Transcript No Slide Title

The Fight Against Money Laundering
and Terrorist Financing The HKMA Viewpoint
David Carse
Deputy Chief Executive
Hong Kong Monetary Authority
17 March 2003
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Background
• Heightened concern about money laundering
(ML) post- 9/11
• Extension of that concern to cover terrorist
financing (TF)
• Naming and shaming of Non-Cooperative
Countries and Territories (NCCTs)
• US Patriot Act
• Intensified monitoring of observance of FATF’s
recommendations by IMF etc
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Implications for banks
• Must regard anti-ML and TF systems as an
essential means of self-preservation
• Involvement in a ML or TF scandal could mean –
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damage to reputation
breach of the law
financial penalties
exclusion from the US payment system
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What is terrorist financing?
• TF refers to the carrying out of transactions
involving funds that are owned by terrorists or that
have been/intended to be used for terrorist acts
• Source of funds in TF may be legitimate
• But there is still the same need to disguise the
source of funds - and their potential use
• Therefore terrorists still need to launder funds like
conventional criminals
• Characteristics of TF transactions are similar to
suspicious transactions generally
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Importance of customer due diligence
• It may be possible to detect terrorist-linked
transactions directly through links to the names of
terrorist suspects
– requires particular controls to be put in place to achieve
this
• But in other cases the terrorist link may only
emerge after the event
• It is important therefore to have the general ability
to detect and report suspicious transactions
• This requires effective customer due diligence
within an overall anti-ML system
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The role of the HKMA
• As regulator, our role is to verify that banks have
in place adequate policies, procedures and controls
to combat ML and TF – identify suspicious customers and transactions
– report suspicious transactions to JFIU
– assist the law enforcement authorities through
providing an audit trail
• This is consistent with our role to promote the
stability of the system and protect depositors
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The HKMA Guideline
• The HKMA has published a statutory Guideline on
anti-ML which sets out the standards expected of
banks
• This Guideline is presently being updated through a
Supplement
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Objectives of presentation
• Concentrate on the proposed Supplement to our
Guideline
• Highlight the main areas of change taking account
of – Basel Committee’s paper on “Customer Due Diligence
for Banks”
– the proposed revisions to the Financial Action Task
Force (FATF) Forty Recommendations
– the FATF’s Eight Special Recommendations on
Terrorist Financing
– the new anti-terrorism legislation in Hong Kong
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Customer due diligence (1)
• First priority is for banks to have effective systems
for customer due diligence (CDD)
• This involves the following steps – identify the direct customer
– verify the customer’s identity
– identify the person with beneficial ownership and
control (if different from the direct customer)
– verify the identity of the beneficial owner
– conduct ongoing due diligence and scrutiny (requires
knowledge of customer’s business as well as identity)
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Customer due diligence (2)
• Don’t establish a business relationship until the
CDD process is satisfactorily completed – or at least don’t allow any funds to be paid out of the
account to a third party until identity is verified
• Close the account and return the funds to original
source if process of verification cannot be
successfully completed – consider report to JFIU
– return of funds is subject to any request from JFIU to
freeze the funds
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Customer acceptance policies
• Banks should adopt policies and procedures to
identify higher risk customers – apply enhanced due diligence
– approve at senior management level
• Need to apply appropriate risk factors –
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who the customer is
what he does
where he comes from
where he does business
how he operates the account
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Examples of high risk customers
• Politically exposed persons (PEPs) - individuals
holding important public positions or those related
to them
• Other types of private banking customer
• Correspondent banks - particularly “shell banks”
or those from NCCTs
• Corporate vehicles - including offshore companies
and trusts (need to verify the identity of trustees,
settlors, beneficiaries)
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Reliance on intermediaries for CDD
• OK for banks to rely on intermediaries to perform
CDD procedures on their behalf, BUT – ultimate responsibility for knowing the customer
remains with the bank
– bank must satisfy itself that its intermediaries are “fit
and proper” and use adequate CDD procedures
– CDD procedures should be as rigorous as those of the
bank, and bank must be able to verify this
– preferable to rely on regulated intermediaries from
FATF jurisdictions
– all relevant customer identification data should be
submitted to the bank for review
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Client accounts
• Bank must establish the identity of the underlying
client(s) unless funds for individual clients are comingled at the bank – not permissible to rely on professional secrecy as a
reason for not disclosing identity of the client
• With co-mingled accounts, bank must satisfy itself
about the CDD procedures of the intermediary and
that the intermediary has systems and controls to
allocate funds in the pooled account to the
individual underlying clients
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Non-face-to-face customers
• Banks should conduct a face-to-face interview
wherever possible – particularly important for higher risk customers
• Where an interview is not held (e.g. for internet
accounts), banks should adopt additional risk
mitigation measures, e.g. – require additional documentation
– third party introduction through a reliable intermediary
– first payment into account to be made from an account
with a respectable bank
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Existing accounts
• Banks should review existing accounts in line with
the new standards – where necessary obtain additional verification of
identity
• Should adopt a risk-based approach focusing on
higher risk customers
• Review other accounts based on certain trigger
events, e.g. a large or unusual transaction
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Risk management
• Banks need to be able to conduct effective ongoing monitoring of accounts – not sufficient to rely on ad hoc reports of suspicious
transactions from front line staff
– also need regular MIS reports to identify patterns of
unusual or suspicious activity
• Banks need to appoint a compliance officer to be
in direct charge of their anti-ML effort – compliance officer needs to be proactive and to have
sufficient status and resources
• Internal audit should independently evaluate the
bank’s anti-ML policies and procedures
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Terrorist financing
• United Nations Sanctions (Afghanistan)
Regulation
• United Nations (Anti-Terrorism Measures)
Ordinance – prohibits the supply of funds to terrorists
– requires the reporting of knowledge or suspicion that
any property is terrorist property
• Lists of terrorist names have been gazetted
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Best practices for anti-TF (1)
• Be aware of legal obligations under anti-terrorist
legislation in Hong Kong
• Extend systems for identification of suspicious
transactions to cover terrorist suspects
• Provide adequate guidance and training to staff
• Be aware of the characteristics of TF
• Establish criteria for identifying high risk
customers
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Best practices for anti-TF (2)
• Maintain and update in a timely fashion a
centralised and easily accessible database of
terrorist names
• Check names of both new and existing customers
• Check names of the counterparties of customers
and the beneficiaries/originators of remittances
– look back to past transactions
• Report suspicious transactions to both the JFIU
and the HKMA
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Remittances
• Revised guidance in the Supplement based on the
relevant FATF Recommendation on TF
• Ordering bank in a remittance should include – name of customer and account no (if it exists)
– address or other unique identifier
• Intermediary bank should ensure that the
information remains with the message
• Beneficiary bank should scrutinise remittances that
contain incomplete originator information
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Way forward
• Waiting for final comments from the industry on
our proposals
• Intending to finalise the Supplement by 31 March
• Six month period for implementation
• Case-by-case extension for needed system changes
• Industry forum to be set up to produce further
interpretative guidance
• Full revision of the Guideline when FATF
produces its revised Recommendations
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