1. What is money laundering and terrorist financing? 4. The legislation against money laundering and terrorist financing

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2 1. What is money laundering and terrorist financing? 2. Money laundering activities 3. Doing your duty 4. The legislation against money laundering and terrorist financing 5. Does the law protect you? 6. Effective AML/CTF risk management 7. Risk-based approach and customer acceptance policy 8. Methods for identifying and reporting suspicious activities 9. What happens to suspicious transaction reports? 10. Record keeping 11. International initiatives and standards Appendix I - Laws and regulations Appendix II - Useful websites References to penalties in this guide are current as at the date of publication. 2

3 What is money laundering and terrorist financing? 1.1 Money laundering is the process of disguising the illegal origin of the proceeds of crime. This enables the proceeds to appear as having a legitimate source and be openly used. 1.2 The sums involved can be very large and include proceeds generated as a result of predicate crimes such as: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) drug trafficking tax evasion theft or burglary smuggling criminal deception or forgery illegal gambling or bookmaking blackmail extortion loan sharking illegal arms sales bribery and corruption insider dealing or market manipulation copyright piracy 1.3 Directly or indirectly, these crimes affect everyone. The social and law enforcement costs can be very high. If not dealt with seriously, crime can infiltrate financial institutions, damaging the reputation of Hong Kong as an international financial centre and affecting foreign direct investment. It may promote bribery, allowing corrupt persons to tarnish good business practices and the economy. 1.4 The Hong Kong regulatory regime is not only limited to crimes committed in Hong Kong. The Hong Kong money laundering legislation applies to conduct outside of Hong Kong which would constitute a crime had it occurred in Hong Kong. 3

4 1.5 Terrorist financing refers to the provision or collection of funds to be used to commit terrorist acts or making funds or financial services available to a terrorist or terrorist associate. This includes carrying out transactions involving funds owned by terrorists, used to fund terrorists or assist in the commission of terrorist acts. 1.6 In money laundering, the focus is to turn dirty money into clean funds (i.e. legitimize the criminal proceeds). In terrorist financing, the focus is on the successful distribution of the funds. The source of funds to support terrorism may come from legitimate sources (e.g. donations, legitimate business earnings), or from the proceeds of crimes. 4

5 Money laundering activities 2.1 Many criminals use the banking system to disguise the source of cash, instruments and other valuables illegally obtained. Their aim is to avoid raising suspicion. 2.2 While the techniques for laundering funds vary considerably and are often highly intricate, there are generally three stages in the process: placement, layering and integration. A. Placement 2.3 Cash gives anonymity to many forms of criminal activity and is the normal medium of exchange in the world of drug trafficking. Placement involves placing the crime proceeds (usually banknotes) into a bank account, which means getting it across the counter. This stage - when money enters Hong Kong s banking system - offers the best opportunity for bank staff to recognise and report money laundering. 2.4 Examples: (a) Depositing a large amount of cash in numerous small denominations. (b) Setting up a cash business as a cover for banking criminal proceeds. (c) Exchanging money into other currencies. 5

6 B. Layering 2.5 Layering separates the illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. This is usually done by using monetary instruments (such as cashier s orders) and electronic funds transfers. Taken individually, the transactions may seem perfectly innocent. 2.6 Examples: (a) A company passes money through its accounts under cover of bogus invoices, merely to generate additional transactions. C. Integration 2.7 After the layering process, an integration scheme brings the laundered proceeds back into the legitimate economy, so that the proceeds appear to be normal business funds, arousing no suspicion. 2.8 Example: Gaining control of a private company by investing money in it. The company appears to trade normally, but it is using criminal proceeds as its capital. (b) (c) A customer raises a loan on the security of a deposit in another bank to help break the connection with criminal proceeds. A customer pays large credit card debts from an account funded by criminal proceeds. 6

7 Doing your duty 3.1 Sound money laundering and terrorist financing ( ML/TF ) risk management plays an important role in the overall safety and soundness of banks and the banking system, in that it: (a) supports the integrity of the international financial system and the work of governments in their anti-money laundering/ counter- terrorist financing ( AML/CTF ) initiatives (including for example, anti-corruption efforts); and (b) contributes to protecting the bank s reputation and Hong Kong s reputation as a leading international financial centre by preventing and detecting attempts to use the banking system for ML/ TF. 3.2 As such, all bank employees have an important role to play, in conducting customer due diligence ( CDD ) as well as the identification and reporting of suspicious activity. 7

