Money Laundering (“ML”) means turning the proceeds of a crime into legitimate and useable funds, a process of “cleaning up” the money.
Three stages of ML:
- Placement: Physical disposal of cash proceeds derived from illegal activities
- Layering: Separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the source of the money, subvert the audit trail
- Integration: Creating the impression of apparent legitimacy to criminally derived wealth.
When the layering transaction process is successful, the integration process effectively returns the laundered money to the general financial system, giving the impression that the money comes from or involve legitimate business activities.
ML means an act intended to have the effect of making any property:
- that is the proceeds obtained from the commission of an indictable offence under the laws of Hong Kong, or of any conduct which if it had occurred in Hong Kong would constitute an indictable offence under the laws of Hong Kong;
- that in whole or in part, directly or indirectly, represents such proceeds, not to appear to be or so represent such proceeds.
Terrorist Financing (“TF”) means money may come from legitimate or criminal sources to finance any forms of terrorist related actions. Examples of terrorist financing: drug dealing, smuggling weapons etc.
- The provision or collection, by any means, directly or indirectly, of any property: (i) with the intention that the property be used; or (ii) knowing that the property will be used, in whole or in part, to commit one or more terrorist acts (whether or not the property is actually so used);
- The making available of any property or financial (or related) services, by any means, directly or indirectly, to or for the benefit of a person knowing that, or being reckless as to whether, the person is a terrorist or terrorist associate;
- The collection of property or solicitation of financial (or related) services, by any means, directly or indirectly, for the benefit of a person knowing that, or being reckless as to whether, the person is a terrorist or terrorist associate.
- Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”) is a centralised guidance to licensed corporations, banks, other applicable professionals such as lawyers, accountants
- Adoption of the “Risk-Based Approach”
- Includes Know Your Customer (“KYC”) , identification and verification, customer risk assessment, customer due diligence (“CDD”), transaction monitoring, periodic / trigger reviews, sanctions, politically exposed person screening etc.
- Other Guidance and Circulars : Banks & Store Value Facility (“SVF”, issued by HKMA), Licensed Corporations (“LCs”, Issued by SFC), and Insurance Institutions (Issued by the IA) to alert these institutions what procedures and controls are expected to be in place in order to combat ML and TF
- In fact, the AMLO comes from the Financial Action Task Force (“FATF”), which was established in 1989 and is a global international organization.
- Its purpose is to formulate a series of international standards for combating money laundering, terrorist financing and arms proliferation financing, and to promote the effective implementation of relevant legal, regulatory and operational measures. It is hoped that countries can establish a healthy financial system and ensure a fair and competitive environment.
- To ensure full and effective implementation of its standards around the world, the organization conducts assessments across jurisdictions to monitor compliance and takes stringent follow-up measures after assessments.
FATF:
- Objectives are to set standards and promote effective implementation of legal, regulatory and operational measures for combating ML, TF and other related threats to the integrity of the international financial system.
- Reviews ML and TF techniques and continuously strengthens its standards to address new risks, such as the regulation of virtual assets, which have spread as cryptocurrencies gain popularity.
- Developed FATF Recommendations, or FATF Standards, which ensure a co-ordinated global response to prevent organised crime, corruption and terrorism.
Of course, There is no exception in Hong Kong. This assessment was carried out in 2018, and in order to meet the standard, anti-money laundering legislation was already in place in 2012. Among them, financial institutions and non-financial institutions are designated to impose legal requirements on customer due diligence and record keeping.
- In addition to authorizing agencies to supervise, these regulations also establish a licensing system for money service operators and trust or company service providers.
- Under this Ordinance, the specified relevant authorities, namely the Hong Kong Monetary Authority, the Insurance Authority, the Securities and Futures Commission, the Customs and Excise Department, the Law Society of Hong Kong, the Hong Kong Institute of Certified Public Accountants, the Estate Agents Authority and the Companies Registry are required to provide their respective The regulated sector publishes guidelines.
- Guidelines are very important. They are used to help the industry to formulate internal control measures for each organization, to provide some practical guidelines to assist their senior management, etc., and to implement relevant operational areas according to individual circumstances.
- Whether it is policies, procedures, and control measures to comply with relevant statutory and regulatory requirements for combating money laundering and terrorist financing, the relevance and usability of these guidelines will be reviewed regularly.
