Carmen Chu, Executive Director (Enforcement and AML), Hong Kong Monetary Authority
Next-Generation Anti-Money Laundering (AML)
- Good morning, ladies and gentlemen.
- It is my great pleasure to speak at today’s conference. Thanks to ACAMS for the invitation to participate in this important dialogue with public and private AML practitioners from across the region.
- This is a challenging time. Against the background of Covid and technological development, there is increasing evidence that our global response to money laundering and terrorist financing (ML/TF) is under challenge. Growing popularity of online activities during the pandemic, coupled with speedy, remote bank account opening and operation powered by Fintech, while bringing great benefits and convenience, is also fuelling a surge in fraud and money mules. It requires speedy detection and disruption to address the emerging threats, and protect banks as well as their customers from resultant financial losses.
- New technologies are also driving changes in international standards; virtual assets are now subject to the same AML regulation as traditional financial assets, with cybersecurity risk and investor protection also under close check globally and in a holistic manner. At the same time, the Financial Action Task Force (FATF) has been promoting the use of Regtech, which is sharpening our anti-money laundering and counter-financing of terrorist (AML/CFT) efforts and better protecting our economies across the APAC region.
- International standards remain our anchor in responding to threats, and cascading through these standards is the assessment of emerging risks. In Hong Kong, we are currently updating the ML/TF risk assessment for our ecosystem. The banking sector, which the Hong Kong Monetary Authority (HKMA) supervises, remains at “high” risk of being exploited for illicit fund flows. This is no surprise given Hong Kong’s role as an international financial centre and global development in technological innovation in recent years. Our risk assessment builds on detailed information on typologies and trends, which is shared day-to-day through public-private partnerships among banks, law enforcement agencies and the HKMA. This forms the baseline for our risk-based approach to AML.
- Let me turn to the actions necessary to address these identified risks. Innovation in our response will not only make compliance more effective, but also achieve better outcomes, sustainable over the longer term. I will highlight three areas of our work where innovation is really accelerating the move to next-generation approaches to AML, or what I also call “AML” – Analytics, Monitoring and Link-up.
- The value of Analytics has already been demonstrated through more banks being able to examine bigger volumes of data and as a result, speedily identify connections between accounts which would not otherwise be seen. And it is important to share success stories, that is one of the reasons why we are all here. Leveraging more advanced technology and capabilities, Analytics provides high-quality and actionable information to support other stakeholders in the AML ecosystem to disrupt fraud and financial crime. Compliance effectiveness is improved under the overarching objective of protecting the integrity and safety of our system.
- Network analytics was selected as the theme of our first AML Regtech Lab (AMLab), which was launched last November under the HKMA’s Fintech 2025 Strategy, to provide a collaborative platform for banks and the Fintech community to explore the wider use of data and technology. AMLab is part of a broader strategy to support AML Regtech adoption and empowers banks that are less familiar with these tools to develop skills and capabilities in network analytics, and to integrate alternative data sources to strengthen entity resolution.
- And it is the job of regulators such as the HKMA to ensure that such capabilities are deployed consistently across the banking sector, a mission to which we are whole-heartedly committed to help address the four-fold increase in complaints against banks in relation to online scams and fraud over the last two years, alongside the growing popularity of online banking and commerce. The positive response to the first AMLab has set our future direction for Regtech engagement and we will arrange further AMLabs on more themes, such as lower-technology solutions that are more accessible to smaller banks to widen the impact of this initiative.
- As for the HKMA itself, we are also transforming our approach to the collection, storage and analysis of data, in support of more data-driven supervision and targeted interventions. I am referring here to our AML surveillance enhancement programme, a long-term commitment and investment in data, technology as well as supporting capabilities and culture. The objective is to better understand and target higher risks in banks we supervise – such as fraud and global money laundering networks that may prejudice customers’ interests and threaten banking stability.
