FATF Plenary: 8 things you should know

FATF’s top priority remains its work on combating terrorist financing

Combating terrorist financing remains FATF’s priority.  Some key focus areas include (i) tackling sources, techniques and channels of terrorist financing and (ii) ensuring that all countries of the FATF global network have implemented measures to prevent, detect and counter terrorist financing.

To help improve cooperation and exchange of information within jurisdictions, a report on inter-agency information sharing will be made available to key agencies involved in tackling terrorism and its financing, as well as agencies not traditionally involved in counter-terrorist financing activities.

Hong Kong imposes travel restrictions on Hong Kong residents

In September 2014, the United Nations Security Council passed UNSCR 2178, in which it expressed grave concern about the acute and growing threat posed by foreign terrorist fighters.  To address this concern, Hong Kong published the United Nations (Anti-Terrorism Measures) (Amendment) Bill 2017 in June 2017.

Among other things, the bill introduces prohibitions on Hong Kong permanent residents from travelling to a foreign state to perpetrate, plan, prepare or participate in terrorist acts, and to provide or receive terrorist training or associated acts.  Conviction may involve imprisonment for up to 14 years.

FATF continues its work on improving  transparency and beneficial ownership

Preventing the misuse of legal persons and legal arrangements remains an important issue for FATF.  It will continue its work programme in improving transparency and access to beneficial ownership information.

Hong Kong-incorporated companies have to ascertain the individuals and legal persons that have significant control over them, and maintain a register

On 23 June 2017, Hong Kong published the Companies (Amendment) Bill 2017 in the Gazette.

The bill is intended to impose requirements on companies incorporated in Hong Kong (unless otherwise exempted) to take reasonable steps to ascertain the individuals and legal persons that have significant control over the companies, and maintain a register of significant controllers
(“PCS Register”) of the company for inspection by law enforcement officers upon demand.

This change will improve transparency and beneficial owners of companies where the current legal regime only requires disclosure of legal ownership, and does not require a company to ascertain, keep or file information about its ultimate beneficial owner (except in the case of a listed corporation).

Further details are set out in our May 2017 alert on the requirements to maintain a PCS Register and the expanded scope of AML/CTF regulation covering designated non-financial business and professions.

Impact of recent FATF work on de-risking

De-risking has been a priority for FATF since 2014, hence it issued guidance to clarify the risk-based approach in October 2014.

FATF is working closely with the Financial Stability Board, International Monetary Fund, and other relevant organisations to continue tackling this issue.

The HKMA clarifies that the principles of the risk-based approach should not undermine financial inclusion

The Hong Kong Monetary Authority’s (“HKMA”) circular “De-risking and Financial Inclusion” issued on 8 September 2016 addressed the concerns about financial inclusion associated with authorized institutions (“AIs”) adopting the practice of “de-risking”.  This circular highlights the guiding principles of the RBA, emphasising that it should not be applied to undermine financial inclusion.  AIs are directed to consider whether any existing processes or practices should be remediated to address these principles appropriately.

Financial inclusion is an ongoing concern, in particular for corporate customers, but it remains work in progress.

Further details are set out in our September 2016 alert.

Discussion of the mutual evaluation reports of Denmark and Ireland

The Plenary discussed the key findings, priority actions and recommendations from the mutual evaluation report of Denmark and Ireland.  These reports are expected to be published in September 2017 after the final reviews.

Hong Kong mutual evaluation process is commencing in 2018

The Hong Kong mutual evaluation process is commencing soon.  The possible onsite period is scheduled to take place in October/November 2018 and possible plenary discussion in June 2019.

This evaluation will consider the Hong Kong AML/CTF regime after the implementation of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Chapter 615 of the Laws of Hong Kong) (“AMLO”) since 2012.  This should also capture recent efforts by the HKMA and the banking industry on implementing the industry-wide Enhanced Competency Framework (“ECF”) for Banking Practitioners covering AML/CTF  and any subsequent statutory amendments, including efforts to improve transparency and beneficial ownership described in point 2 above and in the upcoming amendments to the AMLO gazetted on 23 June 2017.

Iran remains high risk

With the high-level commitment to address its strategies AML/CTF deficiencies, FATF has decided to continue the suspension of counter-measures, and will monitor the progress in Iran’s implementation of the Action Plan in order to consider next steps.

In the meantime, Iran will remain on the FATF Public Statement and FATF remains concerned with the terrorist financing risk emanating from Iran.