8 3.3 Efforts in combating money laundering by bank staff can help to fight crime and reduce its impact. Law enforcement investigations often reveal the connections made through financial transaction records that allow hidden assets to be located (and subsequently returned to victims) and establish the identity of criminals and the criminal organisations. 3.4 Most importantly, targeting the money laundering aspect of criminal activity and depriving the criminal of their ill-gotten gains means hitting them where they are vulnerable. Without a usable profit, the criminal activity will not continue. 3.5 Adhering to the requirements relating to CDD and record-keeping has become a statutory obligation. Furthermore, assisting money laundering in any way, failing to report suspicious transactions or tipping off any persons regarding such suspicions are criminal offences. If you fail to meet your obligations, whether deliberately or negligently, you may find yourself subject to internal disciplinary procedures, which may adversely affect your career, and in the worst case, you could also face criminal charges. 3.6 Failure to establish and maintain sound AML/CTF risk management can expose banks to serious risks, including reputational, operational and compliance. These risks are illustrated by the increased willingness of regulators globally to take enforcement action where AML/CTF control failures are identified. 8

9 The legislation against money laundering and terrorist financing A. Anti-money laundering 4.1 Hong Kong has effective legal systems in place to counter money laundering and terrorist financing. The four main ordinances for countering money laundering and terrorist financing are: (a) Anti-Money Laundering and Counter- Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) ( AMLO ); (b) Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405); (c) Organized and Serious Crimes Ordinance (Cap. 455); and (d) United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575). 4.2 You may refer to Appendix I for the text of the key relevant sections of these Ordinances for reference. 4.3 Under the current legal regime, there are several legal duties for each bank staff member to be aware of: (a) Duty not to cause a contravention of the AMLO It is a criminal offence if a person who is an employee of a bank, employed to work for a bank or is concerned in the management of a bank to (1) knowingly; or (2) with the intent to defraud the bank or any relevant authorities, cause or permit the bank to contravene a specified provision in the AMLO. The maximum penalty is a HK$1 million fine and 7 years imprisonment. A breach of the AMLO by a bank employee may attract a criminal penalty for both the employee and the bank, or disciplinary sanction in respect of the bank, depending on the severity of the breach and the intent. The Hong Kong Monetary Authority ( HKMA ) (as a relevant authority) has power under the AMLO to prosecute the authorized institutions ( AI ), or its staff, or take disciplinary actions 9

10 against the AI for breaches of the AMLO customer due diligence and record-keeping requirments. Possible disciplinary actions include public reprimand, order to take remedial actions and pecuniary penalties. (b) Duty not to deal It is an offence for a person to deal with any property, knowing or having reasonable grounds to believe that it represents the proceeds of drug trafficking or an indictable offence. The maximum penalty is a HK$5 million fine and 14 years imprisonment. ( MLRO ) or Compliance Officer designated by their employer. Failure to report is an offence. The maximum penalty is a HK$50,000 fine and 3 months imprisonment. (d) Duty not to tip off A person commits a tipping-off offence if, when knowing or suspecting that a disclosure to authorities has been made, they disclose to any other person any matter which is likely to prejudice an investigation following the disclosure. The maximum penalty is a HK$500,000 fine and 3 years imprisonment. (c) Duty to report There is a statutory duty to report to the Joint Financial Intelligence Unit 1 ( JFIU ) knowledge or suspicion that any property represents the proceeds of drug trafficking or crime or terrorist property. Employees of a bank can discharge this duty by reporting suspicions to the Money Laundering Reporting Officer 1 The JFIU is jointly run by staff of the Hong Kong Police Force and the Hong Kong Customs & Excise Department ( 10

11 4.4 The United Nations (Anti- Terrorism Measures) Ordinance (Cap. 575) prohibits the and includes the following provisions: (a) Prohibition on the provision or collection of property to commit terrorist acts It is an offence if a person provides or collects any property, with the intention or knowing or believing that the property will be used to commit one or more terrorist acts. The maximum penalty is 14 years imprisonment and an (b) Duty to report It is a statutory requirement for a person to report to the JFIU knowledge or suspicion that any property is terrorist property. Failure to report is an offence. The maximum and 3 months imprisonment. (c) Duty not to tip off A person commits a tipping-off offence if, when knowing or suspecting that a disclosure to authorities has been made, they disclose to any other person any matter which is likely to prejudice an investigation following the disclosure. The maximum penalty is 3 years imprisonment and an C. Proliferation of weapons of mass destruction 4.5 The Weapons of Mass Destruction (Control of Provision of Services) Ordinance (Cap. 526) prohibits a person from providing any services where that person believes or suspects, on reasonable grounds, that those services will or may assist the development, production, acquisition or stockpiling of weapons of mass destruction. Services the lending of money and assistance. This law falls outside of the scope of this paper, although many of the principles in this paper are relevant from a practical perspective. 11

