FATF mutual evaluation of Hong Kong – time to check your controls

1 October 2019

Bovill - Marking your own homework

Hong Kong is the first APAC jurisdiction to come out of a FATF evaluation ‘overall compliant’ for anti-money laundering and countering the financing of terrorism. But the recent review did pinpoint areas where further work is required. With this in mind, and following a recent circular from the SFC, now is a good time to review your AML and CFT measures. 

What is the FATF mutual evaluation?

The Financial Action Task Force (FATF) is responsible for setting international standards on anti-money laundering and countering the financing of terrorism (AML/CFT). The FATF conducts strict mutual evaluations on its jurisdiction members – in other words, a peer review where members from different countries assess another country. A mutual evaluation report (MER) is published at the end of the assessment which provides an analysis of the assessed country’s AML/CFT system and recommendations to the country.

How did Hong Kong do?

The FAFT has published the MER of Hong Kong on 4 September 2019, and the results of the assessment are positive. Hong Kong’s AML/CFT system was assessed to be effective and compliant overall. Hong Kong is one of the five (out of 23 assessed) jurisdictions rated overall compliant by the FATF, and also the first jurisdiction in APAC with the overall compliant result.

In short, Hong Kong has proved and demonstrated that it has an effective AML/CFT framework against the FATF 40 Recommendations.

However, Hong Kong was only found partially compliant with the following areas of the FATF 40 Recommendations:

Recommendation 12 Politically exposed persons (PEPs)
Recommendation 22 Designated non-financial Businesses and Professions (DNFBPs): Customer due diligence (CDD)
Recommendation 25 Transparency and beneficial ownership of legal persons
Recommendation 28 Regulation and supervision of DNFBPs

What has the SFC highlighted further to the MER?

Even with an overall compliant result, the MER pinpoints specific significant improvements that are needed in other areas. Further to the publication of the MER, the SFC has issued a circular that highlights a few focus areas from the MER, which we have summarised below.

The MER noted the following inadequacies among financial institutions

  1. Understanding of ML/TF risks in relation to cross-border financial flows, politically exposed persons (PEP), non-resident customers and applying risk mitigating measures that are commensurate with the ML/TF risks
  2. Implementation of CDD requirements (especially the risks posed by non-resident customers), and EDD measures for foreign PEPs. Improvements needed for smaller firms and those in the MSO and moneylender sectors, in particular, in relation to their targeted financial sanctions programmes. This is because they tended to be incomplete, inaccurate, or over-reliant on manual processes which are prone to error.
  3. Inadequate suspicious transaction monitoring and reporting in the non-banking sector

Priority actions you should consider

With the MER and SFC circular in relation to the FATF evaluation published, we suggest licensed corporations and DNFBPs to prioritise the review and implementation of appropriate measures and procedures in relation to AML/CFT.

Bovill has in-depth experience and the technical expertise with a practical mindset to help you with what the regulator expects from you:

  • Review and/or implement effective risk mitigating measures that can adequately manage ML/TF risks
  • Regular review of AML/CFT policies, procedures and controls, and rectify inadequacies identified from the review immediately
  • Review and strengthen systems and processes for identifying and reporting of suspicious transactions to the Joint Financial Intelligence Unit
  • Provide a thorough internal controls, policies and procedures review on your AML/CFT system and related processes

Let us know how we can help.

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