Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report

Hong Kong’s Money Laundering / Terrorist Financing (ML/TF) Risk Assessment: Banking Sector AML and Financial Crime Risk Division Enforcement and AML Department Hong Kong Monetary Authority 11 Jun 2018

Disclaimer  The presentation is provided for training purposes and does not form part of the formal legal and regulatory requirements of the HKMA. It should not be substituted for seeking detailed advice on any specific case from an AI’s own professional adviser.  The HKMA is the owner of the copyright and any other rights in the PowerPoint materials of this presentation. These materials may be used for personal viewing purposes or for use within an AI. Such materials may not be reproduced for or distributed to third parties, or used for commercial purposes, without the HKMA’s prior written consent. 2

Outline  Hong Kong’s ML/TF Risk Assessment Report  Government and HKMA AML/CFT policies  Relevance for Authorized Institutions (AIs)  Areas of work  Mutual Evaluation  Q&A 3

Risk Assessment Report  Covers 12 sectors including financial sub-sectors and non-financial sectors  Published in April 2018 (https://www.fstb.gov.hk/fsb/aml/en/d oc/hk-risk-assessment-report_e.pdf)  Examines the ML/TF threats and vulnerabilities facing various sectors and Hong Kong as a whole 4

Risk Assessment Report  First territory-wide risk assessment  Coordinated by the Steering Committee  All relevant agencies participated: – Financial Services and the Treasury Bureau – Security Bureau – Commercial and Economic Development Bureau – Department of Justice – Hong Kong Police Force – Customs and Excise Department – Independent Commission Against Corruption – Hong Kong Monetary Authority – Securities and Futures Commission – Insurance Authority – Self-regulatory Bodies for DNFBP sectors 5

FATF Recommendation 1 – Assessing Risks & Applying a Risk-based Approach (RBA) 6 Identify, assess and understand ML/TF risks Formulate better targeted response to ML/TF risks Apply an RBA in developing AML/CFT policies

Risk Assessment Report  Not a one-off exercise  Risk is dynamic and must be kept under constant review  There will therefore be further assessments at intervals  HKMA will update its assessment for the banking sector  Similar assessments overseas have tended to evolve significantly 7

Hong Kong’s AML/CFT Policy The Government is committed to upholding a robust AML/CFT regime that: a) Fulfills the international AML/CFT standards; b) Deters and detects illicit fund flows; c) Combats ML/TF and restrains and confiscates illicit proceeds effectively; d) Reduces ML/TF vulnerabilities in Hong Kong; e) Adopts an RBA in applying compliance obligations to businesses and individuals; f) Fosters strong external and international collaboration to disrupt global ML/TF threats; and g) Promotes awareness and builds capacity of private sector stakeholders in combatting ML/TF risks. 8

Enhancing the AML/CFT Regime Five major areas of work: a) Enhancing AML/CFT legal framework to address gaps in legislation; b) Strengthening risk-based supervision to ensure targeted regulation of riskier areas; c) Sustaining outreach and capacity-building to promote awareness and understanding of ML/TF risks; d) Monitoring new and emerging risks; and e) Strengthening law enforcement efforts and intelligence capability to tackle domestic and international ML/TF, and enhance restraint and confiscation of the proceeds of crime. 9

HKMA’s AML/CFT Policy  HKMA’s AML/CFT policy flows from the Government’s policy and is founded on an RBA  HKMA’s AML/CFT policy objectives:

• Addressing ML/TF risks in banking sector
• Disrupting ML/TF activities through identification and reporting by AIs on the basis of a fully collaborative relationship with law enforcement agencies
• Raising effectiveness and efficiency of AIs’ AML/CFT Systems
• Avoiding undue barriers for legitimate businesses and ordinary citizens accessing banking services
• Assisting AIs to focus resources and effort more effectively and efficiently to reduce unnecessary compliance burden  Policy recognises the important role of AIs 10