Financial sanctions refer to the prohibition of providing or dealing with any economic assets (any funds or other financial assets or economic resources) to:
- A person or entity designated by the United Nations Security Council;
- A person or entity representing under (1) above, or directed, owned, or controlled by that person or entity.
Financial sanctions include: freezing measures, bans on investment, loans or insurance in certain sectors or financing the import or export of specific goods.
- Authorised Institutes should maintain a database of individuals and entities designated under the United Nations Sanctions Ordinance (UNSO) and United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) for customer and transaction screening purposes.
- Institutions need to know who they enter into business with, and be very clear with the sanctioned individuals/entities, which requires the institutions to keep their sanction lists updated to avoid missing out any newly sanctioned individuals/entities/countries
- The HKMA expects all new designations to be screened against an AI’s customer list as soon as practicable whenever there are updates. Any transactions or relations with any designated individual or entity should be reported to the Joint Financial Intelligence Unit.
- A Politically Exposed Persons (“PEP”) is defined in the AMLO as: an individual who is or has been entrusted with a prominent public function in a place outside the People’s Republic of China includes head of government, senior politician, senior government, judicial or military official etc ;
- Also expand to the close family members of such PEP, i.e. his/her spouse, and children
- Companies are required to assess risk, and apply appropriate mitigating controls to PEPs/ former PEPs, that are typically of senior positions, with certain level of authority. PEP will have higher risk of involved in bribery and corruption by virtue of their standing and influence in default compare to other individuals.
- PEPs may use their position to get involved with corrupt practices. For example: bribery, outright theft of assets or funds from political parties and unions, and tax fraud.
Politicians may use their power and influence to gain personal or family or close relationships during or after their term in office. Many times, because of his power, he can use family members or close relatives as a cover to misappropriate funds from abuse of power. They may abuse their power and influence to control some institutions for personal gain and damage to the reputation of many institutions.
Politicians have the ability to use their positions to engage in corrupt practices such as bribery, outright theft of political party and union assets or funds, and tax fraud. So in order to have controls on politicians, many institutions have to set up databases to help screen to see if there are such politicians, or even if they are on the financial sanctions list. In the case of high-risk politicians, controls are in place and some of the more important customer due diligence is done.
How can institutions respond?
In fact, they have a database of many political figures, and a list of designated individuals and entities under the United Nations Sanctions Ordinance and the United Nations (Anti-Terrorism Measures) Ordinance, to screen customers and transactions. It helps identifying politicians and those on sanctions lists when agencies conduct screenings. Each time the list is updated, the institution needs to complete the update as soon as possible, and if the authorized institution has any past or present transactions or relationships with any sanctioned individuals or entities, it should immediately report to the Joint Financial Intelligence Unit.
Actually, we have been experiencing a great payment change in the past 5-10 years. With more payment methods and remittance channels rolling out year by year, coupled with the rise of virtual currencies, online fraud and money-laundering behaviour are also emerging endlessly. Naturally, relevant regulations and controls need to be tightened to ensure the safety of transactions by the public.In particular, small and medium-sized enterprises may lack expertise in this area and therefore may fall into a trap without knowing it. With that in mind, when regulations are tightened in the future, it is important to educate the public and also to raise merchants’ awareness on AML issues.
Payment Asia, being a payment service provider, is committed to complying with AML regulatory requirements. For example, in processing merchant applications, our electronic application platform would mandatorily require applicants to upload specific documents and information, and then we would use OCR Technology and World Check, an internationally recognized screening tool, to improve the speed and accuracy of the approval process.
As an international financial centre, Hong Kong places great importance in safeguarding the integrity and stability of our financial system by implementing an effective anti-money laundering (AML) and counter financing of terrorism (CFT) regime. Without an effective regime to deter and detect the flow of illicit funds in accordance with international standards, it opens the opportunity for criminals and terrorists to run rampant, leading to dire consequences in the entire community.
Hong Kong Monetary Authority (HKMA) is the relevant regulatory body regulating Payment Asia’s business partners such as SVF licensees and other financial institutions. Merchants using Payment Asia’s platform to open merchant accounts are required to go through a CDD & KYC process prior to being onboarded. Subsequent to onboarding, merchants would be subject to ongoing monitoring in two aspects: ongoing CDD and transaction monitoring. Merchants may think that their business information is confidential, but actually, they have the responsibility to continuously demonstrate the legitimacy of their businesses and transactions so that we are able to fulfil compliance requirements.
