Supervisory Measures Following Seminars on Anti-Money Laundering Annex A

High-Level Seminar on Anti-Money Laundering Norman T.L. Chan Chief Executive Hong Kong Monetary Authority 12 April 2013

2 • Credit Intermediation and Maturity Transformation • Payment • Wealth Management Key Functions of Modern Banking Capability needs constant upgrading to protect franchise

3 Continued growth of bank deposits, loans and assets Hong Kong as an International Financial Centre (1) Source: Hong Kong Monetary Authority 0 2 4 6 8 10 12 14 16 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (HKD trillion) Total loans and advances Total deposits Total assets HK$6.0 trn HK$14.9 trn

4 Hong Kong as an International Financial Centre (2) Growing payment activities in Hong Kong RTGS system average daily transaction value Source: Hong Kong Monetary Authority and staff calculation HKD USD HKD USD RMB HKD USD RMB 2003 13,801 4,058 -- 2012 23,054 15,744 4,600 RTGS system average daily transaction volume 2003 2012 USD 5 bn HKD 353 bn HKD 504 bn USD 17 bn RMB 214 bn

5 • Loss in cost competitiveness • Erosion of professional competence and market integrity • Inadequate or inappropriate supervision • Failure in AML work Potential Threats to Hong Kong’s Future IFC Status

6 • Compliance with international standards and obligations to combat money laundering • Dire consequences for AML failures, both for the bank concerned and HK as a whole • Allocation of adequate resources by banks, regulators and law enforcement agents • Ownership by all stakeholders, including commitment of the Boards and senior management of Banks, to strong AML culture and controls A Robust AML Regime is Crucial for Hong Kong as an IFC

Review of banks’ anti-money laundering systems and controls Stewart McGlynn Anti-Money Laundering Banking Supervision Department Hong Kong Monetary Authority 12 April 2013

2 Disclaimer  This presentation provides guidance to authorized institutions (“AIs”) on issues relating to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (“AMLO”) and the AMLO Guideline. 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.

3 Regulatory Regime  Mature Anti-Money Laundering (AML) Regime • HKMA Guideline since 1993, STR requirement since 1989/95  Anti-Money Laundering and Counter-Terrorist Financing Ord. (AMLO) commenced on 1 April 2012  14 x AML Examinations after 1 April 2012 • 5 x In-Depth ‘Tier 2’ • 9 x Thematic examination - Transaction Monitoring (TM) & Suspicious Transaction Reporting (STR)

4 ML/TF Risk Management  Senior Management Oversight  Policies and Procedures  Management of AML/CFT Function  Internal Audit and Compliance Reviews  Correspondent Banking  Transaction Screening  Transaction Monitoring  Suspicious Transaction Reporting

5 Senior Management Oversight  Expectation is senior management should take clear responsibility for managing ML risks • There should be evidence of active engagement by senior management in the bank’s approach to managing ML risks  AMLO requires a FI to take all reasonable measures to ensure that proper safeguards are taken to prevent a contravention and to mitigate ML and TF risks (s.23)

6 Senior Management Oversight  Participation by management at sufficiently high level is needed  Senior management should receive informative and objective information sufficient to discharge AML obligations  Must be strategy or evidence of self improvement • Coordination across the bank on AML required • AML issues must be dealt with on a proactive basis  Senior Management should ensure AML department has sufficient resources

7 Policies and Procedures Must have in place up-to-date P&P that are appropriate to its business. These P&P must be readily accessible, effective and understood by all relevant staff. We expect banks to check whether P&P are applied consistently and effectively

8 Money Laundering Reporting Officer  the MLRO should have sufficient resources, experience, access and seniority to be effective  the MLRO should fully understand the rationale of policies they were overseeing  The MLRO should have sufficient awareness and oversight of the highest risk relationships Money Laundering Reporting Officers (MLRO) are responsible for oversight of the banks compliance with its AML/CFT obligations and should act as a central reference point for reporting suspicious transactions. For example:

