Our Ref: B10/1C
14 November 2005
The Chief Executive
All authorized institutions
Dear Sir / Madam,
Combating Money Laundering and Terrorist
Financing Activities
In the light of the recent incident involving Banco Delta Asia
SARL, some Authorized Institutions ("AIs") sought our clarification
on the level of due diligence expected of them in combating money
laundering and terrorist financing activities. We therefore
consider it useful to write to all AIs to clarify our supervisory
standard and approach. You should note that this letter does not in
any way replace or alter our policy requirements and AIs must
continue to observe all the circulars and guidelines issued by the
HKMA on this subject.
Like other supervisory matters, the HKMA adopts a risk-based
approach when evaluating the measures that AIs adopt in combating
money laundering and terrorist financing activities. We also expect
AIs to take a similar approach and put in place proper safeguards
from time to time as situations arise. In other words, AIs should
review their policies, practices, and procedures in combating money
laundering and terrorist financing activities in the light of
emerging events. With regard to the current situation, we believe
that legal risk and reputational risk would stand out as
particularly important among all risk dimensions, and so warrant
special focus.
Legal Risk
While we trust that all AIs are fully aware of their legal and
regulatory obligations in respect of countering money laundering
and terrorist financing, the following serves as a general
reminder:
-
Ongoing obligation to report to
the Joint Financial Intelligence Unit (JFIU): The act
of reporting suspicious transactions involving a particular account
does not necessarily discharge an AI's duty to report suspicious
transactions involving the same account in future.
AIs should therefore maintain the same level of stringency in
reporting suspicious transactions, notwithstanding that the
accounts involved may have been reported to the JFIU before.
-
Implications arising from
regulations of other jurisdictions: While AIs may not
be directly subject to regulations of jurisdictions outside Hong
Kong, it is advisable, depending on their scale and nature of
business, geographical areas of operation etc, for AIs to consider
the need for seeking legal advice on the implications of specific
foreign laws and orders. This is also important in the context of
reputational risk (see below).
Reputational
risk
Narrow compliance with laws and regulations may not fully
protect AIs from reputational risk. AIs need to demonstrate that
they have exercised adequate due diligence and put in place
vigilant control measures that can effectively pick up suspicious
accounts and transactions. In this regard, we would draw your
attention to the following in particular:
-
Evolving nature of money
laundering and terrorist financing activities: AIs
should keep themselves abreast of news and developments relating to
the subject of money laundering and terrorist financing (including
the financing of development, production, acquisition, stockpiling,
and delivery of weapons of mass destruction). This is particularly
important in relation to the identification of names that may
trigger suspicion or be perceived as posing higher risk to the
institution concerned. In this regard, relevant designation by
overseas authorities, such as the list of names published under US
Executive Order 13382, provides useful references in addition to
those lists that the HKMA draws to the attention of AIs from time
to time.
-
Importance of "Know Your
Customer" ("KYC"): The ability to identify suspicious
transactions hinges on the quality of KYC processes. To effectively
distinguish suspicious transactions from normal ones, AIs need to
know their customers, particularly the high-risk customers, to the
extent of understanding the normal volume, forms (e.g. cash
deposit, remittance, letter of credit) and denomination of their
transactions. The usual location of the customers' funding sources
and payment destinations as well as other relevant information
should also be analysed as far as practicable. In essence, the mere
fact of modest transaction amounts may not be sufficient for AIs to
determine that there is no suspicion.
-
Business relationship with
high-risk accounts: In addition to reporting suspicious
transactions, it is also in the interest of AIs to assess the
reputational risk that may arise from maintaining business
relationship with high-risk accounts. Adopting the risk-based
approach, AIs should evaluate such accounts individually to
ascertain the appropriateness of maintaining business relationship
with each of those accounts and whether the benefits brought by
such business relationship justifies taking up the respective risk.
Since these are commercial decisions, AIs will have to make their
judgement based on all the information available to them.
AIs should also note that the standard expected of financial
institutions in combating money laundering and terrorist financing
activities may evolve over time. AIs should in particular keep
themselves updated by, for example, studying the implications of
cases involving financial institutions found by supervisors in
major markets as requiring improvements to their controls for
combating money laundering and terrorist financing. The actions
taken by the Comptroller of the Currency of the United States
earlier this year that involved the New York branch of Arab Bank
PLC is an example.
We expect all AIs to carefully assess the stringency and
effectiveness of the measures that they adopt in combating money
laundering and terrorist financing activities on an ongoing basis.
We will continue to vigorously monitor AI's policies, practices,
and procedures through our supervision process.
Meanwhile, should you have any question arising from this
letter, please feel free to contact your usual supervisory contacts
at the HKMA.
Yours faithfully,
Arthur Yuen
Executive Director
(Banking Supervision)