12 D. Financial sanctions 4.6 From time to time, regulations are made under the United Nations Sanctions Ordinance (Cap. 537) ( UNSO ) to enforce the sanctions implemented by the United Nations Security Council. 4.7 The maximum penalty for contravention or breach of any regulations made under the UNSO is an unlimited fine and 7 years imprisonment. 4.8 Banks are not obliged under Hong Kong law to have regard to lists issued by other authorities in other jurisdictions. However, a bank operating internationally needs to be aware of the scope and focus of the relevant financial and trade sanction requirements in relevant jurisdictions and what implications this might have for their operations (both in Hong Kong and in the relevant jurisdiction). Failure to do so otherwise can also increases the bank s reputational risk and increases its exposure to local regulatory action. E. Regulatory compliance 4.9 At a regulatory level, these obligations are supported by the HKMA s Guideline on Anti-Money Laundering and Counter-Terrorist Financing (For Authorized Institutions) ( AMLO Guideline ) issued in 2012 and amended from time to time. Failure to comply with any part of the AMLO Guideline does not render a person liable to proceedings, but the AMLO Guideline is admissible in evidence if it is relevant to any proceedings under the AMLO Failure to comply with AML/CTF requirements could also result in your bank being subject to regulatory sanctions under both the AMLO and the Banking Ordinance(Cap. 155). 12

13 Does the law protect you? Under the legislation for AML/ CTF, it is your responsibility and duty to report any suspicious transactions or activities to your bank s MLRO. You discharge your legal duties when you inform your bank s MLRO that you have a belief or suspicion - whether it is substantiated or not. This does not constitute a breach of your duties of confidentiality. 13

14 Effective AML/CTF risk management 6.1 An effective AML/CTF risk management system ensures proper safeguards are in place to mitigate the bank s risks of relating to ML/TF and prevents contraventions of the AMLO. This requires several components which need to be tailored appropriately with respect to each individual bank. The key components are as follows: (a) Senior management oversight and appointing relevant officers Senior management are responsible for managing the overall business effectively; this includes overseeing the bank s management of ML/TF risk. Specifically, senior management should: (i) Systems: ensure appropriate and robust AML/CTF systems that address the bank s ML/TF risks; (ii) Compliance Officer: appoint a director or senior manager as a Compliance Officer ( CO ) to assume responsibility for establishing and maintaining the bank s AML/CTF systems. The CO provides guidance and support to senior management to ensure that the bank s ML/TF risks are adequately managed. This include developing and reviewing the systems in place and monitoring effectiveness and enhancing where necessary; and (iii) MLRO: appoint a MLRO to act as the central reference point for the bank s staff to report suspicious transactions. The MLRO reviews and maintains a record of all internal disclosures, provides guidance to the bank s staff to avoid tipping off and acts as the bank s main point of contact with the authorities responsible for ML/TF prevention and detection. 14

15 The CO and MLRO are entrusted with significant responsibility and senior management should ensure they have sufficient expertise and resources to carry out their responsibilities and functions. They should, ideally, be independent of all operational and business functions of the bank, have sufficient level or seniority within the bank and have regular contact with senior management. They should be fully conversant with the bank s statutory and regulatory requirements and ML/TF risk exposures, and be sufficiently resourced to assess all available information in a timely manner. However, the responsibility does not rest with just these individuals; they should have a support network and resources that can cover during their absence. (b) Compliance and audit function Where practicable, a bank should establish an independent compliance and audit function to review the internal controls and effectiveness of the AML/CTF systems in place. This allows the bank to review and appraise the soundness and adequacy of its AML/CTF program as well as test whether or not the program is complying with its regulatory expectations. It also ensures that the bank is identifying and communicating AML / CTF compliance weaknesses before they become examination issues or targeted areas for enforcement actions. Similar to the CO and MLRO, the compliance and audit function should have direct access to senior management and should have sufficient expertise and resources to carry out their responsibilities and functions. 15

16 (c) Staff awareness and training The fight against ML/TF requires that bank staff have appropriate skills and knowledge to conduct CDD and keep relevant records, detect suspicious transactions and activities and, most importantly, to understand what staff need to do when they sense that something is not quite right. Each bank should provide adequate training to its staff on a regular basis. Such training should be tailored for different groups of staff, with due consideration given to the size of the bank and the complexity of its operations. For further guidance on staff training, please refer to Chapter 9 of the AMLO Guideline. In particular, guidance is provided on certain areas of training that may be appropriate for different groups of staff. 16

17 Risk-based approach and customer acceptance policy A. Risk-based approach 7.1 Not all customers pose the same level of money laundering risks to the bank. The risk-based approach ( RBA ) to CDD and ongoing monitoring is an effective way to combat ML/TF. 7.2 Each bank should determine the AML/CTF risks specific to the institution. A reasonably designed RBA provides a framework for identifying the degree of potential ML/TF risks associated with customers and transactions and allows the bank to focus on those customers and transactions that potentially pose the greatest risk of money laundering. 7.3 Specifically, where particular customers, transactions or other arrangements are assessed to pose higher ML/TF risks, banks should take enhanced measures to manage and mitigate those risks appropriately. Correspondingly they may be permitted to apply simplified measures where the risks are lower. This allows the bank to allocate its resources effectively to ensure risks are addressed and mitigated appropriately and efficiently. 7.4 Importantly, however, the RBA does not operate as a waiver of CDD and other requirements. Please refer to paragraph 1.6 and Chapter 3 of the AMLO Guideline for further details. 17

