terroristfinancing are:
4.2 You may refer to Appendix Ifor the text of the key relevantsections of these Ordinancesfor reference.
4.3 Under the current legal regime, there are several legalduties for each bank staff member to be aware of:
(a)
(b)
(c)
(d)
Anti-Money Laundering andCounter- Terrorist Financing(Financial Institutions) Ordinance (Cap. 615)(“AMLO”);Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405);Organized and SeriousCrimes Ordinance (Cap. 455); andUnited Nations(Anti-Terrorism Measures) Ordinance (Cap. 575).
(a) Duty not to cause a contravention of the AMLOIt is a criminal offence if a person who is an employeeof a bank, employed to work for a bank or isconcerned in the managementof a bank to (1) knowingly; or (2) with the intent to defraudthe bank or any relevantauthorities, cause or permitthe bank to contravene a specified provision in the AMLO. The maximum penalty is a HK$1 millionfine and 7 years’ imprisonment.
A breach of the AMLO by a bank employee may attracta criminal penalty for boththe employee and the bank, or disciplinary sanction inrespect of the bank, dependingon the severity of the breachand the intent.
The Hong Kong Monetary Authority (“HKMA”) (as arelevant authority) haspower under the AMLO to prosecute the authorized institutions (“AI”), or its staff, or take disciplinary actions
The legislation against money laundering and terrorist financing
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(“MLRO”) or ComplianceOfficer designated by their employer. Failure to report isan offence. The maximumpenalty is a HK$50,000 fineand 3 months’imprisonment.
(d) Duty not to tip offA person commits a ‘tipping-off’ offence if, whenknowing or suspecting that adisclosure to authorities hasbeen made, they disclose to anyother person any matterwhich is likely to prejudice aninvestigation following the disclosure. The maximumpenalty is a HK$500,000 fineand 3 years’ imprisonment.
against the AI for breaches of the AMLO customer due diligence and record-keepingrequirments. Possible disciplinaryactions include public reprimand, order to take remedial actions and pecuniary penalties.
(b) Duty not to dealIt is an offence for a personto deal with any property, knowing or having reasonablegrounds to believe that it represents the proceeds of drug trafficking or an indictable offence. The maximum penaltyis a HK$5 million fine and 14 years’ imprisonment.
(c) Duty to reportThere is a statutory duty toreport to the Joint FinancialIntelligence Unit 1 ( “JFIU” )knowledge or suspicion that any property represents the proceeds of drug trafficking or crime or terrorist property. Employees of a bank can discharge this duty by reportingsuspicions to the MoneyLaundering Reporting Officer
1 The JFIU is jointly run by staff of the Hong Kong Police Force and the Hong Kong Customs & Excise Department (http://www.jfiu.gov.hk/eng/about.html)
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(c) Duty not to tip offA person commits a ‘tipping-off’ offence if, when knowing or suspectingthat a disclosure to authorities has been made, they disclose to any other person any matter which is likely to prejudice an investigation following the disclosure. The maximum penalty is 3 years’imprisonment and an
C. Proliferation of weapons of mass destruction
4.5 The Weapons of MassDestruction (Control of Provision of Services)Ordinance (Cap. 526) prohibits a person from providing any services wherethat person believes or suspects,on reasonable grounds, thatthose services will or mayassist the development, production, acquisition or stockpiling of weapons of mass destruction. “Services”
the lending of money and
assistance. This law falls outside of the scope of this paper, although many of the principles in this paper are relevant from a practical perspective.
4.4 The United Nations (Anti-Terrorism Measures) Ordinance(Cap. 575) prohibits the
and includes the following provisions:
(a) Prohibition on the provision or collection of property to commit terrorist acts It is an offence if a person provides or collects any property, with the intentionor knowing or believingthat the property will be used to commit one or more terrorist acts. The maximum penalty is 14 years’ imprisonment and an
(b) Duty to reportIt is a statutory requirement for a person to report to the JFIU knowledge or suspicion that any property is terroristproperty. Failure to report is an offence. The maximum
and 3 months imprisonment.
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E. Regulatory compliance
4.9 At a regulatory level, theseobligations are supported by the HKMA’s Guideline onAnti-Money Laundering and Counter-Terrorist Financing (For Authorized Institutions) (“AMLO Guideline”) issuedin 2012 and amendedfrom time to time. Failureto comply with any partof the AMLO Guidelinedoes not render a person liable to proceedings, but the AMLO Guideline is admissible in evidence ifit is relevant to anyproceedings under theAMLO.
4.10 Failure to comply withAML/CTF requirements couldalso result in your bank being subject to regulatory sanctions under both the AMLO and theBanking Ordinance(Cap. 155).
D. Financial sanctions
4.6 From time to time, regulations are made under the United Nations Sanctions Ordinance (Cap. 537) (“UNSO”) to enforce the sanctions implemented bythe United Nations SecurityCouncil.
4.7 The maximum penalty forcontravention or breach of any regulations made under the UNSO is an unlimited fine and7 years’ imprisonment.
4.8 Banks are not obliged underHong Kong law to haveregard to lists issued by other authorities in other jurisdictions. However, a bank operating internationallyneeds to be aware of the scope and focus of therelevant financial and tradesanction requirements in relevant jurisdictions and what implications this mighthave for their operations(both in Hong Kong and in the relevant jurisdiction). Failureto do so otherwise can also increases the bank’s reputational risk and increasesits exposure to local regulatoryaction.
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Does the law protect you?