FIs should continue to exercise caution and comply with financial sanctions requirements when it comes to links with Iran

FIs should continue to apply enhanced due diligence to business relationships and transactions with natural and legal persons from Iran, consistent with FATF Recommendation 19.  This may need to be reassessed once the Action Plan has been fully implemented.

Updates on the AML/CTF progress of Brazil, Afghanistan and Lao People’s Democratic Republic (“Lao PDR”)

In respect of Brazil, FATF expressed its continuing concern about Brazil’s shortcomings and deficiencies regarding targeted financial sanctions.  FATF indicates that it may consider additional steps in its follow-up process if Brazil fails to take further action to fully address these shortcomings.

In respect of Afghanistan and Lao PDR, both are no longer subject to FATF’s monitoring under its ongoing global AML/CTF compliance process, due to both countries making significant progress in addressing AML/CTF deficiencies identified by FATF.

Both countries will continue to work with the Asia Pacific Group on Money Laundering as they continue to further strengthen their AML/CTF regime.

FIs should follow the progress of these jurisdictions and adopt appropriate processes and practices

Public statements of FATF, inter-governmental bodies and other relevant authorities are important for evaluating and determining the risk(s) of a particular jurisdiction, which ties into applying the RBA when dealing with customers and other FIs from these jurisdictions.

Given many Hong Kong-based FIs have international operations and customers, we recommend keeping an eye on the progress of these matters and adopt appropriate processes and practices accordingly.

FATF has revised an important interpretative note

A revision to the interpretive note to Recommendation 7 adopted by the Plenary will bring the FATF standards in line with the requirements of recent United Nations Security Council (“UNSC”) resolutions, further clarify the implementation of targeted financial sanctions to comply with the United Nations Security Council resolutions in preventing and disrupting the proliferation of weapons of mass destruction.

The revised FATF Recommendations (updated June 2017) are available here.

Hong Kong’s WMD non-proliferation regime continues to evolve in line with global developments

To comply with UNSC resolutions, Recommendation 7 requires countries to implement targeted financial sanctions relating to financing of WMD proliferation.

The recent UNSC resolution 2356 extended the number of individuals and entities subject to an asset freeze and travel ban for those involved in the Democratic People’s Republic of Korea’s nuclear-weapon programme.  This was implemented in Hong Kong on 9 June 2017 by gazette of the updated list of “relevant persons” and “relevant entities” for the purposes of section 31 of the United Nations Sanctions (Democratic People’s Republic of Korea) Regulation (Cap 537AE).

Additionally, under section 4 of the Weapons of Mass Destruction (Control of Provisions of Services) Ordinance (Chapter 526 of the Laws of Hong Kong), it is an offence for a person to provide any services to another person and where they believe or suspect, on reasonable grounds, that the services will or may assist the development, production, acquisition or stockpiling of WMD.  This includes a very broad range of services including financial services

This is one of the key ways in which non-UNSC sanctions (eg sanctions imposed by the United States) can become applicable to Hong Kong.

FIs should continue to stay vigilant to possible activities or transactions relating to sanctioned persons or that are suspected to be related to proliferation of WMD, and handle such activities and transactions with great caution.

Meeting of the Forum of FATF Heads of Financial Intelligence Units (FIUs) to discuss how to enhance the effectiveness of international AML/CTF efforts

The FATF Heads of FIUs and representatives from some international banks discussed how to enhance the effectiveness of suspicious transaction reporting regimes and recent developments concerning public-private partnerships.

The Forum agreed a paper identifying a number of areas where further work would increase the effectiveness of international AML/CTF efforts.

The Hong Kong public-private partnership pilot project to enhance the detection, prevention and disruption of serious financial crime and money laundering threats

The Fraud and Money Laundering Intelligence Taskforce (“FMLIT”) (a 12-month pilot project), was launched in May 2017.

The FMLIT is a collaboration between law enforcement agencies, the HKMA, The Hong Kong Association of Banks and a number of banks, intended to bring together expertise and resources of government and the banking industry to better understand the true scale of money laundering and the methods used by criminals to exploit the Hong Kong financial system and terrorists using the financial systems to finance attacks.

A similar initiative from the United Kingdom, the Joint Money Laundering Intelligence Taskforce (“JMLIT”), set-up by the National Crime Agency, has achieved a number of operational outcomes.  These operations have led to a number of arrests, investigations and identification of potential criminal activities which might not have otherwise come to light without the benefit of the collaborative efforts.  The National Crime Agency provided helpful input regarding their JMLIT experiences to the founders of the FMLIT.