18 B. Customer acceptance policy 7.5 In order to apply an RBA to every customer relationship, banks should develop a clear customer acceptance policy to allow them to determine and implement proportionate measures and controls to mitigate the risks. 7.6 A customer acceptance policy typically includes a description of the types of customer that are likely to pose a higher than average risk of money laundering, and the bank s corresponding guidelines/ criteria for acceptance of new customers 2 that fall within the categories. 7.7 Factors to be considered as part of a customer risk assessment may include: (a) Country risk Customers who reside in, or are connected with, high-risk jurisdictions, e.g. those that with strategic AML/CTF to sanctions, embargos or similar measures; countries which are vulnerable to corruption; and / or countries that are believed to have strong links to terrorist activities. (b) Customer risk Factors associated with the individual customers, e.g. occupation, source of wealth/ fund/income, their reputation, involvement with politically exposed persons 3 ( PEP ), complexity of the relationship, nature, scope and location of business activities generating the funds/assets, involvement in cash-intensive business, purpose of account, etc. (c) Product/service risk Factors presenting higher risk might include: services that inherently provide more anonymity; and ability to pool underlying customers/ funds. Financial Action Task Force ( FATF ) as jurisdictions 2 The term customer refers to the party, or parties, with whom a business relationship is established, or for whom a transaction is carried out by a bank. This generally excludes the third parties of a transaction. Source: AMLO Guideline. 3 18

19 (d) Delivery/distribution channel risk The distribution channel for products may alter the risk profile of a customer. This may include sales through online, postal or telephone channels where a non-face-to-face account opening approach is used. Business sold through intermediaries may also increase risk as the business relationship between the customer and the bank may become indirect. 7.8 Higher risk customers should be subject to an enhanced customer due diligence ( Enhanced CDD ) to mitigate the AML/CTF risk, which may include: (a) obtaining additional information on the customer and updating more regularly the customer profile including the identification data; (b) obtaining additional information on the intended nature of the business relationship, the source of wealth and source of funds; (c) obtaining the approval of senior management to commence or continue the relationship; and (d) conducting enhanced monitoring of the business relationship. 7.9 Factors that may be taken into consideration to determine if Enhanced CDD is required may, for example, include: (a) (b) (c) (d) (e) customers / counterparties of customers reside/ incorporated in countries with high corruption rate and lax money laundering regulations; customers occupying public or high profile position (e.g. PEP); customers who own, operate or engage in high risk businesses, such as money services businesses, casino, etc.; companies with complex ownership structure for no good reason; and shell companies which have no business substance in their own right. 19

20 C. Customer due diligence 7.10 A comprehensive CDD program is one of the most effective defences used by banks to prevent abuse through ML/TF activities The CDD process includes: (a) identifying the customer and verifying the customer s identity using reliable and independent source documents, data or information; (b) owner 4 in relation to the customer, identifying and taking reasonable measures owner s identity so that that it knows who the including in the case of a legal person or trust, measures to enable the bank to understand the ownership and control structure of the legal person or trust 5 ; (c) (d) For example, in the case of corporate customers, the bank should identify and record the identity of all take reasonable measures to verify the identity of all shareholders holding 25% or more of the voting rights or share capital for normal risk circumstances. The shareholder purposes is decreased to 10% or more for high risk circumstances which consequently increases CDD obligations; obtaining information on the purpose and intended nature of the business relationship (if any) established with the bank unless the purpose and intended nature are obvious; and if a person purports to act on behalf of the customer: (i) identifying the person and taking reasonable measures to verify the person s identity using reliable and independent source documents, data or information; and 4 respect to a corporation, partnership, trust or any other person not falling in the preceding categories. In relation to a company, it includes any person holding 10% or more of the voting rights or share capital. 5 The term trust refers to an express trust or any similar arrangement for which a legal-binding document (i.e. a trust deed or in any other forms) is in place. Source: AMLO Guideline. 20

21 (ii) verifying the person s authority to act on behalf of the customer Establishing the real identity of a customer and its beneficial owners and knowing your customer s background are vital components of any CDD program The basic requirements of a CDD program generally include the identification and/or verification of the following: (a) customer name; (b) customer identification document such as identity card, passport and registration document (in the case of non-individual customers); (c) residential address (and permanent address if different)/ incorporation/ operation address; (d) date of birth/ incorporation; (e) nationality (for individual customers); (f) occupation or business (such as type and size, product/ services offered, location of the business (g) (h) (a) (b) (c) counterparties, experience in their respective fields, etc); source of funds and purpose of opening the account; and for corporate customers, the identity of relevant individuals, such as ultimate beneficial owners (unless simplified CDD is allowed), ownership structure, directors and account signatories For higher risk customers, additional information may include: source of wealth and/ or income; anticipated account activity; and public information (e.g. negative news) The identity of customers should be verified using reliable and independent source documents, data or information (e.g. Hong Kong identity card, passport, search at the Companies Registry or equivalent bodies if overseas, utility bill, bank statement etc.) 21

