Client Misconduct – Money Laundering

Client Misconduct – Money Laundering

Client Misconduct – Money Laundering 1402 790 Hauzen

Since Hong Kong is a member of the Financial Action Task Force, businesses are obliged to make a report where they suspect money laundering may be taking place.

Under the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap 405) and the Organised and Serious Crime Ordinance, a person is required to report any property he knows or suspects that such property represents the proceeds of crime or terrorist property. A similar obligation exists in the Organised and Serious Crimes Ordinance (Cap 455). Suspicious transaction reports should be made to the Joint Financial Intelligence Unit, staffed by officers from the Hong Kong Police Force and the Hong Kong Customs and Excise Department. There is an e-reporting system called STREAMS, for which an application form can be made on the JFIU website. In addition, reports can be made by email, fax, post or telephone.

Joint Financial Intelligence Unit
Drug Trafficking (Recovery of Proceeds) Ordinance
Organised and Serious Crimes Ordinance

Financial markets

There are four regulatory authorities which have supervisory and enforcement powers in respect of suspicious transactions: the Securities and Futures Commission, the Hong Kong Monetary Authority, the Insurance Authority and the Customs and Excise Department.

All four have published guidelines on Anti-Money Laundering and Counter-Terrorist Financing to supplement compliance with the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap 615). For more information, see Systems and controls to prevent money laundering and terrorist financing.

In addition, Designated Non-Financial Businesses and Professions (DNFBP), including lawyers, accountants, estate agents, trust and company service providers, as well as precious metal and stone dealers, are also obligated to report suspicious financial transactions to the JFIU. Most of the professions have their own set of guidelines to follow.

AMLO, Sch 2
SFC Codes & Guidelines
Guideline on Anti-Money Laundering and Counter-Terrorist Financing (for authorised institutions)
Guideline on Anti-Money Laundering and Counter-Terrorist Financing (for authorised insurers, reinsurers, appointed insurance agents and authorised insurance brokers carrying on or advising on long term business)
Guideline on Anti-Money Laundering and Counter-Terrorist Financing (for money service operators)

Red flags

The regulatory authorities mentioned above have issued guidelines which set out various factors to determine whether a client is engaged in money laundering:

For example, JFIU sets out factors to take into account when considering if a transaction is ‘suspicious’. It recommends using the ‘SAFE’ system, which it identifies as:

  • Screen – screen accounts for suspicious indicators
  • Ask – ask the customer questions
  • Find – find the customer’s records and review them
  • Evaluate – evaluate all the information

In addition, JFIU outlines some of the more common suspicious activity indicators, which includes but are not limited to the following:

  • Large or frequent cash transactions;
  • Accounts used as a temporary repository for funds;
  • Accounts which suddenly see increased activity, having previously been dormant;
  • Customer refuses, or is unwilling, to provide explanation of financial activity, or provides explanation assessed to be untrue;
  • Activity is incommensurate with that expected from the customer considering the information already known to you about the customer and the customers previous financial activity.

In the financial markets, there is increased regulatory pressure for institutions to be fully appraised of their client: the ‘know your customer’ principle.

The HKMA for example has detailed guidelines on the steps that should be taken, which begins with verification. Anonymous accounts should not be kept, and evidence on the identity and legal existence of clients is necessary.

Reference: Detailed guidelines, Chapter II

In respect of individual applicants:

  • institutions should institute effective procedures for obtaining satisfactory evidence of the identity of applicants for business including obtaining information about name, permanent address, date of birth and occupation
  • positive identification should be obtained from documents issued by official or other reputable sources eg passports or identity cards. For Hong Kong residents, the prime source of identification will be the identity cards which they are required by law to carry with them. File copies of identity documents should be kept
  • institutions are advised to check the address of the applicant by appropriate means, eg by requesting sight of a recent utility or rates bill or checking the Voters Roll maintained by the Registration & Electoral Office

For corporate applicants:

  • company accounts are one of the more likely vehicles for money laundering, even where the company is also being used for legitimate trading purposes. It is therefore important to obtain satisfactory evidence of the identity of the principal shareholders, directors and authorised signatories and of the nature of the business. The guiding principle should be to establish that it is safe to enter into a business relationship with the company concerned
  • the following documents or information should be obtained in respect of corporate applicants for business which are registered in Hong Kong (comparable documents, preferably certified by qualified persons such as lawyers or accountants in the country of registration, should be obtained for those applicants which are not registered in Hong Kong): Certificate of Incorporation and Business Registration Certificate; Memorandum and articles of association; resolution of the board of directors to open an account and confer authority on those who will operate it; and a search of the file at Company Registry
Staff education and training

Employers should ensure that staff are aware of their legal obligations under money laundering laws, and that they can be held personally liable for failing to report suspicious activity to the authorities.

The HKMA guidelines stress that institutions provide proper anti-money laundering training to both local and overseas staff.


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