9 Money Laundering Reporting Officer Our Requirements:  MLRO should not simply be that of a passive recipient of ad hoc reports of suspicious transactions  MLRO should play an active role in the identification and reporting of suspicious transactions  This may also involve regular review of exception reports or large or irregular transaction reports as well as ad hoc reports made by staff

10 Internal Audit & Compliance Reviews  Banks approach to reviews of effectiveness of AML systems must be comprehensive  Scope of review must address Bank’s risks  Findings of recent IA and compliance reviews on AML controls must drive change • Reports must be of sufficient quality • Should ensure the information is discussed at sufficiently senior level  Implementation of remedial measures must be consistent

11 Risks of Correspondent Banking  The correspondent AI often has no direct relationship with the underlying parties to a transaction  Banks often have limited information regarding the nature and purpose of the underlying transactions  Correspondent banking is therefore regarded as high￾risk from a ML/TF perspective  Special due diligence requirements for correspondent banking relationships apply

12  Are the banks transaction monitoring systems adequate, given their business activities and size?  How does the bank ensure systematic investigations into unusual transactions and potential STRs? Transaction Monitoring

13 Transaction Monitoring  Depending on nature and scale of the bank, automated TM systems may be important for effective AML controls  Must ensure sufficiently detailed system review  Should have a clear understanding of what the system could deliver / limitations • TM can only supplement, not replace human element  Responsibilities for reviewing, investigating and reporting alerts must be clearly allocated

14 Suspicious Transaction Reports  To what extent does the bank understand and carry out, their detection and reporting obligations on the suspected proceeds of crime?

15 Suspicious Transaction Reports  STR reporting is not only a legal necessity, rather it is a matter of real concern for banks  All internal reports must be subject to meaningful analysis to determine whether disclosure is required  Processes for dealing with repeat internal / external STRs must be sufficiently robust to protect the bank

16 Opportunity for Intervention Customer On Boarding Ongoing Monitoring STR and Post Reporting Actions Robust CDD Ongoing Monitoring STR and Post Reporting Actions Protect the institution from further ML risks

17 ML/TF Risk Management  Senior management must demonstrate leadership on AML  Policy and procedures must reflect that leadership  AML function needs experienced people and adequate resources  AML responsibility lies with all staff but CO/MLRO play a central role  Effectiveness of controls must be regularly reviewed  ML risks should be understood and mitigated  Banks should demonstrate willingness to exit where there are unacceptable ML risks

18 Stewart McGlynn Tel. 2878 1095 smcglynn@hkma.gov.hk

Supervisory Response of the HKMA Arthur Yuen Deputy Chief Executive Hong Kong Monetary Authority 12 April 2013

2 Well-focused Supervision  Our programme of in-depth AML examinations will continue and at the same time be strengthened  Thematic AML examinations will remain a key part of our supervisory approach  A thematic review of the private banking sector will begin in the coming weeks  AML examinations will also test banks’ controls and vigilance to combat the risks of tax evasion

3 What to expect?  We intend to be more proactive, adopting a more forward looking approach  We will review the frequency, intensity and scope of our on-site and off-site examinations  We are significantly strengthening the resources dedicated to AML supervision and are reviewing our follow-up processes  We will be prepared to take early intervention to tackle root cause rather than waiting for risks to accumulate

4 Key Questions  Is the tone from the top clear in your bank?  Have you discharged your responsibility to ensure that the AML function is equipped with sufficient resources to perform effectively?  Are measures in place to ensure that your AML programme is systematic?  Is your AML programme subject to regular review?  Have you taken all reasonable measures to mitigate ML risks?

5 Hong Kong must have a robust AML regime  International standards and obligations on AML must be met  Effective AML measures in the banking sector are essential as it acts as a gatekeeper  Resources afforded to AML work must be adequate  The obligation to implement the AML rules fully and in good faith must always come before business interests  HKMA will be ready to take tougher actions, including the use of our powers under AMLO. Also very important for banks to raise senior management attention in AML matters

~ Thank You ~