Under the legislation for AML/CTF, it is your responsibility and duty to report any suspicious transactions or activities to your bank’s MLRO. You discharge your legal duties when you inform your bank’s MLRO that you have a belief or suspicion - whether it issubstantiated or not. This does notconstitute a breach of your dutiesof confidentiality.
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6.1 An effective AML/CTF risk management system ensuresproper safeguards are in place to mitigate the bank’s risksof relating to ML/TF and prevents contraventions of the AMLO. This requires several components which need to be tailored appropriately with respect to each individualbank. The key components areas follows:
(a) Senior management oversight and appointing relevant officersSenior management are responsible for managing theoverall business effectively;this includes overseeing the bank’s management of ML/TF risk. Specifically, senior management should:(i) Systems:
ensure appropriate and robust AML/CTF systems that address the bank’s ML/TF risks;
(iii) MLRO: appoint a MLRO to act as the central reference point for the bank’s staff to report suspicioustransactions. The MLRO reviewsand maintains a record of all internal disclosures, provides guidance to the bank’s staff to avoid “tipping off” and acts as the bank’s main point of contact with the authoritiesresponsible for ML/TF prevention and detection.
Effective AML/CTF risk management
(ii) Compliance Officer: appoint a director or seniormanager as a Compliance Officer (“CO”) to assume responsibility for establishingand maintaining the bank’s AML/CTF systems. The CO provides guidance and support to senior management to ensure that the bank’s ML/TF risks areadequately managed. This include developing and reviewing the systems in place and monitoring effectivenessand enhancing where necessary; and
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The CO and MLRO are entrusted with significantresponsibility and senior management should ensurethey have sufficient expertise and resources to carry out their responsibilities and functions.
They should, ideally, be independent of all operationaland business functions of the bank, have sufficient level or seniority within the bankand have regular contactwith senior management.They should be fullyconversant with the bank’s statutory and regulatoryrequirements and ML/TF riskexposures, and be sufficientlyresourced to assess all available information in a timely manner. However, theresponsibility does not rest with just these individuals; they should have a support network and resources that can cover during their absence.
(b) Compliance and audit functionWhere practicable, a bankshould establish an independent compliance andaudit function to review the internal controls and effectiveness of the AML/CTFsystems in place. This allows the bank to review and appraise the soundness and adequacy of its AML/CTF program as wellas test whether or not theprogram is complying withits regulatory expectations. It also ensures that the bank is identifying and communicatingAML / CTF compliance weaknesses before they become examination issues or targeted areas for enforcement actions.
Similar to the CO and MLRO, the compliance and audit function should have direct access to senior managementand should have sufficientexpertise and resources to carryout their responsibilities andfunctions.
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(c) Staff awareness and trainingThe fight against ML/TF requires that bank staff have appropriate skills and knowledge to conduct CDD and keep relevant records, detect suspicious transactionsand activities and, most importantly, to understand what staff need to do when they sense that something is not quite right. Each bank should provide adequatetraining to its staff on aregular basis. Such training should be tailored for differentgroups of staff, with due consideration given to the size of the bank and the complexity of its operations.
For further guidance on staff training, please refer toChapter 9 of the AMLO Guideline. In particular,guidance is provided oncertain areas of trainingthat may be appropriate for different groups of staff.
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A. Risk-based approach
7.1 Not all customers pose thesame level of money launderingrisks to the bank. The risk-basedapproach (“RBA”) to CDD and ongoing monitoring is an effective way to combat ML/TF.
7.2 Each bank should determinethe AML/CTF risks specific tothe institution. A reasonably designed RBA provides a framework for identifying the degree of potential ML/TF risksassociated with customers and transactions and allows the bankto focus on those customersand transactions that potentiallypose the greatest risk of moneylaundering.
7.3 Specifically, where particularcustomers, transactions or other arrangements are assessedto pose higher ML/TF risks, banks should take enhanced measures to manageand mitigate those risksappropriately. Correspondingly they may be permitted to applysimplified measures where the risks are lower. This allows the bank to allocate its resourceseffectively to ensure risks are addressed and mitigated appropriately and efficiently.
7.4 Importantly, however, theRBA does not operate as a “waiver” of CDD and other requirements. Please refer to paragraph 1.6 and Chapter 3of the AMLO Guidelinefor further details.
Risk-based approach and customer acceptance policy
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with strategic AML/CTF
to sanctions, embargos orsimilar measures; countrieswhich are vulnerable to corruption; and / or countriesthat are believed to have strong links to terrorist activities.
(b) Customer riskFactors associated with the individual customers, e.g. occupation, source of wealth/fund/income, their reputation, involvement with politicallyexposed persons3 (“PEP”), complexity of the relationship, nature, scope and location of business activities generatingthe funds/assets, involvementin cash-intensive business, purpose of account, etc.
(c) Product/service riskFactors presenting higherrisk might include: services that inherently provide moreanonymity; and ability to pool underlying customers/funds.
B. Customer acceptance policy
7.5 In order to apply an RBA toevery customer relationship,banks should develop a clear customer acceptance policyto allow them to determineand implement proportionatemeasures and controls to mitigate the risks.
7.6 A customer acceptance policytypically includes a descriptionof the types of customer thatare likely to pose a higherthan average risk of moneylaundering, and the bank’scorresponding guidelines/ criteria for acceptance of new customers2 that fall within the
categories.