- The second theme is Monitoring. A common pain point is how to get the best from rules-based monitoring systems and address inefficiencies arising from large volumes of sometimes unproductive alerts. I’ll be brief here noting one of today’s sessions is dedicated to this topic. My view is that transaction monitoring systems will remain an important part of AML efforts, reflected by the fact that technology firms are offering innovative ideas and add-on enhancements that promise to make such systems more effective and efficient.
- While customer on-boarding remains the first line of defence, and whether this is done remotely or in-person, or whether and what technology solutions are employed, the same standards apply. Realistically, on-boarding process is not a “zero failure” concept; it is impossible to stop all criminals from entering the financial system solely by the on-boarding process. Therefore, ongoing transaction monitoring by financial institutions is extremely important for detecting and reporting suspicious transactions early, and assisting investigations by law enforcement agencies to disrupt bad acts.
- Next-generation transaction monitoring is an area we have been looking at since the first AML/CFT Regtech Forum in 2019. Market feedback suggests that a flexible approach will deliver the best results, integrating subject matter expertise with an approach that is customised to each bank. With this in mind, the HKMA is currently undertaking thematic work, supported by a leading Regtech provider, to review performance of a number of banks’ transaction monitoring systems.
- In addition, we are updating our guidance on name screening, transaction monitoring and suspicious transaction reporting, incorporating sound practices as well as insights from engagement with other stakeholders. We will continue to maintain close contact with the industry to assist banks in their important “gatekeeper” role in the AML ecosystem.
- This brings me to the third theme, which is Link-up. Our efforts to apply analytics, improve monitoring, and use the power of the cloud to interrogate increased data sources will be for nothing if there is no link-up across the ecosystem. In Hong Kong, banks and law enforcement agencies as well as the HKMA are linked up through public-private partnerships, notably the Fraud and Money Laundering Intelligence Taskforce (FMLIT)1 which has been scaled up since its inception in 2017 and now includes all 8 virtual banks and 15 major retail banks. A total of 25 alerts were issued to share modus operandi information and good practices across the wider industry. Close collaboration in FMLIT has helped improve our ecosystem response to fraud and financial crime, with around HK$820 million in crime proceeds restrained or confiscated up to March 2022.
- In addition, the HKMA has been closely working with the Anti-Deception Coordination Centre (ADCC)2 to strengthen the banking industry’s capability to intercept fraudulent payments. With the rise in online fraud and mule account networks globally, it is important for banks to be agile and responsive as threats arise. Under the 24/7 stop payment mechanisms, the banking industry helped intercept over HK$2.2 billion in suspected fraudulent payments in 2021.
- The local banking industry, similar to that in other international financial centres, contributed over 80% of suspicious transaction reports filed to the Joint Financial Intelligence Unit (JFIU), providing timely and actionable intelligence leading to criminal investigations. We also support more collaboration at the regional and international levels, for examples through ACAMS events such as this one, and the HKMA’s active participation in FATF discussion including its co-chairmanship of the FATF Evaluations and Compliance Working Group.
- The pandemic, advances in technology and the move to a digital economy are all transforming the landscape to which AML work responds. It is now very clear that innovative tools – adoption of Analytics and technology to supplement and enhance Monitoring systems, with Link-up of public-private as well as regional and international efforts – will allow AML work to focus on keeping up with current and emerging risks. To reap these benefits, financial institutions must continue to innovate and adapt their approaches to Analytics, Monitoring and Link-up for AML.
- Ladies and gentlemen, an open, timely dialogue like this one will help us navigate and accelerate the AML journey in a prudent and agile manner. We must collectively ensure that the APAC region leads the way on innovation in AML/CFT work, delivering higher levels of effectiveness and better outcomes to safeguard our financial systems from being abused for illicit fund flows and to protect consumers from financial losses. I look forward to further insights and fruitful discussions in the remaining part of the programme.
- Thank you.
1 Established in May 2017, the FMLIT is a public-private partnership for information sharing among the Hong Kong Police Force, the HKMA and 23 banks.
2 The Anti-Deception Coordination Centre was established in July 2017 by Hong Kong Police Force to combat against deception and enhance public awareness of various kinds of scams.
Remark: The conference was held on April 23 - 24, 2022.