Recently, there were some online scammers who impersonated real retail chain stores and accepted payment through online transactions. Not only did the consumers not receive the items for which they had paid, but it was also difficult for them to investigate the matter, because everything was conducted online.AML controls are in place so that residents feel safer in the community, knowing that regulated bodies and regulators are doing what they can as gatekeepers to maintain the integrity and stability of our financial system.
The AML regulatory measures have been tightening year by year. Payment tool partners and banks have required our payment technology providers to formulate AML control measures. Therefore, we must formulate and implement internal AML policies, including new merchant account opening, regular review, etc., to regularly assess the risk level of merchants, and to formulate corresponding measures.
Our payment tool partners and banks regularly review our AML policies and implementation to fulfil HKMA’s requirements. If they fail to carry out their duties to continuously monitor business relationships (such as the relationship with Payment Asia), they may be subject to disciplinary actions and pecuniary penalties. Recently a few banks were fined by HKMA due to this failure, and the total amount of the fines were more than HKD40 million. The consequences of non-compliance by regulated institutions can be extremely serious.
As a middleman between merchants and payment tool companies, Payment Asia needs to strike a balance between streamlining the account opening process and AML compliance. It hopes to follow the guidelines of regulatory agencies and improve CDD standards and efficiency, so as to ensure the safety of merchant transactions and ensure merchants don’t fall into the money laundering trap, also to lower the risk of being the subject of investigation.
We provide the payment technology, as well as acquiring services for SVF licensees and credit card companies. Since there is the risk of potential ML/TF activities taking place via our payment platform where various transactions are processed, we are committed to maintaining robust AML/CFT controls to detect and deter ML/TF activities and manage the risks to which it may be exposed. We would also cooperate with regulated bodies to comply with any AML, CFT, sanctions compliance laws and regulations in Hong Kong.
The commonly used e-wallet apps and some payment tool service providers are regulated by the HKMA. As a partner of such service providers, Payment Asia has certain guidelines to follow. The scope of HKMA’s regulation includes the transactions of various payment tools. So, regardless of whether your business scale is large or small, all merchants involved in these transactions will naturally fall under HKMA’s AML controls with no exemption, because there is a chance that customers will use these platforms to launder money.
For Payment Asia, it is very important for us to know our merchants and to take corresponding measures to detect suspicious transactions. Even for small and medium enterprises, we would do our best to prevent and detect potential ML or TF risks. Merchants can regard the KYC and ongoing monitoring as a formal procedure/channel for them to prove that their business is compliant with the law, is reasonable and legitimate. I am sure that after watching our interview, law-abiding merchants would surely be willing to cooperate with us to fulfil such AML requirements.
The use of technology is increasing in tandem with the times. As the type of businesses are changing through the use of new technologies, so is the pace of financial transactions. E-commerce is one of the means of trading goods and services through the Internet. Criminals would make use of new technology to handle crime proceeds and disguise the ‘money’ as coming from legitimate activities so merchants might easily fall into the trap.
In the world of AML/CFT, there is a very common method of laundering money, which is smurfing. Smurfing refers to the method of structuring a large sum of money into small amount and injecting them into the market which might confuse the monitoring system to think that they are legitimate transactions as the amount of each transactions were not particularly high.
This could be an approachable idea for money launderers to launder their money through these merchants via the payment system by abusing the QR obtained from another third party.
As mentioned previously, regardless of whether your business scale is large, medium or small, there are no exemptions to HKMA’s AML requirements. We only require the most basic company and operation documentation and information from our merchants. If merchants encounter any difficulties in the process, they may make further enquiries with Payment Asia.
Payment Asia should ensure that all documents were obtained before onboarding the customer. If the customer/merchant is unwilling to provide certain documents, Payment Asia has the authority to reject the merchants’ applications and prohibit them from onboarding with the company. As a procedure part of the ID&V process, Payment Asia is required to verify all the documents obtained and ensure that they are all legitimate. Any discovery of falsified documents might lead to criminal offences filed against the person/merchant in accordance to the Crimes Ordinance.