7.7 Factors to be considered as part of a customer risk assessmentmay include:
(a) Country risk Customers who reside in, orare connected with, high-riskjurisdictions, e.g. those that
Financial Action Task Force(“FATF”) as jurisdictions
2 The term “customer” refers to the party, or parties, with whom a business relationship is established, or for whom a transaction is carried out by a bank. This generally excludes the third parties of a transaction. – Source: AMLO Guideline.
3
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customers / counterpartiesof customers reside/ incorporated in countries with high corruption rate and lax money laundering regulations;
customers occupying publicor high profile position (e.g. PEP);
customers who own, operateor engage in high risk businesses, such as money services businesses, casino,etc.;
companies with complexownership structure for nogood reason; and
shell companies whichhave no business substancein their own right.
(a)
(b)
(c)
(d)
(e)
7.9 Factors that may be takeninto consideration to determineif Enhanced CDD is requiredmay, for example, include:
(d) Delivery/distribution channel riskThe distribution channel for products may alter the risk profile of a customer. This may include salesthrough online, postal or telephone channels where a non-face-to-face account opening approach is used. Business sold through intermediaries may also increase risk as the business relationship between the customer and the bank maybecome indirect.
7.8 Higher risk customers shouldbe subject to an enhancedcustomer due diligence (“Enhanced CDD”) to mitigate the AML/CTF risk, which may include:(a)
(b)
obtaining additional information on the customer and updatingmore regularly thecustomer profile includingthe identification data;
obtaining additionalinformation on the intendednature of the business relationship, the source ofwealth and source offunds;
(c)
(d)
obtaining the approval of senior management to commence or continuethe relationship; and
conducting enhanced monitoring of the businessrelationship.
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obtaining information on the purpose and intended nature of the business relationship (if any) established with the bank unless the purpose andintended nature are obvious;and
if a person purports toact on behalf of the customer:
(i) identifying the person and taking reasonable measuresto verify the person’s identity using reliable and independent sourcedocuments, data orinformation; and
(c)
(d)
C. Customer due diligence
7.10 A comprehensive CDDprogram is one of the mosteffective defences used by banks to prevent abuse through ML/TF activities.
7.11 The CDD process includes:identifying the customer and verifying the customer’s identity using reliable and independent source documents, data or information;
owner4 in relation to thecustomer, identifying and taking reasonable measures
owner’s identity so that
that it knows who the
including in the case of a legal person or trust,measures to enable the bank to understand theownership and control structure of the legal person or trust 5;
(a)
(b)
For example, in the case of corporate customers, thebank should identify and record the identity of all
take reasonable measures toverify the identity of all shareholders holding 25% or more of the voting rights or share capital for normal risk circumstances. The shareholder
purposes is decreased to 10% or more for highrisk circumstances which consequently increases CDD obligations;
4 respect to a corporation, partnership, trust or any other person not falling in the preceding categories. In relation to a company, it includes any person holding 10% or more of the voting rights or share capital.
5 The term “trust” refers to an express trust or any similar arrangement for which a legal-binding document (i.e. a trust deed or in any other forms) is in place. – Source: AMLO Guideline.
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counterparties, experience in their respective fields,etc);source of funds andpurpose of opening theaccount; andfor corporate customers, the identity of relevantindividuals, such as ultimate beneficial owners(unless simplified CDD is allowed), ownership structure, directors andaccount signatories.
(g)
(h)
source of wealth and/ or income;anticipated account activity; andpublic information(e.g. negative news).
(a)
(b)
(c)
7.15 The identity of customersshould be verified using reliable and independentsource documents, data or information (e.g. Hong Kong identity card, passport,search at the CompaniesRegistry or equivalent bodiesif overseas, utility bill, bank statement etc.)
7.14 For higher risk customers,additional information may include:
(ii) verifying the person’s authority to act on behalf of the customer.
7.12 Establishing the real identityof a customer and its beneficial owners and knowing your customer’sbackground are vital components of any CDDprogram.
7.13 The basic requirements of aCDD program generallyinclude the identificationand/or verification of thefollowing:
customer name;customer identificationdocument such as identitycard, passport and registration document (in the case of non-individual customers);residential address (and permanent address if different)/ incorporation/operation address;date of birth/incorporation;nationality (for individual customers);occupation or business (such as type and size, product/ services offered, location of the business
(a)(b)
(c)
(d)
(e)
(f)
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6 Please refer to section 4(3) of Schedule 2 to the AMLO and paragraph 4.10.3 of the AMLO Guideline.
7 An ‘occasional transaction’ is a transaction between a bank and a customer who does not have a business relationship with the bank; please refer to sections 1 and 3 of Schedule 2 to the AMLO. There is a limited exception to the rule relating to when you can establish a business relationship in section 3(2) of Schedule 2 to the AMLO.
7.20 Staff should refer to internalpolicies or instructions issued by their bank regarding theidentification of corporatecustomers.
7.21 Special attention should be exercised when the customeris unwilling to provide the information requested, as this may provide cause for suspicion. Banks must not establish a business relationship or carry out any occasional transactionwith an aggregate valueof at least HK$120,000 (or HK$8,000 for wire transfers) for a customer if CDD cannot be satisfactorily conducted.7
D. Ongoing monitoring
7.22 Effective ongoing monitoringis crucial for understandingcustomer activities and isan essential component of a successful AML/CTFprogram.
7.23 Banks must conduct ongoingmonitoring and scrutiny of:
7.16 Face-to-face meetings arehighly recommended as this is an effective way to verifythe existence of the customer.If a customer has notbeen physically present for identification purposes,the bank must carry out at least one of the measures prescribed in section 9 of Schedule 2 to the AMLO.
