FATF

Financial Action Task Force on Money Laundering (FATF)

Financial Action Task Force on Money Laundering (FATF) was established by the G-7 Summit held in Paris in July 1989. It aims to specialize in researching the consequence of money laundering, preventing and combating money laundering as well as coordinating international actions against money laundering. Shortly after its establishment, the Task Force, being one of the most important organizations against money laundering, issued a report containing a set of Forty Recommendations which provides a comprehensive plan of action needed to fight against money laundering.

The FATF currently comprises 37 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe: Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Denmark ,European Commission, Finland, France, Germany, Greece, Gulf Co-operation Council, Hong Kong (China), Iceland, India, Ireland, Israel, Italy, Japan, Republic of Korea, Luxembourg, Malaysia, Mexico, Kingdom of Netherlands, New Zealand, Norway, Portugal, Russian Federation, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Kingdom and United States.

Hong Kong has been an active member of the FATF since 1990. Over the years, Hong Kong has put in place effective legal and financial systems to tackle money laundering, and has implemented most of the FATF's 1996 Forty Recommendations - the international standards and practices in combating money laundering designed for universal application - either by legislation or through guidelines issued by the financial regulators.

Hong Kong is intensely involved in all the important forums of the FATF, participating in the work of the Working Group on the Review of the Forty Recommendations, which culminated in the adoption of the revised set of recommendations by the task force at its Berlin Plenary in June 2003. The revised set forms the new international benchmark against which jurisdictions worldwide are assessed on their efforts in the areas of Anti-Money Laundering and Countering Financing of Terrorism.

Revised FATF Recommendations (February 2012) (updated in June 2019) #

High-risk and non-cooperative jurisdictions:
The International Co-operation Review Group (ICRG) of the FATF closely monitors jurisdictions that pose risks to the international financial system. In particular, the FATF called upon its members and urged all jurisdictions to strengthen preventive measures and apply effective counter-measures towards these high risk jurisdictions. The FATF updated its public statement on:

Jurisdictions subject to a FATF call on its members and other jurisdictions to apply counter-measures to protect the international financial system from the on-going and substantial money laundering and terrorist financing (ML/FT) risks emanating from the jurisdictions.
Jurisdictions with strategic AML/CFT deficiencies that have not made sufficient progress in addressing the deficiencies or have not committed to an action plan developed with the FATF to address the deficiencies.

Jurisdictions mentioned in the Public Statement issued in June 2014 can be found on the FATF official website where the FATF call on all jurisdictions to be pay particular attention to the risks posed by these jurisdictions.

Mutual Evaluation Report

2019 Hong Kong, China's measures to combat money laundering and terrorist financing (4 September 2019) (Source：FATF)

Mutual Evaluation

Through the findings of the mutual evaluation conducted by the FATF in 2008, FATF recognized the strengths of Hong Kong’s anti-money laundering regime, but also highlighted inter alia:

The lack of statutory backing for customer due diligence and record keeping requirements;
The lack of regulatory and enforcement power of financial institution regulatory bodies in respect to regulatory compliance;
The lack of appropriate criminal/civil sanctions; and
The absence of an anti-money laundering regulatory regime for remittance agents and money changers.

Follow-up process:
The Financial Services and the Treasury Bureau served as the secretariat of the Central Coordinating Committee, responsible for coordinating suggestions and to provide policy support based on suggestions made in relation to international policies and standards against money laundering/ terrorist financing in Hong Kong.

Five-pronged approach:

Legislation (Financial Services and the Treasury Bureau, Security Bureau and Department of Justice)
Administrative means (Hong Kong Monetary Authority, Office of Commissioner of Insurance and Securities and Futures Commission)
Law enforcement (Hong Kong Police Force, Hong Kong Customs and Excise Department and Hong Kong Independent Commission Against Corruption)
Publicity and Education (Financial Services and the Treasury Bureau, Security Bureau and Hong Kong Police Force)
International Cooperation (Department of Justice and Law Enforcement Agencies)

Legislation:

Anti-Money Laundering & Counter-Terrorist Financing (Financial Institutions) Ord. (AMLO)
To be effective: 2012-04-01
Guiding principles for AMLO:

Conform with FATF standards
Compliance cost minimized
Partnership approach to assist market

Apply to whom:

Authorized institutions (by HKMA)
Licensed corporations (by SFC)
Insurers, insurance agents & brokers (by OCI)
Remittance agents & money changers (by HK Customs)

Latest development:

Mutual Evaluation: According to FATF’s reports, the followings are the extracts regarding the Money Service industry of relevant countries:

Italy (Feb 2016):

The money transfer operators were indicted for transnational criminal association and money laundering, and 18 persons were arrested.
37 entities were sanctioned by a total value of sanctions of EUR 8,412,527 for violating the obligation to file STRs, where 4 of them were money transfer operators.

Malaysia (Sep 2015):

Malaysian supervisors strongly support measures to enhance financial inclusion while strengthening AML/CFT and indicate that the number of reporting institutions that have terminated their relationships with Money Service Businesses (MSBs) is low and confined to some foreign banks. Commercial banks continue to provide banking services to MSB players.
The number of STR submitted by MSBs, which has been classified as high-risk industry, from 2009 to 2013 is 51,798, representing nearly 50% of the sum of all industries.
Money or Value Transfer Services (MVTS) providers in Malaysia are required either to

be approved MSBs under s.11 of the Financial Services Act 2013 (FSA) or s.11 of the Islamic Financial Services Act 2013 (IFSA) to issue designated payment instruments (banking and non-banking institutions);
be approved under s.11 of the FSA or IFSA to issue designated payment instruments and be licensed under s.7 of the Money Services Business Act 2010 (MSBA) for remittance services (non-banking institutions which also carry out remittance services); or
be licensed under s.7 of the MSBA for remittance services (other institutions that carry out a remittance business only).

