Government proceeds with proposals to enhance Hong Kong regulations on anti-money laundering and counter-terrorist financing

In 2018, Hong Kong's regime will be subject to mutual evaluation with those of other members of the Financial Action Task Force (FATF). FATF sets international standards for anti-money laundering and counter-terrorist financing regulation and reviews the effectiveness of regulation in member countries. The Government is keen to ensure that Hong Kong's rating is not adversely affected. It is proceeding with proposed changes to bring Hong Kong's regulatory regime in line with FATF’s standards in time for its mutual assessment.

The Government has issued a combined consultation conclusions paper on its two consultation papers issued in January 2017 setting out proposals to (i) enhance the transparency of beneficial ownership of Hong Kong companies and (ii) to extend the customer due diligence (CDD) and relevant record-keeping requirements to designated non-financial businesses and professions (DNFBPs).

Across the board, there was general support for the Government's proposals. Save for some amendments discussed below, the Government is planning to take the proposals forward and introduce amendment bills into the Legislative Council by July 2017.

Consultation conclusions on proposals to enhance transparency of beneficial ownership of Hong Kong companies

Please refer to our e-bulletin for details on the key features of the proposals. Following general support, the Government will proceed with its proposed amendments to the Companies Ordinance (Cap 622) requiring all Hong Kong incorporated companies (other than listed companies who will be exempt) to obtain and hold beneficial ownership information.

In response to consultation feedback, the Government is making some modifications to its original proposal. These include:

• restricting access to the registers of  persons with significant control (PSC Register) to competent authorities only, rather than allowing public inspection as initially proposed. This takes into account privacy concerns raised during the consultation.
• reserving power to the Secretary for Financial Services and Treasury to make rules expanding categories of company exempt from the regime. Currently only listed companies will be exempt.
• reducing the scope of persons to whom a company is required to serve a notice when seeking to identifying beneficial owners.
• adding a statutory defence for addressees not responding to a notice on the grounds that is a frivolous or vexatious claim.
• reducing the record keeping requirement from ten years to six years.

The Government is not pursuing market suggestions to extend the regime to foreign companies registered in Hong Kong. In respect of a market suggestion that the PSC Register should be filed with the Companies Registry for more timely access by competent authorities, the Government will monitor international developments and revisit this in the future if necessary.

To ease concerns raised on the application of the regime, the Companies Registry will issue guidelines to aid interpretation.

Consultation conclusions on proposals to extend application of AMLO to DNFBPs

Please refer to our e-bulletin for details on the key features of the proposals. By way of recap, the Government proposed that the scope of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) (AMLO) be extended to require DNFBPs to observe statutory customer due diligence and record-keeping requirements. DNFBPs (which include solicitors, accountants, real estate agents and trust or company service providers (TCSPs)) would be subject to such requirements when they engage in specified transactions.

Two notable sectors (legal and real estate) proposed exemptions from the legislation entirely. The Law Society of Hong Kong (LSHK) argued that solicitors and foreign lawyers should be treated differently to other DNFBP sectors because they are subject to a comparable regime already in the form of Practice Direction P issued by the LSHK. The Government pointed to unfavourable ratings by FATF in Singapore and the US, where those jurisdictions had relied on their respective industry regimes. As such, the Government will proceed with the inclusion of solicitors and foreign lawyers in the legislation. It should be noted that in-house solicitors fall outside the scope of FATF's defined scope. It is the underlying business employing the in-house lawyer which is relevant when determining the rules that in-house lawyer is subject to with respect to customer due diligence and record-keeping.

The Estate Agents Authority (EAA) also argued that real estate agents should be exempted due to the low money laundering risk posed. The Government rejected this argument: real estate agents fell within FACTF's defined scope and the AMLO should not, in their view, be burdened with sector nuances.

The Government retained the large majority of its original proposals. In response to consultation feedback, the Government is making some modifications. These include:

• an enabling provision in the AMLO to allow regulatory authorities to issue sector-specific guidelines on the application of the risk-based approach they should take;
• extending the transitional period for migration to the licensing regime by TCSPs from 90 days to 120 days.

These legislative proposals should be read against the backdrop of increased enforcement in respect of anti-money laundering (AML) and counter financing of terrorism (CFT) compliance in the territory. Since early March 2017, the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) have collectively taken disciplinary actions against five regulated entities and an individual relating to breaches of AML and CFT requirements. See our briefing dated 26 April for more information on these recent disciplinary actions.