7.17 Screening of customer names
against relevant terroristlists (e.g. United Nations Security Council Resolutions)should be a key componentof the bank’s customeracceptance policy.
7.18 Banks may adopt otherverification tools as additionaldue diligence measures such as banking referencesor information provided byan external agency.
7.19 Simplified CDD (e.g. without the need to identify and verifythe identity of the beneficialowners) may be adopted for the specified customers/ products defined in the AMLO and the AMLO Guideline.6
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7.24 These items may evolveover the course of a businessrelationship and banks shouldensure their procedures can readily adapt and meet anychange in customer risk profile. This may involve carrying out additional CDD measures on the customerrelationship as and whenappropriate.
7.25 There is no “one-size-fits-all” approach to ongoingmonitoring. Banks should apply an RBA whendetermining their monitoring
methods and procedures and which customers require more frequent and intensive monitoring. Other importantconsiderations include thesize, complexity andidentified risks of the bank’s business, existing proceduresand the nature of the productsand services.
E. Ongoing review of existing customer records
7.26 It is also necessary, fromtime to time, to ensure the records of existing customersare kept up-to-date andrelevant. An appropriatetime to conduct such reviews is upon trigger events (e.g. when there is a materialchange in the way the account is operated). In the absence of a trigger event, the bank should monitorand periodically review the business relationship consistent with the customer’s risk profile. All high-risk customers (excluding dormant accounts) should be subjectto a minimum of annualreview. Staff should referto internal policies and procedures issued by theirbank regarding the frequencyand methodology in reviewing their customerrecords.
(a) information: documents, data and information relatingto and obtained from customers;
(b) activities: customer activities throughout the course of the business relationship to ensure they are consistent with the bank’s knowledge of the customer, its business and risk profile, including, where necessary, identifying the source offunds; and
(c) transactions: individualor patterns of transactions that are complex, large or unusual with no apparent economic or lawful purpose.
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8.1 The JFIU advocates a “SAFE”approach to assist bankemployees in identifyingsuspicious transactions andactivities. You are encouragedto familiarise yourself with, and make good use of, this four-step approach to decide if a suspicious transactionreport (“STR”) should be filed.
8.2 The four steps are:
Step one: Screen the customer and transaction for suspicious activity indicators
8.3 A suspicious activity indicator(or a red flag) is a typeof activity or entity that iscommonly associated withmoney laundering. You shouldbe familiar with the indicators that are particularly relevant to the products / services provided by your bank so that you canrecognize them if you encounter them during yourwork. Some examples of suspicious activities are setout below. Further examples
Screen the customer and transaction for suspiciousactivity indicators.
Ask the customer appropriate questions toclarify suspiciouscircumstances.
Find out whether thetransaction or activity iscommensurate with the profile or expected transaction pattern of the customer by reviewingthe information already known to the bank.
(a)
(b)
(c)
Evaluate all the information above to make a decision on whether the customer’s financial activity is genuinelysuspicious or not.
(d)
Methods for identifying and reporting suspicious activities
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can be found in paragraphs 7.39 to 7.44 of the AMLO Guideline and on the websiteslisted in Appendix II.
(a) Significant cash transactionsThese can be either one or a small number of large cash transactions or many small cash transactions.
(b) Suspicious transactionpatterns
The account is used as atemporary repository forfunds.
Significantly increasedactivity amid relativelyquiet periods.
‘Structuring’, i.e. many low value transactions areconducted when one or a few high value transactions could havebeen used.
‘U-turn’ transactions, i.e. money passes from oneaccount to another and then back to the firstaccount.
Significantly increasednumber of transactions on Mondays and Thursdays throughout the Hong Konghorse-racing season. This pattern is indicative of illegal bookmaking.
(i)
(ii)
(iii)
(iv)
(v)
Deliberate attempts to break the audit trail, e.g. a customermoves money by requesting a cash withdrawal followed by a cash deposit to another account rather than by a transfer.
Numerous account balance enquiries, cash deposits and withdrawals/ transfers in a personal account within one day; in particular, if most of these transactions were made through ATMs.
Atypical or uneconomicalfund transfer to or fromforeign jurisdiction.
Unusual business activityor transaction that deviatesfrom the known businesspurpose or usual activitiesof the customer.
(vi)
(vii)
(viii)
(ix)
(c) Involvement of one or more of the following entities
Shelf company, i.e. bought from a secretarial companyor a shell company which hasno actual business.
Company formation agent or ‘secretarial’ company.
Money service operator(i.e. remittance agent or money changer).
(i)
(ii)
(iii)
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Casino.
Currencies and countriescommonly associated withinternational crime.
Company registered in an ‘offshore financial centre’ or ‘tax haven’.
(iv)
(v)
(vi)
(d) Other red flags
Unrealistic wealth compared to customer profile.
Defensive stance toquestioning.
Multiple accounts for similar offshore companies.
Unusual intermediary role.
Transaction volumedisproportionate to source of funds.
Large, unexplained source of wealth.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
8.4 With a view to identifyingterrorist financing activities, banks should build up their terrorist database for name screening by referring tovarious terrorist namelists issued by local
governments, major foreign governments (e.g. Office of Foreign Assets Control of the U.S. Department of Treasury)and international bodies, etc. Alternatively, banks may make arrangements to access this kind of database maintained by third party service providers.