22 7.16 Face-to-face meetings are highly recommended as this is an effective way to verify the existence of the customer. If a customer has not been physically present for identification purposes, the bank must carry out at least one of the measures prescribed in section 9 of Schedule 2 to the AMLO Screening of customer names against relevant terrorist lists (e.g. United Nations Security Council Resolutions) should be a key component of the bank s customer acceptance policy Banks may adopt other verification tools as additional due diligence measures such as banking references or information provided by an external agency Simplified CDD (e.g. without the need to identify and verify the identity of the beneficial owners) may be adopted for the specified customers/ products defined in the AMLO and the AMLO Guideline Staff should refer to internal policies or instructions issued by their bank regarding the identification of corporate customers Special attention should be exercised when the customer is unwilling to provide the information requested, as this may provide cause for suspicion. Banks must not establish a business relationship or carry out any occasional transaction with an aggregate value of at least HK$120,000 (or HK$8,000 for wire transfers) for a customer if CDD cannot be satisfactorily conducted. 7 D. Ongoing monitoring 7.22 Effective ongoing monitoring is crucial for understanding customer activities and is an essential component of a successful AML/CTF program Banks must conduct ongoing monitoring and scrutiny of: 6 Please refer to section 4(3) of Schedule 2 to the AMLO and paragraph of the AMLO Guideline. 7 An occasional transaction is a transaction between a bank and a customer who does not have a business relationship with the bank; please refer to sections 1 and 3 of Schedule 2 to the AMLO. There is a limited exception to the rule relating to when you can establish a business relationship in section 3(2) of Schedule 2 to the AMLO. 22

23 (a) information: documents, data and information relating to and obtained from customers; (b) activities: customer activities throughout the course of the business relationship to ensure they are consistent with the bank s knowledge of the customer, its business and risk profile, including, where necessary, identifying the source of funds; and (c) transactions: individual or patterns of transactions that are complex, large or unusual with no apparent economic or lawful purpose These items may evolve over the course of a business relationship and banks should ensure their procedures can readily adapt and meet any change in customer risk profile. This may involve carrying out additional CDD measures on the customer relationship as and when appropriate There is no one-sizefits-all approach to ongoing monitoring. Banks should apply an RBA when determining their monitoring methods and procedures and which customers require more frequent and intensive monitoring. Other important considerations include the size, complexity and identified risks of the bank s business, existing procedures and the nature of the products and services. E. Ongoing review of existing customer records 7.26 It is also necessary, from time to time, to ensure the records of existing customers are kept up-to-date and relevant. An appropriate time to conduct such reviews is upon trigger events (e.g. when there is a material change in the way the account is operated). In the absence of a trigger event, the bank should monitor and periodically review the business relationship consistent with the customer s risk profile. All high-risk customers (excluding dormant accounts) should be subject to a minimum of annual review. Staff should refer to internal policies and procedures issued by their bank regarding the frequency and methodology in reviewing their customer records. 23

24 Methods for identifying and reporting suspicious activities 8.1 The JFIU advocates a SAFE approach to assist bank employees in identifying suspicious transactions and activities. You are encouraged to familiarise yourself with, and make good use of, this four-step approach to decide if a suspicious transaction report ( STR ) should be filed. 8.2 The four steps are: (a) Screen the customer and transaction for suspicious activity indicators. (b) Ask the customer appropriate questions to clarify suspicious circumstances. (c) Find out whether the transaction or activity is commensurate with the profile or expected transaction pattern of the customer by reviewing the information already known to the bank. (d) Evaluate all the information above to make a decision on whether the customer s financial activity is genuinely suspicious or not. Step one: Screen the customer and transaction for suspicious activity indicators 8.3 A suspicious activity indicator (or a red flag) is a type of activity or entity that is commonly associated with money laundering. You should be familiar with the indicators that are particularly relevant to the products / services provided by your bank so that you can recognize them if you encounter them during your work. Some examples of suspicious activities are set out below. Further examples 24