HKMA’s AML/CFT Policy HKMA seeks to:  Meet international standards;  Embed the RBA through targeted support to deliver a stronger territory-wide response;  Support Government and law enforcement efforts to combat ML/TF activities;  Dovetail with the AML/CFT efforts of other agencies, both in Hong Kong and internationally, through cooperation with other financial regulators and law enforcement agencies as well as active participation in the FATF, APG and other international bodies; and  Raise awareness and build AML/CFT capacity in the banking sector by providing guidance and promoting training and good practices. 11

HKMA’s AML/CFT Policy  HKMA policy and supervisory approach set out in a new Supervisory Policy Manual  Circulated for consultation on 8 June 2018  Supersedes an earlier circular in 2006  To be read in conjunction with the AML Guideline  Intention: not to replace or overlap with the AML Guideline or to impose new requirements 12

Major Predicate Offences 13 Breakdown of 1,621 identified predicate offences associated with 1,908 ML cases in 2011 - 2015 Source: Figure 4.1 of Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report

Relevance for AIs 14 Vulnerability level, threat level and overall ML risks of financial sectors Source: Figure 5.1 of Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report

Key results for the banking sector Main threats  Fraud, tax evasion, corruption, sanctions evasion  Threats arise from domestic and, to a greater extent, external activities 15 Relevance for AIs

Key results for the banking sector Vulnerabilities  ML/TF vulnerabilities exist in various segments and banking products / services  Private banking, trade finance, international funds transfer and retail and corporate banking 16 Relevance for AIs

Expectations Institutional Risk Assessment (IRA)  No assumption of “replicating the Risk Assessment results” in conducting AIs’ own IRA: – a “high” ML risk level for the banking sector does not mean each AI’s IRA result must also be “high”  AIs should take into account the main threats and vulnerable areas of business identified in the Risk Assessment  AIs should study the Risk Assessment Report carefully, consider relevant insights and implications, review and update IRA according to your business model 17

Areas of Work HKMA work  Continue to support the industry in understanding ML/TF risk  Encourage better application of the RBA  Support public-private partnership, especially in information / intelligence sharing: FMLIT, roundtables 18

Areas of Further Work 19 Sanctions compliance Reduce compliance burden Public – private partnership Innovation and use of technology Regulatory cooperation Strengthening ML/TF risk understanding Risk￾Based Approach

Hong Kong’s Mutual Evaluation (ME)  Assess technical compliance with the FATF Standards and level of effectiveness of AML/CFT systems  H2/2018 to H1/2019 (last ME 2007 – 2008)  Work with Government and other agencies in preparation including – published Hong Kong’s ML/TF Risk Assessment Report in April – Update of information on technical compliance and effectiveness – Preparatory work for the on-site visit of the assessment team 20

Hong Kong’s ME – Banking Sector  Expected to be a major focus given the size and importance in Hong Kong’s economy  HKMA continues to accord a high priority to AML/CFT work – Work closely with all relevant stakeholders, domestically and internationally, to develop and provide responses that are agile and adaptable – Recognise innovation and making the best use of technology – Ensure response always relates to effectiveness 21

Hong Kong’s ME – On-site Visit  October to November 2018 – Process has already started  Assessors will meet with representatives of banking sector – To assess the effectiveness and discuss risks – Not an investigation nor an inspection of individual private sector entities – Briefings will be arranged for selected representatives 22

Immediate Outcome 4 – FIs and DNFBPs adequately apply AML/CFT preventive measures commensurate with their risks, and report suspicious transactions  How well do FIs and DNFBPs – Understand their risks and obligations and apply mitigation measures commensurate with these risks? – Apply CDD and record keeping measures? – Apply the enhanced or specific measures for (a) PEPs, (b) correspondent banking, (c) new technologies, (d) wire transfers rules, (e) targeted financial sanctions relating to TF and (f) higher risk countries identified by the FATF? 23

Q&A 24