Step two: Ask the customer appropriate questions to clarify suspicious circumstances
8.5 You should tactfully querythe customer about their reason for conducting the transactionif it is practically possible todo so and there is no risk of “tipping off” the customer as to your suspicions. The purposeis to find out if there is a legitimate reason for the apparently suspicious activity.Appropriate questions should cover the following points:
Identification of the source and/or the destination of the money involved in the apparently suspicious activity.
The reason for conductingthe apparently suspiciousactivity.
(a)
(b)
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8.6 Some bank staff are reluctantto ask these questions on the grounds that the customermay become offended and take their business elsewhere.
8.7 This can be overcome bymaking indirect queries, or using the pretext that the employee is seeking additional information in order to provide a better service to the customer. For example, a customer depositing a large sum of cash could be askedwhere the funds originated from, and the reason for the use of cash, on the groundsthat this information couldhelp the bank providea cheaper or moreconvenient method for thecustomer to perform futuretransactions.
8.8 Persons involved in illegalactivity are more likely to refuse to answer, give only a partial explanation or give an unlikely explanation, all of which should be regarded as adding to thelevel of suspicion surrounding
8.9 Obviously, customers can only be questioned by staff when it is practically possible to do so. Such circumstances include situations when there is face-to-face contact between a customerand a staff member. However,in some circumstances suchopportunities do not arise (e.g. when a customer’s bank account receives incoming remittances).In such circumstances,telephoning the customer underthe auspices of a sales or marketing initiative, but equallyto solicit answers to questionsrelating to the source, destinationand reason for the suspicious
approach.8
Step three: Find out whetherthe transaction or activityis commensurate with the
pattern of the customer by reviewing the information already known to the bank
8.10 The third stage in thesystemic approach to identifying suspicious activityis to review the informationalready known to the bank
8 This is subject to the bank complying with any other applicable regulatory requirements, such as those arising under the Personal Data (Privacy) Ordinance (Cap. 486).
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about the customer and theirprevious financial activities and using this information to determine whether the activity is consistent with the customer’susual and expected activity. If so, the activity is less likelyto be suspicious. This stage involves what is commonlyknown as the ‘know-your-customer’ principle.
8.11 Banks hold various piecesof information about theircustomers which can be usefulwhen considering whether the customer’s financial activity is to be expected or is unusual.
8.12 Examples of the sort ofinformation held and theconclusions which may be drawn from them, are listedbelow.
The customer’s occupation.Certain occupations implythat the customer is a low wage earner (e.g. driver,hawker, waiter, student).High value activitieson the accounts of such customers would therefore not be expected. It is important that staff handling the opening of accounts ensure that the
(a)
occupation of all personal customers, and the nature and type of business for all corporate customers, is recorded and is accurate.
The customer’s residential address. A residential address in low cost housing,e.g. a squatter village or public housing, may be indicative of a low wage earner.
The customer’s age. Frequent high value transactions would normally not be expected to be found on the account of a very young or old customer.
Regular monthly or weeklydeposits seen on an accountmay be salary depositsand, if so, may give an indication of the level of financial activity which could reasonably be expected of a customer. For example, if a customer receives low valuesalary deposits then otherfrequent high value transactions would not beexpected.
(b)
(c)
(d)
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Step four: Evaluate all the information above to make a decision on whether the customer’s
suspicious or not
8.13 whether to make an STR.
quantify, it is not possible to give exact guidelines on the circumstances in which a report should, or should not,be made.
8.14 However, such a decision will
be of the highest quality when you have taken all three of the preceding steps. A report
the activity is genuinely suspicious having consideredall the circumstances. Forexample, a decision should
The average balance, number and type of transactions seen on an account over a period of time give an indication
which is normal for the customer. Marked increases in activity, or activity of a differenttype to these norms, would normally be considered to be unusual.
from a particular customer concerning a suspicious
reasonable or legitimate based on the background information known to the bank.
8.15 Very seldom, if ever, will you be able to connect suspicious
not stop you from makingSTRs. The law requiresyou to make reports and does not ask you to specify the
activity relates. 8.16 It is at the bank’s discretion
as to whether the relationshipwith the customer concerned should be maintained aftera report has been made unlessthe JFIU has givenspecial instructions. However, any decision should take into account the legal duty not to deal with any property in circumstances where aperson knows or has reasonable grounds to believethat the property is connectedwith an indictable offence—such dealing is a criminaloffence.
(e)
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8.17 If a bank decides tomaintain the relationship with a customer who is the subject of an STR, the bank should record the decisions made and rationale and take steps to mitigate any ML/TF risks that are presented. This may include reviewing the customer’s risk classification,escalating to any relevantcommittee that has oversight for such risks, enhancedmonitoring of the customer’sactivities and submitting further STRs if suspicious activity is identified.
Post-reporting risk mitigation
8.18 Filing a report to the JFIU does not absolve the bank from all legal, reputationalor regulatory risks associatedwith the account’s continuedoperation. Further, a “consent” response from the JFIU to a pre-transactionreport should not be construed as a “clean bill of health” for the continued operation of the account or an indication that the account does not pose a risk to the bank.
8.19 Once an STR has been filed, banks must comply with the following rules:
(a) Review the customer relationship: the business relationship with the customer should be subjectto appropriate review by the bank’s MLRO, irrespective of whether feedback is providedby the JFIU. If necessary, the issues should be escalatedto senior management to determine how to mitigatepotential legal or reputationalrisks posed by the relationship. Banks are not obliged to continue business relationships with customers if such action would place them at risk.