25 can be found in paragraphs 7.39 to 7.44 of the AMLO Guideline and on the websites listed in Appendix II. (a) Significant cash transactions These can be either one or a small number of large cash transactions or many small cash transactions. (b) Suspicious transaction patterns (i) The account is used as a temporary repository for funds. (ii) Significantly increased activity amid relatively quiet periods. (iii) (iv) Structuring, i.e. many low value transactions are conducted when one or a few high value transactions could have been used. U-turn transactions, i.e. money passes from one account to another and then back to the first account. (v) Significantly increased number of transactions on Mondays and Thursdays throughout the Hong Kong horse-racing season. This pattern is indicative of illegal bookmaking. (vi) (vii) (viii) (ix) Deliberate attempts to break the audit trail, e.g. a customer moves money by requesting a cash withdrawal followed by a cash deposit to another account rather than by a transfer. Numerous account balance enquiries, cash deposits and withdrawals/ transfers in a personal account within one day; in particular, if most of these transactions were made through ATMs. Atypical or uneconomical fund transfer to or from foreign jurisdiction. Unusual business activity or transaction that deviates from the known business purpose or usual activities of the customer. (c) Involvement of one or more of the following entities (i) (ii) (iii) Shelf company, i.e. bought from a secretarial company or a shell company which has no actual business. Company formation agent or secretarial company. Money service operator (i.e. remittance agent or money changer). 25

26 (iv) Casino. (v) (vi) Currencies and countries commonly associated with international crime. Company registered in an offshore financial centre or tax haven. (d) Other red flags (i) (ii) (iii) (iv) (v) (vi) Unrealistic wealth compared to customer profile. Defensive stance to questioning. Multiple accounts for similar offshore companies. Unusual intermediary role. Transaction volume disproportionate to source of funds. Large, unexplained source of wealth. 8.4 With a view to identifying terrorist financing activities, banks should build up their terrorist database for name screening by referring to various terrorist name lists issued by local governments, major foreign governments (e.g. Office of Foreign Assets Control of the U.S. Department of Treasury) and international bodies, etc. Alternatively, banks may make arrangements to access this kind of database maintained by third party service providers. Step two: Ask the customer appropriate questions to clarify suspicious circumstances 8.5 You should tactfully query the customer about their reason for conducting the transaction if it is practically possible to do so and there is no risk of tipping off the customer as to your suspicions. The purpose is to find out if there is a legitimate reason for the apparently suspicious activity. Appropriate questions should cover the following points: (a) (b) Identification of the source and/or the destination of the money involved in the apparently suspicious activity. The reason for conducting the apparently suspicious activity. 26

27 8.6 Some bank staff are reluctant to ask these questions on the grounds that the customer may become offended and take their business elsewhere. 8.7 This can be overcome by making indirect queries, or using the pretext that the employee is seeking additional information in order to provide a better service to the customer. For example, a customer depositing a large sum of cash could be asked where the funds originated from, and the reason for the use of cash, on the grounds that this information could help the bank provide a cheaper or more convenient method for the customer to perform future transactions. 8.8 Persons involved in illegal activity are more likely to refuse to answer, give only a partial explanation or give an unlikely explanation, all of which should be regarded as adding to the level of suspicion surrounding 8.9 Obviously, customers can only be questioned by staff when it is practically possible to do so. Such circumstances include situations when there is face-toface contact between a customer and a staff member. However, in some circumstances such opportunities do not arise (e.g. when a customer s bank account receives incoming remittances). In such circumstances, telephoning the customer under the auspices of a sales or marketing initiative, but equally to solicit answers to questions relating to the source, destination and reason for the suspicious approach. 8 Step three: Find out whether the transaction or activity is commensurate with the pattern of the customer by reviewing the information already known to the bank 8.10 The third stage in the systemic approach to identifying suspicious activity is to review the information already known to the bank 8 This is subject to the bank complying with any other applicable regulatory requirements, such as those arising under the Personal Data (Privacy) Ordinance (Cap. 486). 27

28 about the customer and their previous financial activities and using this information to determine whether the activity is consistent with the customer s usual and expected activity. If so, the activity is less likely to be suspicious. This stage involves what is commonly known as the know-yourcustomer principle Banks hold various pieces of information about their customers which can be useful when considering whether the customer s financial activity is to be expected or is unusual Examples of the sort of information held and the conclusions which may be drawn from them, are listed below. (a) The customer s occupation. Certain occupations imply that the customer is a low wage earner (e.g. driver, hawker, waiter, student). High value activities on the accounts of such customers would therefore not be expected. It is important that staff handling the opening of accounts ensure that the (b) (c) (d) occupation of all personal customers, and the nature and type of business for all corporate customers, is recorded and is accurate. The customer s residential address. A residential address in low cost housing, e.g. a squatter village or public housing, may be indicative of a low wage earner. The customer s age. Frequent high value transactions would normally not be expected to be found on the account of a very young or old customer. Regular monthly or weekly deposits seen on an account may be salary deposits and, if so, may give an indication of the level of financial activity which could reasonably be expected of a customer. For example, if a customer receives low value salary deposits then other frequent high value transactions would not be expected. 28

