AML / CFT: HK's new draft law: it's been a long time coming

The signs are good: the Bill has reached the first major milestone. On 29th October, it was gazetted. There is no doubt both relief and dread in equal measure.

Relief because HK has been something of a laughing stock for several years. The territory which gave us the concept of an independent and efficient anti-corruption agency has found its counter-money laundering law both antiquated and subverted.

And therefore, it has been underused.

It's about a decade since Hong Kong first tried to update its ancient (1994) law which was closely modelled on the counter-money laundering provisions of the UK's Criminal Justice Act 1988 (but actually appearing in the CJA1993 and "exported" to the 1988 Act) and the UK's Money Laundering Regulations 1993 (themselves based on the EU's First Money Laundering Directive in 1991). The EU directive was broadly in line with the Financial Action Task Force's original 40 Recommendations.

While Hong Kong has made minor modifications to its laws, most changes have been effected at a regulatory level - and even then mostly applicable to banks.

Yet, as the gateway between China and the rest of the world (a role increasingly being challenged by Shanghai although there is a long way to go), Hong Kong plays a vital role in accessing information on money flows.

Indeed, only last week SAFE, the Chinese foreign currency regulator, disciplined nine banks for failures in their exchange control processes relating to many millions of USD, much of which was introduced into China from or via Hong Kong.

Property in Hong Kong is seen as a wise investment by mainland Chinese and prices have been on a steady upswing for the past decade with little more than a passing nod to the global financial crisis. Car dealers and estate agents talk of customers with carrier bags stuffed with US dollars. Shops, originally built to cater for western bargain hunters now have a door policy to guard their doors against being overwhelmed by a tidal wave of mainlanders with money to burn.

Prosecutions were all but halted when the government received advice that a case in the UK (long set aside by legislative reform in the UK but still persuasive in HK) required that prosecutors establish that suspicious funds related to specific criminal conduct. That decision - at best rogue in the UK and flying in the face of the ordinary and natural meaning of the words in the 1988 statute, rendered the prosecution of money laundering offences in HK almost moribund.

The Bill is to be introduced to LegCo (the Legislative Council) on 10 November 2010.

But financial institutions and other affected businesses need not panic: HKG plans implementation for 1 April 2012.

"We look forward to early enactment of the Bill to allow more time for the relevant authorities and financial institutions to make necessary preparation for the implementation of the new legislation on the target date of commencement," a spokesman said.

For a place where the skyline used to change every six months, where they run out of land and build new extensions to islands, where one of the world's busiest airports can be relocated literally overnight the speed with which this issue has been handled is remarkably snail-like.

And still it seems that there is no rush.

HKG considers that most of the changes that are in the Bill are to do little more than to regularise the position where there are already regulatory requirements. That's fine in relation to banking, insurance and (some) securities houses where regulators take a strict stance. But outside those core areas, there are huge holes to be plugged.

HKG issued the following list of primary objectives of the Bill:

The major proposals covered by the Bill include:
- codifying the customer due diligence requirements, which refer to the measures enabling financial institutions to establish the identity of each customer, and record-keeping requirements in line with the prevailing international standards as promulgated by the Financial Action Task Force (FATF);
- subjecting specified financial institutions, namely banks and deposit-taking companies (collectively referred to as authorised institutions), licensed corporations in the securities sector, authorised insurers, appointed insurance agents, authorised insurance brokers, money service operators and the Postmaster General to the statutory requirements provided in the new legislation;
- empowering the Monetary Authority (MA), the Securities and Futures Commission (SFC), the Insurance Authority (IA) and the Customs and Excise Department (C&ED) as the respective relevant authorities to supervise compliance with the statutory requirements by the specified financial institutions;
- providing for supervisory and criminal sanctions for contravention of the statutory customer due diligence and record-keeping requirements;
- putting in place a licensing regime for money service operators to be administered by C&ED; and
- establishing an independent review tribunal to review decisions made by the relevant authorities to impose supervisory sanctions and decisions related to money service operator licensing matters.
The proposed statutory customer due diligence and record-keeping requirements largely reflect the existing requirements set out in the administrative guidelines issued by MA, SFC and IA.