(b)Mitigate risks: if there are concerns with a customer’s account or with a particularbusiness relationship, the bank should take appropriateaction to mitigate these risks. In case of doubt, banksshould consider discussingthe matter with the JFIU and/or the HKMA, as appropriate9.
9 Consent from the JFIU to continue operating the account should not be construed as an indication that the account is risk-free; please refer to paragraph 7.33(b) of the AMLO Guideline.
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8.20 For further guidance, pleaserefer to your bank’s policies and procedures or relevant sections in the AMLO Guideline.
Tipping Off
8.21 A further importantconsideration for the bank is to ensure there are internal controls and systems to prevent directors, officers andemployees “tipping off” the customer or any otherperson who is the subjectof the STR.
8.22 You must not disclose
to any other person any matterwhich is likely to prejudicean investigation of moneylaundering activities. This isimportant if you have filed an STR or, for any otherreason, you are aware or suspect that a customeris under investigation.
(c)Report further suspicious circumstances: the bank should report any further suspicious transactions orevents in respect of the same customer.
(d)Record disclosures made to JFIU: the bank shouldestablish and maintain arecord of all disclosures made to the JFIU, including details of the date ofthe disclosure, the person who made the disclosureand information to allow the papers relevant to the disclosure to be located.
(e)Comply with orders: the bank should ensure that it is able to freeze any relevant property as it may be served with a restraint order. The bank should consider what, if any, funds or property may be utilised subject to havingobtained the appropriateconsent from the JFIU. The bank should alsorespond to any productionorders within the requiredtime limit.
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8.23 Doing so may defeat the purpose of reporting suspicious transactions if the suspected person is “tipped off” to the fact that they are under investigation. Tipping off is therefore a criminal offence in order to preserve the integrity of aninvestigation.
8.24 If your role requires routinecontact with the customer, maintaining the contact does not constitute tipping off so long as you confine your discussion to regularbusiness matters at hand.
8.25 If you are in doubt as towhether you should contact a customer under suspicion orinvestigation, you should follow your bank’s internalprocedures to seek the adviceof your MLRO.
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9.1 Each bank has at least one designated MLRO whoreceives all STRs made by bank staff. You will fulfillyour legal obligation to reportany suspicious activity by sending your report to your bank’s MLRO.
9.2 The MLRO is responsiblefor forwarding STRs consideredto be genuinely suspicious to the JFIU. The JFIU then sends the STRs to specialist units within the Hong Kong Police and the Customs & Excise Department for investigation.
9.3 The JFIU web site is http://www.jfiu.gov.hk.
What happens to suspicious transaction reports?
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A. CDD information and related documents
10.1 Adequate records should bemaintained to demonstrate that appropriate initial and ongoingCDD procedures have been followed for all customers. CDD information and relateddocuments should be retainedfor a period of at least 6 yearsafter the termination ofthe relationship with the customer concerned. Additionally, where the customer is the subject of an STR, the relevant authority may require the relevant CDD information/documents and the STR to be retained for a periodlonger than 6 years after the termination of the relationshipbecause the records may be relevant to an ongoingcriminal or other investigation, or another purpose. This period will be specified by a notice in writing by therelevant authority.
B. Transaction records
10.2 Adequate records of all transactions should be maintained to support the reconstruction of transactions,including the amount, type of currency, origin of funds received into customers’ accounts and the beneficiariesof outward payments from customers’ accounts. The records should be kept for at least 6 years after the completion of the transactions. Additionally,where the transactions relate to an STR, the relevant authority may require the records to be retained for a period longer than 6 years after the termination of the relationship because thetransaction records may berelevant to an ongoing criminal or other investigation,or another purpose. This period will be specified by a notice in writing by the relevant authority.
Record keeping
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11.1 A number of international organisations have developedstandards for combatingmoney laundering and
some important organisations that have issued standards
sectors.
A. The Financial Action Task Force
11.2 The FATF is an inter-governmental body formed in 1989 whose purpose is to develop and promote nationaland international policies to combat money laundering
FATF published the FATF Recommendations in 2012 to meet its objective10. These are counter-measures
.tpoda ot seirtnuoc rofThe FATF membershipis currently made up of 34 countries and territories and 2
fo sa snoitasinagro lanoigerMarch 2013. Hong Kong has been a member of the FATFsince 1991 .
11.3 For details, you may visit its
(http://www.fatf-gafi.org).website
International initiatives and standards
10 The FATF has also previously published the FATF Forty Recommendations for combating money
objective. These recommendations were revised and consolidated into the FATF Recommendations issued in February 2012.
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C. The Wolfsberg Group
11.6 The Wolfsberg Group is an association of eleven global banks, which aimsto develop financial services industry standardsand related products, forknow-your-customer and AML/CTF policies. The Group came together in 2000 and a number of AMLPrinciples and Guidelineshave been published by theWolfsberg Group, coveringthe areas of private banking, correspondent banking, mutual funds andpooled investment vehicles,etc.
11.7 For details, you may visit itswebsite (http://www.wolfsberg-principles.com).
B. The Basel Committee on Banking Supervision
11.4 The Basel Committee on Banking Supervision is established by the centralbank Governors of the Group of Ten nationsin 1974. The Committeeformulates broad supervisorystandards and guidelines and recommends statements of best practice in banking supervision. In particular, theCommittee has had a long standing commitment to promoting sound AML/CTFpolicies and procedures that are critical in protecting the safety and soundness of banks and the integrity of the international financial system. The revised version of the Core Principles for Effective Banking Supervision includesa dedicated principle for dealing with the abuse of financial services (see the 29th
principle). From time to time, the Committee also publishesAML/CTF related guidelineswhich set the standards for the banks all over the world in formulating their AML policyand procedures.