29 Step four: Evaluate all the information above to make a decision on whether the customer s suspicious or not 8.13 (e) The average balance, number and type of transactions seen on an account over a period of time give an indication which is normal for the customer. Marked increases in activity, or activity of a different type to these norms, would normally be considered to be unusual. whether to make an STR. quantify, it is not possible to give exact guidelines on the circumstances in which a report should, or should not, be made However, such a decision will be of the highest quality when you have taken all three of the preceding steps. A report the activity is genuinely suspicious having considered all the circumstances. For example, a decision should from a particular customer concerning a suspicious reasonable or legitimate based on the background information known to the bank Very seldom, if ever, will you be able to connect suspicious not stop you from making STRs. The law requires you to make reports and does not ask you to specify the activity relates It is at the bank s discretion as to whether the relationship with the customer concerned should be maintained after a report has been made unless the JFIU has given special instructions. However, any decision should take into account the legal duty not to deal with any property in circumstances where a person knows or has reasonable grounds to believe that the property is connected with an indictable offence such dealing is a criminal offence. 29

30 8.17 If a bank decides to maintain the relationship with a customer who is the subject of an STR, the bank should record the decisions made and rationale and take steps to mitigate any ML/TF risks that are presented. This may include reviewing the customer s risk classification, escalating to any relevant committee that has oversight for such risks, enhanced monitoring of the customer s activities and submitting further STRs if suspicious activity is identified. Post-reporting risk mitigation 8.18 Filing a report to the JFIU does not absolve the bank from all legal, reputational or regulatory risks associated with the account s continued operation. Further, a consent response from the JFIU to a pre-transaction report should not be construed as a clean bill of health for the continued operation of the account or an indication that the account does not pose a risk to the bank Once an STR has been filed, banks must comply with the following rules: (a) Review the customer relationship: the business relationship with the customer should be subject to appropriate review by the bank s MLRO, irrespective of whether feedback is provided by the JFIU. If necessary, the issues should be escalated to senior management to determine how to mitigate potential legal or reputational risks posed by the relationship. Banks are not obliged to continue business relationships with customers if such action would place them at risk. (b)mitigate risks: if there are concerns with a customer s account or with a particular business relationship, the bank should take appropriate action to mitigate these risks. In case of doubt, banks should consider discussing the matter with the JFIU and/or the HKMA, as appropriate 9. 9 Consent from the JFIU to continue operating the account should not be construed as an indication that the account is risk-free; please refer to paragraph 7.33(b) of the AMLO Guideline. 30

31 (c)report further suspicious circumstances: the bank should report any further suspicious transactions or events in respect of the same customer. (d)record disclosures made to JFIU: the bank should establish and maintain a record of all disclosures made to the JFIU, including details of the date of the disclosure, the person who made the disclosure and information to allow the papers relevant to the disclosure to be located. (e)comply with orders: the bank should ensure that it is able to freeze any relevant property as it may be served with a restraint order. The bank should consider what, if any, funds or property may be utilised subject to having obtained the appropriate consent from the JFIU. The bank should also respond to any production orders within the required time limit For further guidance, please refer to your bank s policies and procedures or relevant sections in the AMLO Guideline. Tipping Off 8.21 A further important consideration for the bank is to ensure there are internal controls and systems to prevent directors, officers and employees tipping off the customer or any other person who is the subject of the STR You must not disclose to any other person any matter which is likely to prejudice an investigation of money laundering activities. This is important if you have filed an STR or, for any other reason, you are aware or suspect that a customer is under investigation. 31

32 8.23 Doing so may defeat the purpose of reporting suspicious transactions if the suspected person is tipped off to the fact that they are under investigation. Tipping off is therefore a criminal offence in order to preserve the integrity of an investigation If your role requires routine contact with the customer, maintaining the contact does not constitute tipping off so long as you confine your discussion to regular business matters at hand If you are in doubt as to whether you should contact a customer under suspicion or investigation, you should follow your bank s internal procedures to seek the advice of your MLRO. 32

33 What happens to suspicious transaction reports? 9.1 Each bank has at least one designated MLRO who receives all STRs made by bank staff. You will fulfill your legal obligation to report any suspicious activity by sending your report to your bank s MLRO. 9.2 The MLRO is responsible for forwarding STRs considered to be genuinely suspicious to the JFIU. The JFIU then sends the STRs to specialist units within the Hong Kong Police and the Customs & Excise Department for investigation. 9.3 The JFIU web site is 33

34 Record keeping A. CDD information and related documents 10.1 Adequate records should be maintained to demonstrate that appropriate initial and ongoing CDD procedures have been followed for all customers. CDD information and related documents should be retained for a period of at least 6 years after the termination of the relationship with the customer concerned. Additionally, where the customer is the subject of an STR, the relevant authority may require the relevant CDD information/documents and the STR to be retained for a period longer than 6 years after the termination of the relationship because the records may be relevant to an ongoing criminal or other investigation, or another purpose. This period will be specified by a notice in writing by the relevant authority. B. Transaction records 10.2 Adequate records of all transactions should be maintained to support the reconstruction of transactions, including the amount, type of currency, origin of funds received into customers accounts and the beneficiaries of outward payments from customers accounts. The records should be kept for at least 6 years after the completion of the transactions. Additionally, where the transactions relate to an STR, the relevant authority may require the records to be retained for a period longer than 6 years after the termination of the relationship because the transaction records may be relevant to an ongoing criminal or other investigation, or another purpose. This period will be specified by a notice in writing by the relevant authority. 34

