Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report

---

Our Ref.: B10/1C
B1/15C
2 May 2018
The Chief Executive
All Authorized Institutions
Dear Sir/Madam,
Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report (Report) I am writing to draw your attention to the captioned Report published by the Government on 30 April 2018. The Report includes a policy statement of Hong Kong’s anti-money laundering and counter-financing of terrorism (AML/CFT) regime and covers results of a jurisdiction-wide assessment of the money laundering and terrorist financing (ML/TF) risks and other related threats to Hong Kong, including those which are relevant to the banking sector. The Report can be found at https://www.fstb.gov.hk/fsb/aml/en/risk-assessment.htm . The assessment concludes that our banking sector faces high ML/TF risks, which is consistent with the situation in other major financial centres. The more prominent threats to banks include fraud, tax evasion, corruption and sanctions evasion, and these threats arise from domestic activities and, to a greater extent, external activities due to Hong Kong’s status as an international financial centre. ML/TF vulnerabilities exist in various segments and banking products/services, including private banking, trade finance, international funds transfer, and retail and corporate banking. In this respect, the HKMA has been, and will continue to be, working closely with other competent authorities as well as Authorized Institutions (AIs) to make significant efforts to address the ML/TF risks in the banking sector. These efforts1 include, among others, strengthening the understanding of ML/TF threats; providing stronger encouragement for AIs to adopt a risk-based approach; strengthening the public-private partnership, particularly for intelligence sharing; strengthening cooperation with regulatory authorities in other jurisdictions; supporting innovation by AIs and exploring the greater use of technology in supervisory work. 1 Please refer to, for example, circular on “De-risking and Financial Inclusion” dated 8 September 2016, circular on “Fintech Supervisory Sandbox” and press release on “Fintech Supervisory Chatroom” dated 6 September 2016 and 28 November 2017 respectively, and press release on “Fraud and Money Laundering Intelligence Taskforce launched” dated 26 May 2017.

---

AIs should study the Report carefully, consider the relevant insights and implications, and review and update, where appropriate, their own institutional ML/TF risk assessments accordingly. Implementing an approach to AML/CFT work which is risk-based2 and proportionate relies upon understanding and communicating the ML/TF threats, vulnerabilities and risks that we face. To that end, the HKMA’s dedicated AML/CFT webpage consolidates all relevant guidance on AML/CFT (http://www.hkma.gov.hk/eng/key-functions/banking-stability/aml-cft.shtml), including information on ML/TF risks, expectations on risk assessment and industry practice on risk-mitigating measures. The Report reinforces various efforts and should be used as an additional resource by the senior management and relevant staff of AIs for ongoing AML/CFT work. The HKMA will organise an industry seminar on 11 June 2018 to present and discuss the findings of the Report as they relate to the banking sector. AIs should nominate senior representatives, who may be Money Laundering Reporting Officers, Heads of Legal and Compliance or other managing staff with the responsibility for institutional ML/TF risk assessments and implementation of AML/CFT systems, for the seminar. Further details and registration form for the seminar are attached. If you have any questions regarding this letter, please contact Ms Idy Chan at 2878 1714 or aml@hkma.iclnet.hk. Yours sincerely, Carmen Chu

Executive Director (Enforcement and AML)
cc. FSTB (Attn.: Ms Eureka Cheung)
Encl.
2 Guiding and monitoring of AIs’ proper application of a risk-based approach in AML/CFT work continues to be on top of the HKMA’s work priorities for 2018. For details, please refer to the presentation “2017 Year-End Review and Priorities for 2018” on 1 February 2018 http://www.hkma.gov.hk/media/eng/doc/key-information/speeches/s20180201e1.pdf.

---

Enclosure 1 - Seminar Details

Seminar on Hong Kong Money Laundering and Terrorist Financing

Date:
Time
Venue:
Medium:
Application:
Administration:
Risk Assessment Report
11 June 2018 (Monday)
2:30 p.m. – 4:00 p.m.

(Registration will start at 2:10 p.m.)

Hong Kong Monetary Authority
55/F, Two International Finance Centre
8 Finance Street, Central, Hong Kong
English
Each AI should only submit one registration form. Please return the form to the HKMA by email (using ICLNet) (amlseminar@hkma.iclnet.hk) on or before 28 May 2018. For questions regarding the arrangements for this seminar, please contact Ms Dilys Cheung at 2878 1605. ' Each AI may nominate two representatives for the seminar. ' Unless otherwise advised, you may assume that your representative is admitted to the seminar if the registration form is submitted to the HKMA before the deadline. No separate confirmation will be issued to individual institutions or participants. ' If a registered representative cannot attend the seminar, please inform the HKMA as soon as possible. ' Please proceed to the Registration Desk located at the G/F of Two International Finance Centre. For security reasons, participants may need to present a photo-bearing identification document and badges will be distributed to each participant for entering the premise.

---

Enclosure 2 - Registration Form

Registration Form for Seminar on Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report Name of AI:
Contact person: Telephone no:
Email:
Nomination:
Name of Representative Title
Note:

1. Registration will start at 2:10 p.m.
2. The personal data supplied will be used solely for the purposes related to the
   captioned seminar, and will be destroyed when no longer required for these purposes.

---

Seminar material - Hong Kong’s Money Laundering /Terrorist Financing (ML/TF) Risk Assessment: Banking Sector

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.

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

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

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

FATF Recommendation 1 – Assessing Risks
& Applying a Risk-based Approach (RBA)
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

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.

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.

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

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.

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  To be read in conjunction with the AML Guideline  Intention: not to replace or overlap with the AML Guideline or to impose new requirements

Major Predicate Offences
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
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 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 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

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

Areas of Further Work
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

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

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

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?

Q&A