Hong Kong SFC AML/CFT Guideline of 2021

The Hong Kong Securities and Futures Commission published its proposed amendments of Guideline on Anti-Money Laundering and Counter-Financing Terrorism (AML/FCT) for licensed corporations last September 2021. Collectively known as Consultation Conclusions, the report is an in-depth analysis of the feedbacks to the Consultation as well as final changes to the AML/FCT Guideline. This however does not include requirements of cross-border relationships which are expected to take into effect on the 30th of March 2022 following a six-month transition period.

This serves as a comprehensive update that provides a 360-degree view of SFC’s amendment to the AML/CFT Guideline, highlighting key pointers as discussed in the Consultation Conclusions/

Comprehensive Look on the Hong Kong SFC Proposed Amendments

Proposed changes of the AML/CFT Guideline aims to complement the Financial Action Task Force’s (FATF) standards as showcased by the Guidance for a Risk-Based Approach for the Securities Sector published in October 2018. Further, it provides invaluable guidance to facilitate the smooth implementation of AML/CFT measures by  high-risk financial institutions (FIs).

The crucial proposed amendments are listed down below:

  • Institutional Risk Assessment

FIs are mandated to create and execute the necessary AML and CFT controls, policies, and procedures relating to the type of products and services offered, customer types, geographical locations, and other elements as defined in the AML/CFT Guideline.

FIs are required to implement institutional risk assessment at least once every two years or more frequently depending on events that may have a negative effect on an FI’s business and risk exposure.

FIs with overseas branches and subsidiaries need to undergo a company-wide risk assessment that will help FIs conduct effective nationwide AML/CFT programs.

  • Risk Indicators for Institutional and Customer Risk Assessment

During an institutional risk assessment, FIs need to carefully assess their AML/CFT risks in relation to customers and business partnerships.

To identify the level of risk or exposure, an FI should take a holistic approach in evaluating various factors such as limitations to country risk, customer risk, transaction risks, as well as risks associated with the delivery and distribution to customers.

Due  Diligence for Cross-Border Correspondent Engagements

While the proposed amendments were supported by majority of FIs, there are also recommendations made in relation to cross-border correspondent relationships.

The Hong Kong SFC ensured greater flexibility and clarity in fulfilling the requirements to allow cross-border correspondent relationships with affiliated entities.

FIs are encouraged to apply more work in risk mitigation measures by evaluating whether their respective policies and AMT/CFT program satisfy FATF standards. Since this amendment is relatively new, FIs are given a six-month transition to create new rules and processes for their pre-existing business relationships.

  • Streamlined and Improved Measures Using the Risk-Based Approach

For low-risk customers, the SFC has imposed limited customer due diligence measures (CDD) to create and follow. It was concluded by the SFC that these types of customers should reduce the frequency of review of their respective CDD records as well as the degree of monitoring of transactions based on a pre—determined and reasonable financial threshold. Consequently, the Hong Kong SFC is mandated to enhance CDD measures for high-risk customers and politically involved individuals.

  • Red Flag Indicators for Suspicious Engagements and Transactions

FIs are required to take additional steps to seek additional information to determine whether highly suspicious transactions are updated with an FIs knowledge of the customers.

The amended AML/CFT Guideline features a list of clear illustrative indicators of suspicious transactions and activities. This helps FIs know for certain if their organization is grounds for suspicion about important or high value customers.

  • Third Party Deposits and Payments

Using illustrative indicators of suspicious transactions and activities, FIs are expected to take the appropriate measures to reduce AML/CFT risks that are related to transactions with third-party deposits and payments.

Additionally, FIs should only accept third-party transactions under rare cases and when they are aligned a customer’s profile and standard commercial operations. Before an FI can process deposits and payments from a third-party firm, they should first guarantee that the right set of policies and procedures as well due diligence are in place.

It can be tedious to complete due diligence prior to accepting third-party deposits and payments. With the amendments, FIs are only allowed to delay these activities in special cases where there are no notable AML and CFT risks, or when an FI has established a reliable risk management rules and regulations.

  • Person Acting on Behalf of Customers

In cases wherein an individual is acting as a customer representative, FIs are highly advised to analyse the AML/CFT risks of that person and determine whether they are truly authorised to conduct such activities for customers.

Effective management of AML/CFT risks should receive great attention among financial regulators. With the proposed amendments., we can clearly see that the SFC is updated and compliant with this security trend.

For additional information on the AML/CFT Guideline, here are additional documents about Key observations and good practices in the use of external information and data in Key observations and good practices in the use of external information and data in Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) systems and Supporting the Use of New Technologies for AML/CFT: Suggested Actions for the Hong Kong Banking Sector .

As a reliable and secure business, Damalion aims to help corporations maintain compliance based on the amendments concluded by the SFC. If you need help in this area of business management, our team of compliance officers will be more than happy to assist. Contact us to schedule a meeting today.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.