11.5 For details, you may visit its website(http://www.bis.org/list/bcbs/tid_32/index.htm).
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D. The Egmont Group of Financial Intelligence Units
11.8 The Egmont Group was formed in 1995 and is aninformal organisation of financial intelligence units (“FIUs”) from over 131countries (as of March 2013). FIUs are national authoritiesresponsible for receiving, analyzing, and disseminating to competent authorities those suspicious transaction/activity disclosures concerning moneylaundering and terrorist financing received from their respective financial sectors. The Egmont Group’s goal is to provide a forum for FIUs to improve support to theirrespective national AML/CTF programs. Each FIU must adhere to all of the Egmont Group’s Principles of Information Exchange to ensure the effectiveness of the measures to combat serious crimes. Their ability to transform data into financial intelligence is a key element in the fight against moneylaundering and the financingof terrorism.
11.9 For details, you may visit its website (http://www.egmontgroup.org).
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Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance Cap. 615, Laws of the Hong Kong SAR
Schedule 1 - Interpretation
Part 1
1. In this Ordinance –
money laundering means an act intended to have the effect of making any property—
(a) that is the proceeds obtained from the commission of an indictable offence under the laws of Hong Kong, or of any conduct which if it had occurred in Hong Kong would constitute an indictable offence under the laws of Hong Kong; or
(b) that in whole or in part, directly or indirectly, represents such proceeds,
not to appear to be or so represent such proceeds;
means—
(a) the provision or collection, by any means, directly or indirectly, of any property— (i) with the intention that the
property be used; or(ii) knowing that the property
will be used,
in whole or in part, to commitone or more terrorist acts (whether or not the propertyis actually so used);
(b) the making available of any
related) services, by any means, directly or indirectly,
of a person knowing that, or being reckless as to whether, the person isa terrorist or terroristassociate; or
(c) the collection of property or
related) services, by any means, directly or indirectly,
38
to or for the benefit of a person knowing that, or being reckless as to whether, the person is a terrorist or terrorist associate.
In the definition of terrorist financing, terrorist, terrorist act and terrorist associate have the meaning given by section 2(1) of the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575).
Schedule 2(Please refer to Schedule 2 for requirements relating to customer due diligence and record-keeping.) Drug Trafficking (Recovery of Proceeds) Ordinance Cap. 405, Laws of the Hong Kong SAR
Section 25 - Dealing with propertyknown or believed to represent proceeds of drug trafficking
(1) Subject to section 25A, a person commits an offence if, knowing or having reasonable grounds to believe that any property in whole or in partdirectly or indirectly representsany person’s proceeds of drug trafficking, he deals with that property.
(2) In proceedings against a person for an offence undersubsection (1), it is a defenceto prove that —
(a) he intended to discloseto an authorised officer such knowledge, suspicionor matter as is mentionedin section 25A(1) in relationto the act in contraventionof subsection (1) concerned;and
(b) there is reasonable excuse for his failure to make disclosure in accordance with section 25A(2).
(3) A person who commits an offence under subsection (1) is liable —
(a) on conviction upon indictment to a fine of HK$5,000,000 and to imprisonment for 14 years; or
(b) on summary conviction to a fine of HK$500,000 and to imprisonment for 3 years.
Section 25A - Disclosure of knowledge or suspicion that property represents proceeds, etc.of drug trafficking
(1) Where a person knows or suspects that any property -
39
11 Please refer to section 113B and schedule 8 to the Criminal Procedures Ordinance (Cap. 221) (“CPO”). 12 Please refer to section 113B and schedule 8 to CPO.
(a) in whole or in part directly or indirectly represents any person’s proceeds of;
(b) was used in connection with; or
(c) is intended to be used in connection with,
drug trafficking, he shall as soon as it is reasonable for him to do so disclose that knowledge or suspicion, together with any matter on which that knowledge or suspicion is based, to anauthorized officer.
(5) A person commits an offence if,knowing or suspecting that a disclosure has been made under subsection (1) or (4), he discloses to any other person any matter which is likely to prejudice any investigationwhich might be conductedfollowing that first-mentioneddisclosure.
(7) A person who contravenes subsection (1) commits an offence and is liable onconviction to a fine at level 5 (HK$50,000)11 and to imprisonment for 3 months.
(8) A person who commits an offence under subsection(5) is liable —
(a) on conviction upon indictment to a fine of HK$500,000 and to imprisonment for 3 years; or
(b) on summary conviction to a fine at level 6 (HK$100,000) 12 and to imprisonment for 1 year.
Organized and Serious Crimes Ordinance Cap. 455, Laws of the Hong Kong SAR
Section 25 - Dealing with propertyknown or believed to represent proceeds of indictable offence
(1) Subject to section 25A, a person commits an offenceif, knowing or having reasonable grounds to believe that any property in whole or in part directly or indirectlyrepresents any person’s proceeds of an indictableoffence, he deals with thatproperty.
(2) In proceedings against a person for an offence undersubsection (1), it is adefence to prove that —
40
(a) he intended to discloseto an authorized officer such knowledge, suspicionor matter as is mentioned in section 25A(1) in relation to the act in contravention of subsection(1) concerned; and
(b) there is reasonable excuse for his failure to make disclosure in accordancewith section 25A(2).
