The Fight Against Money Laundering and Terrorist Financing - The HKMA Viewpoint

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The Fight Against Money Laundering and Terrorist
Financing -The HKMA Viewpoint

• David Carse
• Deputy Chief Executive
• Hong Kong Monetary Authority
• 17 March 2003

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Background

• Heightened concern about money laundering (ML)
  post- 9/11
• Extension of that concern to cover terrorist
  financing (TF)
• Naming and shaming of Non-Cooperative Countries
  and Territories (NCCTs)
• US Patriot Act
• Intensified monitoring of observance of FATFs
  recommendations by IMF etc

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Implications for banks

• Must regard anti-ML and TF systems as an
  essential means of self-preservation
• Involvement in a ML or TF scandal could mean -
• damage to reputation
• breach of the law
• financial penalties
• exclusion from the US payment system

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What is terrorist financing?

• TF refers to the carrying out of transactions
  involving funds that are owned by terrorists or
  that have been/intended to be used for terrorist
  acts
• Source of funds in TF may be legitimate
• But there is still the same need to disguise the
  source of funds - and their potential use
• Therefore terrorists still need to launder funds
  like conventional criminals
• Characteristics of TF transactions are similar to
  suspicious transactions generally

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Importance of customer due diligence

• It may be possible to detect terrorist-linked
  transactions directly through links to the names
  of terrorist suspects
• requires particular controls to be put in place
  to achieve this
• But in other cases the terrorist link may only
  emerge after the event
• It is important therefore to have the general
  ability to detect and report suspicious
  transactions
• This requires effective customer due diligence
  within an overall anti-ML system

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The role of the HKMA

• As regulator, our role is to verify that banks
  have in place adequate policies, procedures and
  controls to combat ML and TF -
• identify suspicious customers and transactions
• report suspicious transactions to JFIU
• assist the law enforcement authorities through
  providing an audit trail
• This is consistent with our role to promote the
  stability of the system and protect depositors

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The HKMA Guideline

• The HKMA has published a statutory Guideline on
  anti-ML which sets out the standards expected of
  banks
• This Guideline is presently being updated through
  a Supplement

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Objectives of presentation

• Concentrate on the proposed Supplement to our
  Guideline
• Highlight the main areas of change taking account
  of -
• Basel Committees paper on Customer Due
  Diligence for Banks
• the proposed revisions to the Financial Action
  Task Force (FATF) Forty Recommendations
• the FATFs Eight Special Recommendations on
  Terrorist Financing
• the new anti-terrorism legislation in Hong Kong

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Customer due diligence (1)

• First priority is for banks to have effective
  systems for customer due diligence (CDD)
• This involves the following steps -
• identify the direct customer
• verify the customers identity
• identify the person with beneficial ownership and
  control (if different from the direct customer)
• verify the identity of the beneficial owner
• conduct ongoing due diligence and scrutiny
  (requires knowledge of customers business as
  well as identity)

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Customer due diligence (2)

• Dont establish a business relationship until the
  CDD process is satisfactorily completed -
• or at least dont allow any funds to be paid out
  of the account to a third party until identity is
  verified
• Close the account and return the funds to
  original source if process of verification cannot
  be successfully completed -
• consider report to JFIU
• return of funds is subject to any request from
  JFIU to freeze the funds

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Customer acceptance policies

• Banks should adopt policies and procedures to
  identify higher risk customers -
• apply enhanced due diligence
• approve at senior management level
• Need to apply appropriate risk factors -
• who the customer is
• what he does
• where he comes from
• where he does business
• how he operates the account

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Examples of high risk customers

• Politically exposed persons (PEPs) - individuals
  holding important public positions or those
  related to them
• Other types of private banking customer
• Correspondent banks - particularly shell banks
  or those from NCCTs
• Corporate vehicles - including offshore companies
  and trusts (need to verify the identity of
  trustees, settlors, beneficiaries)

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Reliance on intermediaries for CDD

• OK for banks to rely on intermediaries to perform
  CDD procedures on their behalf, BUT -
• ultimate responsibility for knowing the customer
  remains with the bank
• bank must satisfy itself that its intermediaries
  are fit and proper and use adequate CDD
  procedures
• CDD procedures should be as rigorous as those of
  the bank, and bank must be able to verify this
• preferable to rely on regulated intermediaries
  from FATF jurisdictions
• all relevant customer identification data should
  be submitted to the bank for review

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Client accounts

• Bank must establish the identity of the
  underlying client(s) unless funds for individual
  clients are co-mingled at the bank -
• not permissible to rely on professional secrecy
  as a reason for not disclosing identity of the
  client
• With co-mingled accounts, bank must satisfy
  itself about the CDD procedures of the
  intermediary and that the intermediary has
  systems and controls to allocate funds in the
  pooled account to the individual underlying
  clients

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Non-face-to-face customers

• Banks should conduct a face-to-face interview
  wherever possible -
• particularly important for higher risk customers
• Where an interview is not held (e.g. for internet
  accounts), banks should adopt additional risk
  mitigation measures, e.g. -
• require additional documentation
• third party introduction through a reliable
  intermediary
• first payment into account to be made from an
  account with a respectable bank

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Existing accounts

• Banks should review existing accounts in line
  with the new standards -
• where necessary obtain additional verification of
  identity
• Should adopt a risk-based approach focusing on
  higher risk customers
• Review other accounts based on certain trigger
  events, e.g. a large or unusual transaction

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Risk management

• Banks need to be able to conduct effective
  on-going monitoring of accounts -
• not sufficient to rely on ad hoc reports of
  suspicious transactions from front line staff
• also need regular MIS reports to identify
  patterns of unusual or suspicious activity
• Banks need to appoint a compliance officer to be
  in direct charge of their anti-ML effort -
• compliance officer needs to be proactive and to
  have sufficient status and resources
• Internal audit should independently evaluate the
  banks anti-ML policies and procedures

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Terrorist financing

• United Nations Sanctions (Afghanistan) Regulation
• United Nations (Anti-Terrorism Measures)
  Ordinance -
• prohibits the supply of funds to terrorists
• requires the reporting of knowledge or suspicion
  that any property is terrorist property
• Lists of terrorist names have been gazetted

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Best practices for anti-TF (1)

• Be aware of legal obligations under
  anti-terrorist legislation in Hong Kong
• Extend systems for identification of suspicious
  transactions to cover terrorist suspects
• Provide adequate guidance and training to staff
• Be aware of the characteristics of TF
• Establish criteria for identifying high risk
  customers

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Best practices for anti-TF (2)

• Maintain and update in a timely fashion a
  centralised and easily accessible database of
  terrorist names
• Check names of both new and existing customers
• Check names of the counterparties of customers
  and the beneficiaries/originators of remittances
• look back to past transactions
• Report suspicious transactions to both the JFIU
  and the HKMA

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Remittances

• Revised guidance in the Supplement based on the
  relevant FATF Recommendation on TF
• Ordering bank in a remittance should include -
• name of customer and account no (if it exists)
• address or other unique identifier
• Intermediary bank should ensure that the
  information remains with the message
• Beneficiary bank should scrutinise remittances
  that contain incomplete originator information

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Way forward

• Waiting for final comments from the industry on
  our proposals
• Intending to finalise the Supplement by 31 March
• Six month period for implementation
• Case-by-case extension for needed system changes
• Industry forum to be set up to produce further
  interpretative guidance
• Full revision of the Guideline when FATF produces
  its revised Recommendations