The Importance of Robust Anti-Money Laundering Controls
Money Laundering is matter of some concern - Globally
It will come as no surprise to learn that money laundering and terrorist financing (“ML/TF”) continues to be a major concern for bank regulators around the world. Money laundering has attracted increasing attention as the global economy has grown and become more integrated. Hardly a day goes by without media coverage somewhere, telling how millions were laundered or how some banks failed to spot what was going on. Some of these cases have a Hong Kong angle, often because transactions reportedly went through our banking system. These cases, if substantiated, indeed impact the integrity of our banks and risk tarnishing Hong Kong’s reputation as a trusted financial centre, a reputation that has been hard earned and we will not give up lightly.
Money laundering is a risk for International Financial Centres
The reported news of involvement of Hong Kong in some high profile cases is hardly a surprise given its role as an important financial centre. Like other IFCs, Hong Kong’s banking system is large and complex, processing hundreds of thousands of cross-border payment transactions on a daily basis. These are often between institutions subject to equivalent AML/CFT requirements in jurisdictions which apply the same international standards.
The vast majority of these transactions support perfectly legitimate economic activities. Even for the very small amount of transactions which may not be legitimate, they may not have the appearance of ‘dirty money’, as money launderers will endeavour to evade anti-money laundering and counter-terrorist financing (“AML/CFT”) controls to conceal their activities such as through the use of multiple companies in different locations and often involving structured payments.
Given these facts and taking into account the importance of the global payments system, it is simply not practicable or realistic to expect that ‘dirty money’ will be identified and/or rejected when a transaction is processed by a bank. The ability to do so would rely heavily on case-specific, targeted information which is rarely available to banks.
Effective systems to detect suspicious transactions are important
Rather, the international standards implemented globally are whether banks have effective AML/CFT systems and controls in place to detect and report suspicious transactions after they have been made, based on their knowledge of the customer, regardless of where the transactions are made to or from.
In the context of Hong Kong, which has free movement of funds and high volumes of daily cross-border transactions, this is an important requirement.
Recognising this importance, the HKMA has over the past years taken steps to require banks to implement better systems and controls to deter ML/TF and detect suspicious transactions. This is perhaps best reflected in our actions - we have increased our specialist resources threefold in 4 years, and formed a dedicated Division to consolidate that experience. We have ramped up our AML/CFT supervision and engagement with the banking sector and provided more guidance, in particular around transaction monitoring and the reporting of suspicious transactions.
These efforts have not gone unrewarded. Many banks in Hong Kong have taken significant steps to beef up their AML/CFT systems and controls. Banks understand their risks better than before and have improved their systems to detect and report suspicious transactions. Although extremely challenging because of the complexity of some ML/TF methods, we have seen a big increase in banks’ capacity in this area. Taking last year as an example, 83% of all suspicious transaction reports (“STRs”) made to the Joint Financial Intelligence Unit were made by banks, with STRs by banks rising year on year, 19,202 in 2012, 27,328 in 2013 and 31,095 in 2014. This reflects increasingly mature and well developed AML/CFT systems and controls in banks.
So when these cases are reported it is not always correct to assume that banks have not played their role; financial intelligence generated by banks is an important pillar of the global AML/CFT regime and Hong Kong banks play a significant part in that. But the law generally precludes discussion of the precise role that financial intelligence provided by banks plays in some of those cases.
It is also often misunderstood that banks have access to law enforcement investigations or intelligence. This is not the case. They have what they know of the customer and the transactions which that customer undertakes and on that basis must determine if any of those transactions are abnormal, unusual or simply don’t make sense. Where this is the case, and after further analysis, the bank may determine they are “suspicious” and make a STR. Given the volume of cross-border payment transactions processed each day in Hong Kong, the size of this undertaking becomes apparent.
Recently, as a result of banks strengthening their control systems, the application of AML/CFT requirements has created some tension with consumer issues and we have seen a number of complaints from customers over being able to open or maintain accounts or being asked to update documentation. This is not dissimilar to what has been happening in some other jurisdictions. We will use our complaints framework to assess these complaints and have also been working with banks to ensure our expectations are clear on this issue. But we expect that some of these complaints will be a result of a lack of awareness of the increased risk-based compliance requirements that now apply and how these are communicated to customers.
How do our efforts on AML compare?
I am often asked how these efforts compare with other jurisdictions. This is a difficult question to answer because no two jurisdictions are completely alike or share the same risks. The only objective benchmark is how we are rated against the ‘international AML/CFT standards’ – the Forty Recommendations set by the Financial Action Task Force (“FATF”), an intergovernmental body to which Hong Kong has been a member since 1991 that provides a global framework to combat ML/TF, part of which are the customer due diligence requirements and obligations to report suspicious transactions which apply to banks.
We were last assessed in 2007 by the FATF. What we can say is that almost all the issues identified in 2007 that related to the banks or the HKMA have been fixed, mainly through the enactment of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (“AMLO”) in 2012. This has played an important role in increasing banks’ capacity to identify suspicious transactions because the requirement to monitor transactions to identify what might be suspicious is now embedded in law.
Our supervisory efforts on the AML/CFT front have been more recently assessed against international standards by the International Monetary Fund who concluded that “the HKMA has demonstrated a high degree of commitment to enhanced practices, increased specialist resources, and strongly promoted awareness of AML/CTF concerns.”
So when asked, I am able to answer that the banking sector has AML/CFT requirements which meet the international standards and are on a par with other financial centres. But how effective these are, that question is probably best left to 2018 after the FATF conducts a further mutual evaluation, preparations for which have already commenced.
But like all large financial centres we are by no means perfect
But as positive as some of these results may be, there is much more work needs to be done. Similar to overseas bank regulators, we found that meeting AML/CFT expectations, particularly around higher risk customers remains a challenge for some banks, while some banks have at times underestimated the effort and resources required by our AML/CFT regime, particularly around monitoring transactions, where the cost of compliance can be high.
While it is fair to say most banks are getting the balance right, there should be no doubt on the part of the industry or the public that where they do not, we will take action. To do this, we use a wide range of tools; we have conducted more on-site examinations on AML/CFT, making more recommendations for enhancements and at the same time made increasing use of powers under the Banking Ordinance to appoint an external expert to assist banks in implementing effective AML/CFT systems.
And looking forward, we anticipate adding to these actions in the near future through the targeted use of our enforcement powers, an additional tool provided under the AMLO in 2012, as the first investigation into AML/CFT control breaches nears completion. These actions, which we intend to make public, will reflect our desire to be as transparent and robust as possible.
We expect ML news involving Hong Kong will continue by virtue of the fact that Hong Kong is an IFC. Many of these cases occurred when some of today’s requirements, introduced to tighten the requirements, did not apply. But as our system matures Banks are increasingly playing their role in combating this global problem and the HKMA will continue to perform its supervisory role with the utmost dedication. This is not only to meet international standards, but because AML/CFT controls enhance the integrity of the banking sector and will continue to take centre stage in the international banking scene going forward. We want banks to do the right things and proactively reduce ML/TF risks to help position Hong Kong for future growth at the centre of a cleaner and more transparent global economy.
The ongoing challenge, which is shared between the HKMA and the banking sector, is to ensure that banks effectively perform their gatekeeper role and are able to detect and report suspicious transactions on the basis of effective, risk-based AML/CFT controls that work towards our common interest in the long term sustainability of a respected and trusted banking sector.
Head (Anti-Money Laundering and Financial Crime Risk)
4 June 2015