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New Hong Kong AML guidance for banks addresses trusts and PEPs

Thursday, 15 August, 2019

The Hong Kong Association of Banks has published a guide dealing with difficult anti-money laundering (AML) issues, in readiness for the Financial Action task Force's (FATF’s) imminent mutual evaluation report on the jurisdiction.

The guidance takes the form of 28 frequently asked questions (FAQs), with answers vetted by the Hong Kong Monetary Authority. The FAQs do not have the force of law, but are likely to carry weight in any examination of a bank’s conduct, and the reasonableness of steps it undertook to comply with the otherwise principles-based regime, as they are based on interpretations of both the banking industry and its regulator.

Among other matters, they address identity-checking of natural and legal persons and trusts or other legal arrangements; beneficial owners; ownership and control structure; persons purporting to act on behalf of the customer (PPTAs); reliability of documents, data or information; simplified and enhanced due-diligence; politically exposed persons (PEPs); intermediaries; correspondent banking; and private banking.

Some of the areas have generated considerable debate, according to law firm King & Wood Mallesons' (KWM’s) Hong Kong Office. One of these, addressed in the FAQs, is the unwrapping of trusts.

'The nature of trusts has always led to questions around who the customer is and how far unwrapping needs to go', says KWM. 'New FAQs set out guidance in relation to steps required to be taken regarding the trustee depending on whether the trust, or the trustee is the customer and when dealing with a trust as part of an intermediate layer in the customer structure.'

Another sensitive area is the level of scrutiny to be applied to PEPs: typically individuals who might have the opportunity of misappropriating public funds. The guidance includes new FAQs in relation to PEPs, address the requirements for dealing with 'former' PEPs, and notes a divergence between those previously regarded as 'foreign PEPs' and those previously regarded as 'domestic' or 'international organisation' PEPs.

The new FAQ document also includes a three-page appendix setting out what is deemed to be good practice in relation to source of wealth, what is considered poor practice and practical source of wealth examples in different scenarios.

Four new FAQs are aimed at dealing with the issue of PPTA and developing a harmonised approach, especially the challenging scenario where several people, such as traders and administrative staff, are involved in initiating and executing a transaction. The FAQs make clear that, generally, each legal person customer should have at least one PPTA, and that there may be multiple PPTAs, who act jointly or alone.

'We expect questions about PPTAs will continue around areas still awaiting industry and HKMA consensus', say KWM. 'Further guidance and FAQs are likely to be issued in future.'

It was reported in June 2019 that FATF has assessed Hong Kong's AML regime as 'overall compliant' with its recommendations. The relevant mutual evaluation report is expected to be published in September.

Sources