Australia (Apr 2015):

The channels that were identified as highly vulnerable to ML activity were the banking sector, money remitters (both licensed and underground operators), gatekeepers, and the abuse of corporate vehicles. The risks are exacerbated by launderers often using false identity documents.
Among the reporting entities in high-risk corporate groups, 15 out of 5,837 are foreign exchange providers.

Risk Assessment: With reference to FATF’s Recommendation 32, countries should ensure that their competent authorities can review the effectiveness of their systems to combat money laundering and terrorist financing systems by maintaining comprehensive statistics on matters relevant to the effectiveness and efficiency of such systems. This should include statistics on the STR received and disseminated; on money laundering and terrorist financing investigations, prosecutions and convictions; on property frozen, seized and confiscated; and on mutual legal assistance or other international requests for co-operation. Therefore, the HKC&ED has published the Risk Assessment Questionnaire on 29th July 2015.

On-site visit: At the Anti-Money Laundering Seminar held by the Narcotics Division - Security Bureau, the Joint Financial Intelligence Unit (JFIU) and the Hong Kong Institute of Certified Public Accountants for Designated Non-Financial Businesses and Professions (DNFBPs), the revised version of the FATF Recommendations issued in February 2012 was discussed. Major requirements against the DNFBPs were also mentioned. Besides casino, requirements relating to the other 5 DNFBPs including dealers of precious stones and metals, estate agents, lawyers, accountants and trust and company service providers are all applicable in the Hong Kong. Licensed money changers who have customers in the above stated industries should provide adequate cooperation. The seminar also touched upon the purpose and requirement for risk assessment against money laundering and terrorist financing, of which includes:

Balance measures for combatting money laundering and terrorist financing against relevant risks
Allocate resources more effectively

"Identify, assess and understand" their money laundering/terrorists financing risks they face
Designated "an authority or mechanism to coordinate actions to assess risks"
DNFBPs are required to identify, assess and understand their money laundering/terrorists financing risks
FATF will conduct on-site visit of the 4th round of mutual evaluation in 2018 Q4. As part of Hong Kong's financial industry, all licensed money service operators should fully cooperation with FATF's evaluation on Hong Kong, especially on the effectively of risk assessment in relation to combatting anti-money laundering and terrorist-financing.

Suggestion on cross-boundary transportation of currency: As a member of the FATF, Hong Kong is committed to implement the international AML and CFT standards promulgated by FATF. Whilst the Financial Services and the Treasury Bureau is the overall coordinator in relation to AML/CFT policies, the Security Bureau is responsible for implementing one of FATF's Recommendations in relation to the establishment, by statute, of a system to detect the physical cross-boundary transportation of currency and bearer negotiable instruments. The Hong Hong government aims to confirm the implementation plan with reference to the timetable, and will consult the Security Panel and launch a public consultation in due course.
Details on cross-boundary transportation of currency: Since there is currently no regulation on cross-border cash in Hong Kong, FATF has made a series of recommendations to Hong Kong. Some of the recommendations include:

To implement a declaration or disclosure system to detect, seize or confiscate the physical cross-border transportation of currency or bearer negotiable instruments ("BNI") that are related to money laundering or terrorist-financing.
It is an offence for making a false/misleading declaration or disclosure be made an offence within this declaration or disclosure system.
HKC&ED to develop a methodology for inspecting passengers in addition to the targeted searches.
To establish separate laws to enable HKC&ED or the police to specifically stop and seize currency or BNI where there is a suspicion of money laundering or terrorist-financing.
Hong Kong authorities to establish a systematic and close working relationship with authorities from Mainland China in an effort to deal with the risks associated with cross-border movement of currency and BNI.
Relevant authorities to improve the information collected and analysed with respect to cross-border movement of currency/BNI.

Hong Kong Police in preparation for the 4th round of Mutual Evaluation: In order to strengthen the combating of money-laundering cases, the Financial Investigations Division of Narcotics Bureau (FINB) and the Joint Financial Intelligence Unit expanded 10% of their manpower. An additional members were recruited in April this year leading to a total of 117 members in the teams. FINB consists of 69 members, of which 5 of them have been allocated to follow up with the 40 recommendations raised by the Financial Action Task Force (FATF) and to prepare for the 4th round of mutual assessment by the FATF on Hong Kong in 2016. According to the FATF 15th recommendation, all countries are called to pay special attention to money laundering threats that may arise from new or developing technologies that might favour anonymity (e.g. Bitcoin), and take measures, if needed, to prevent their use in money laundering schemes. In particular, financial institutions should have policies and procedures in place to address any specific risks associated with non-face to face business relationships and transactions.
Hong Kong removed from "Regular Follow-up Process": During the Plenary Meeting held in October 2010, the FATF recognised that Hong Kong had made significant progress in the following areas and removed Hong Kong from regular follow-up process:

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) entered into force on 1 April 2012
Completed other legislative and administrative steps
Yet there are still room of improvement for the anti-money laundering and counter-terrorist financing systems in Hong Kong

Recommendations on DNFBPs: Recommendations related to DNFBPs have increased in rating from "Non-Compliant" to "Partial Compliant":

Undertook a number of initiatives to raise awareness of the DNFBP sector on AML/CFT issues
Voluntary initiatives launched taken to encourage DNFBP sector to comply with basic preventive ML/FT measures
Further development is required to establishing suitable regulatory structure
Ensure that non-complaint DNFBPs are sanctioned

More on this:

Basel Committee on Banking Supervision's Paper on "Sound management of risks related to money laundering and financing of terrorism" (Source: HKMA)

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