35 International initiatives and standards 11.1 A number of international organisations have developed standards for combating money laundering and some important organisations that have issued standards sectors. A. The Financial Action Task Force 11.2 The FATF is an intergovernmental body formed in 1989 whose purpose is to develop and promote national and international policies to combat money laundering FATF published the FATF Recommendations in 2012 to meet its objective 10. These are counter-measures for countries to adopt. The FATF membership is currently made up of 34 countries and territories and 2 regional organisations as of March Hong Kong has been a member of the FATF since For details, you may visit its website ( 10 The FATF has also previously published the FATF Forty Recommendations for combating money objective. These recommendations were revised and consolidated into the FATF Recommendations issued in February

36 B. The Basel Committee on Banking Supervision 11.4 The Basel Committee on Banking Supervision is established by the central bank Governors of the Group of Ten nations in The Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision. In particular, the Committee has had a long standing commitment to promoting sound AML/CTF policies and procedures that are critical in protecting the safety and soundness of banks and the integrity of the international financial system. The revised version of the Core Principles for Effective Banking Supervision includes a dedicated principle for dealing with the abuse of financial services (see the 29 th principle). From time to time, the Committee also publishes AML/CTF related guidelines which set the standards for the banks all over the world in formulating their AML policy and procedures. C. The Wolfsberg Group 11.6 The Wolfsberg Group is an association of eleven global banks, which aims to develop financial services industry standards and related products, for know-your-customer and AML/CTF policies. The Group came together in 2000 and a number of AML Principles and Guidelines have been published by the Wolfsberg Group, covering the areas of private banking, correspondent banking, mutual funds and pooled investment vehicles, etc For details, you may visit its website ( -principles.com) For details, you may visit its website ( tid_32/index.htm). 36

37 D. The Egmont Group of Financial Intelligence Units 11.8 The Egmont Group was formed in 1995 and is an informal organisation of financial intelligence units ( FIUs ) from over 131 countries (as of March 2013). FIUs are national authorities responsible for receiving, analyzing, and disseminating to competent authorities those suspicious transaction/activity disclosures concerning money laundering and terrorist financing received from their respective financial sectors. The Egmont Group s goal is to provide a forum for FIUs to improve support to their respective national AML/CTF programs. Each FIU must adhere to all of the Egmont Group s Principles of Information Exchange to ensure the effectiveness of the measures to combat serious crimes. Their ability to transform data into financial intelligence is a key element in the fight against money laundering and the financing of terrorism For details, you may visit its website ( org). 37

38 Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance Cap. 615, Laws of the Hong Kong SAR Schedule 1 - Interpretation Part 1 1. In this Ordinance money laundering means an act intended to have the effect of making any property (a) 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; or (b) that in whole or in part, directly or indirectly, represents such proceeds, not to appear to be or so represent such proceeds; means (a) 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); (b) the making available of any related) services, by any means, directly or indirectly, of a person knowing that, or being reckless as to whether, the person is a terrorist or terrorist associate; or (c) the collection of property 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. 38

39 In the definition of terrorist financing, terrorist, terrorist act and terrorist associate have the meaning given by section 2(1) of the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575). Schedule 2 (Please refer to Schedule 2 for requirements relating to customer due diligence and record-keeping.) Drug Trafficking (Recovery of Proceeds) Ordinance Cap. 405, Laws of the Hong Kong SAR Section 25 - Dealing with property known or believed to represent proceeds of drug trafficking (1) Subject to section 25A, a person commits an offence if, knowing or having reasonable grounds to believe that any property in whole or in part directly or indirectly represents any person s proceeds of drug trafficking, he deals with that property. (2) In proceedings against a person for an offence under subsection (1), it is a defence to prove that (a) he intended to disclose to an authorised officer such knowledge, suspicion or matter as is mentioned in section 25A(1) in relation to the act in contravention of subsection (1) concerned; and (b) there is reasonable excuse for his failure to make disclosure in accordance with section 25A(2). (3) A person who commits an offence under subsection (1) is liable (a) on conviction upon indictment to a fine of HK$5,000,000 and to imprisonment for 14 years; or (b) on summary conviction to a fine of HK$500,000 and to imprisonment for 3 years. Section 25A - Disclosure of knowledge or suspicion that property represents proceeds, etc. of drug trafficking (1) Where a person knows or suspects that any property - 39