(3) A person who commits an offence under subsection (1) is liable —
(a) on conviction uponindictment to a fine of HK$5,000,000 and toimprisonment for 14 years; or
(b) on summary convictionto a fine of HK$500,000 and to imprisonment for 3 years.
(4) In this section and section 25A, references to an indictable offence include a reference to conduct which would constitutean indictable offence if ithad occurred in Hong Kong.
Section 25A - Disclosure of knowledge or suspicion that property represents proceeds, etc. of an indictable offence
(1) Where a person knows or suspects that any property —
(a) in whole or in part directly or indirectly represents anyperson’s proceeds of;
(b) was used in connection with;or
(c) is intended to be usedin connection with,
an indictable offence, he shall as soon as it is reasonable for him to do so disclose that knowledge or suspicion, together with any matter on which that knowledge or suspicion is based, to an authorized officer.
(5) A person commits an offence if, knowing or suspecting that a disclosure has been made under subsection (1) or (4), he discloses to any other person any matter which is likelyto prejudice any investigationwhich might be conducted following that first-mentioneddisclosure.
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13 Please refer to section 113B and schedule 8 to CPO. 14 Please refer to section 113B and schedule 8 to CPO.
(7) A person who contravenes subsection (1) commits an offence and is liable on
level 5 (HK$50,000)13 and to imprisonment for 3 months.
(8) A person who commits an offence under subsection (5)is liable —
(a) on conviction upon
HK$500,000 and to imprisonment for 3 years; or
(b) on summary conviction
(HK$100,000)14 and to imprisonment for 1 year.
United Nations (Anti-Terrorism Measures) Ordinance Cap. 575, Laws of the Hong Kong SAR
Section 7 - Prohibition on provision or collection of propertyto commit terrorist acts
A person shall not provide or collect, by any means, directlyor indirectly, any property -
(a) with the intention that the property be used; or
(b) knowing that the property will be used,
in whole or in part, to commit one or more terrorist acts (whether or not the property is actually so used).
Section 8 - Prohibition on makingproperty, etc. available to or collecting property, etc. for terrorists and terrorist associates
A person must not –(a) except under the authority
of a licence granted by theSecretary, make any
(or related) services available, by any means,directly or indirectly, to
person knowing that, or being reckless as to whether, the person is a terrorist or terrorist associate; or
(b) collect property or solicit
services, by any means, directly or indirectly, for
knowing that, or beingreckless as to whether, the person is a terroristor terrorist associate.
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15 Please refer to section 113B and schedule 8 to CPO. 16 Please refer to section 113B and schedule 8 to CPO.
Section 12 - Disclosure of knowledge or suspicion that property is terrorist property, etc.
(1) Where a person knows or suspects that any propertyis terrorist property, then the person shall disclose to an authorized officer the information or other matter —(a) on which the knowledge
or suspicion is based; and(b) as soon as is practicable
after that information or other matter comes to the person’s attention.
(5) Where a person knows or suspects that a disclosure has been made under subsection (1) or (4), the person shall not disclose to another personany information or other matterwhich is likely to prejudiceany investigation whichmight be conducted following that first-mentioned disclosure.
Section 14 - Offences
(1) Any person who contravenes section 7, 8 or 9 commits anoffence and is liable—
(a) on conviction on indictment to a fine and to imprisonment for 14 years;
(b) on summary conviction to a fine at level 6 (HK$100,000)15 and to imprisonment for 2 years.
(5) A person who contravenes section 12(1) commits an offence and is liable on conviction to a fine at level 5and to imprisonment for 3 months.
(6) A person who contravenes section 12(5) commits anoffence and is liable —
(a) on conviction on indictment to a fine and toimprisonment for 3 years;
(b) on summary convictionto a fine at level 6 (HK$100,000)16 and to imprisonment for 1 year.
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Basel Committee on Banking Supervision http://www.bis.org/bcbs/index.htm
Financial Action Task Force http://www.fatf-gafi.org
Hong Kong Monetary Authority
Guideline on Anti-Money Laundering and Counter-Terrorist Financing (for Authorized Institutions)
http://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/guideline/g33.pdf
Joint Financial Intelligence Unit http://www.jfiu.gov.hk/en/index.html
Office of the Commissioner of Insurance
Guideline on Anti-Money Laundering and Counter-Terrorist Financing (For authorized insurers, reinsurers, appointed insurance agents and authorized insurance brokers carrying on or advising on long term business)
http://www.oci.gov.hk/download/appendixc.pdf
Securities and Futures Commission
Refer to Appendix C(ii) of the Prevention of Money Laundering and Terrorist Financing Guidance Note for examples of suspicious transactions
http://en-rules.sfc.hk/en/display/display_main.html?rbid=3527&element_id=2899
The Egmont Group
100 sanitised cases on successes and learning moments in the fight against money laundering
http://www.egmontgroup.org/library/download/21
The International Monetary Fund
The IMF and the Fight Against Money Laundering and the Financing of Terrorism
http://www.imf.org/external/np/exr/facts/aml.htm
The Asia / Pacific Group on Money Laundering
Typologies Reports
http://www.apgml.org/documents/default.aspx?DocumentCategoryID=6
Transparency International
Transparency International Corruption Perceptions Index
http://www.transparency.org/research/cpi/overview
World Bank
Financial Market Integrity http://go.worldbank.org/1M7FH3NPQ0
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