Hong Kong needs a stronger hand to deal with money laundering and banks should beef up their staff and technology in order to close loopholes.
This emerged after two recent high-profile cases rocked Hong Kong’s anti-money laundering (AML) regime.
The government is reviewing its legal and regulatory framework before the next evaluation by an anti-money laundering task force, a Hong Kong Monetary Authority (HKMA) spokesman said.
At the same time, it is strengthening its resources dedicated to anti-money laundering oversight of authorized institutions (AIs) to ensure compliance with regulatory requirements.
On June 5-6, the HKMA held a seminar among AI senior executives, part of a series of steps to foster a stronger risk culture. It issued a guidance paper in December on its AML initiatives.
The tougher approach will force financial institutions, especially banks, to beef up their staff and IT support, experts said.
“The requirements [in the HKMA guidance paper] are not new but they provide detailed steps on what the process should be,” said Joanne Leung, managing director of the Private Wealth Management Association (PWMA) of Hong Kong.
“If the current processes of banks in this area have some deficiencies, they would need to beef up their existing processes for compliance.”
Tighter regulations are a trend in major financial centers everywhere in the world and risk management is key to survival in the financial industry, Leung told EJ Insight.
Closer eye on banks
On Wednesday, Stewart McGlynn, acting head of anti-money laundering and financial crime risk in the banking supervision department of the HKMA, said the authority set up a new division in March to consolidate existing resources and increase oversight of AIs.
It plans to hire 31 people for the team by the end of this year, up from 22 last year. The authority is also planning to increase the number of onsite examinations to 20 or more this year, up from 19 last year, 14 in 2012 and 11 in 2011.
“Banks need to balance customer service with anti-money laundering screening as it might take a long time to investigate some transactions. Not every client is patient enough,” said Alex Lee, director of payments markets for Asia Pacific at financial cooperative SWIFT.
Some of their in-house technology is not updated or are not in compliance with the HKMA guidelines, he said.
For example, the guidelines require banks to adopt a system that can screen misspelled names and match non-Latin script such as Chinese codes.
PWMA’s Leung said that although the screening system can sift transactions with AML risk, it still requires an independent AML officer to review the customer profile in order to determine if it is a reportable transaction.
“Sometimes, they will go back to the customer for more details to confirm the purpose of the transaction. If the customer’s explanation is not satisfactory, the AI will decide if they want to file for suspicious transaction reporting.”
As the reporting is not a mechanical process, once a transaction with risk is detected, it will take some time to review and confirm before filing for reporting, she said.
According to data from the Joint Financial Intelligence Unit jointly run by the Hong Kong Police and Hong Kong Customs and Excise, there were 32,907 cases of suspicious transaction reports last year, 27,328 of which were from banks. This compares with 19,202 cases from banks of 23,282 reports.
As of end-May, 12,931 reports had been filed by Hong Kong lenders, it said.
Chris Fordham, managing partner of Asia Pacific fraud investigation and dispute services of Ernst & Young, said regulators in Hong Kong and around the world are putting more emphasis on understanding money laundering and why it is a crime.
Staff are now required to understand why a particular case is related to money laundering. This is a significant shift from the previous practice in which staff “only needed to know how to screen crime using some sort to tools”.
This is why many banks are reorganizing their crime teams, he said.
Chrisol Correia, a general manager of LexisNexis Risk Solutions, sees AML converging with other compliance areas such as anti-bribery and fraud.
In fact, the HKMA is looking to combat tax evasion when they did examinations on banks. “Existing customer due diligence requirements under the Anti-Money Laundering Ordinance should effectively detect and deter the laundering of tax crime proceeds… and the HKMA is going to enhance focus on tax evasion during anti-money laundering on-site examinations,” McGlynn said.
The culture is changing, too, Correia added. Years ago, compliance work was about prevention, “but now, in a broad consensus, risk management becomes an essential piece of running a good business”.
All this seems to make two high-profile anti-money laundering cases in Hong Kong feel like ages ago.
In January last year, a 22-year-old Chinese man was jailed 10-1/2 years years for laundering HK$13.1 billion through a shell corporation and a bank account, the largest in the city’s history, Yicai reported.
In March, a mainland woman was suspected of laundering HK$10 billion in eight bank accounts, according to China National Radio.
The HKMA had no comment but said Hong Kong should now be better equipped to deal with money laundering or terrorist financing after bolstering its AML defenses.
The Financial Action Task Force, an intergovernmental body, is expected to assess the effectiveness of the measures in Hong Kong, tentatively in 2017, after a similar review in 2012.
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