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Guideline on Anti-Money Laundering and Counter- Terrorist Financing - PDF
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1 G.N. 409 Guideline on Anti-Money Laundering and Counter- Terrorist Financing (For authorized insurers, reinsurers, appointed insurance agents and authorized insurance brokers carrying on or advising on long term business) January 2012 Office of the Commissioner of Insurance
2 CONTENTS Chapter 1 Overview...1 Page Chapter 2 Chapter 3 AML/CFT systems and business conducted outside Hong Kong...7 Risk-based approach...12 Chapter 4 Customer due diligence...15 Chapter 5 Ongoing monitoring...49 Chapter 6 Financial sanctions and terrorist financing...52 Chapter 7 Suspicious transaction reports...56 Chapter 8 Chapter 9 Record-keeping...73 Staff training...76 Chapter 10 Wire transfers...78 Appendix A Appendix B Examples of reliable and independent sources for customer identification purposes...84 Sample correspondence issued by the JFIU...86 Glossary of key terms and abbreviations...90
3 Chapter 1 OVERVIEW Introduction 1.1 The Guideline is published under section 7 of the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, Cap. 615 (the AMLO) and section 4A of the Insurance Companies Ordinance, Cap. 41 (the ICO). 1.2 Terms and abbreviations used in this Guideline shall be interpreted by reference to the definitions set out in the Glossary part of this Guideline. Interpretation of other words or phrases should follow those set out in the AMLO and the ICO. 1.3 This Guideline is issued by the Insurance Authority for giving guidance to authorized insurers, reinsurers, appointed insurance agents and authorized insurance brokers carrying on or advising on long term business (hereinafter referred to as insurance institutions ( IIs ) ). In general, the guidance provided in the Guideline in Chapters 1-10 to IIs is not different from the guidance provided by other relevant authorities (RAs) under their respective regulatory regimes. To the extent that the Insurance Authority sees fit to provide supplementary guidance in Chapters 1-10, such will be put in italics for ease of identification. 1.4 The Guideline is intended for use by financial institutions (FIs) and their officers and staff. The purposes of the Guideline are to: (a) provide a general background on the subjects of money laundering and terrorist financing (ML/TF), including a summary of the main provisions of the applicable anti-money laundering and counter-financing of terrorism (AML/CFT) legislation in Hong Kong; and (b) provide practical guidance to assist FIs and their senior management in designing and implementing their own policies, procedures and controls in the relevant operational areas, taking into consideration their special circumstances so as to meet the relevant AML/CFT statutory and regulatory requirements. 1.5 The relevance and usefulness of the Guideline will be kept under review and it may be necessary to issue amendments from time to time. 1.6 Given the significant differences that exist in the organisational and legal structures of different FIs as well as the nature and scope of the business activities conducted by them, there exists no single set of universally applicable implementation measures. It must also be emphasized that the contents of the Guideline is neither intended to, nor should be construed as, an exhaustive list of the means of meeting the statutory and regulatory requirements. 1.7 This Guideline provides guidance in relation to the operation of the provisions of Schedule 2 to the AMLO (Schedule 2). This will assist FIs to meet their legal and regulatory obligations when tailored by FIs to their particular business risk profile. Departures from this Guidance, and the rationale for so doing, should be documented, and FIs will have to stand prepared to justify departures to the RAs. s.7, 1.8 A failure by any person to comply with any provision of this Guideline does not by 1
4 AMLO itself render the person liable to any judicial or other proceedings but, in any proceedings under the AMLO before any court, this Guideline is admissible in evidence; and if any provision set out in this Guideline appears to the court to be relevant to any question arising in the proceedings, the provision must be taken into account in determining that question. 1.8a In addition, a failure to comply with any provision of this Guideline by IIs may reflect adversely on the fitness and properness of their directors and controllers 1, and may result in disciplinary action taken against IIs. The nature of money laundering and terrorist financing s.1, Sch. 1, AMLO 1.9 The term money laundering is defined in section 1 of Part 1 of Schedule 1 to the AMLO and means an act intended to have the effect of making any property: (a) that is the proceeds obtained from the commission of an indictable offence under the laws of Hong Kong, or of any conduct which if it had occurred in Hong Kong would constitute an indictable offence under the laws of Hong Kong; or (b) that in whole or in part, directly or indirectly, represents such proceeds, not to appear to be or so represent such proceeds There are three common stages in the laundering of money, and they frequently involve numerous transactions. An FI should be alert to any such sign for potential criminal activities. These stages are: (a) Placement - the physical disposal of cash proceeds derived from illegal activities; (b) Layering - separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the source of the money, subvert the audit trail and provide anonymity; and (c) Integration - creating the impression of apparent legitimacy to criminally derived wealth. In situations where the layering process succeeds, integration schemes effectively return the laundered proceeds back into the general financial system and the proceeds appear to be the result of, or connected to, legitimate business activities. s.1, Sch. 1, AMLO 1.11 The term terrorist financing is defined in section 1 of Part 1 of Schedule 1 to the AMLO and means: (a) the provision or collection, by any means, directly or indirectly, of funds (i) with the intention that the funds be used; or (ii) knowing that the funds will be used, in whole or in part, to commit one or more terrorist acts (whether or not the funds are actually so used); or (b) making available funds or financial (or related) services, directly or indirectly, to or for the benefit of a person knowing that, or being reckless as to whether, the person is a terrorist or terrorist associate. 1 For interpretations of the terms director and controller, please refer to section 2 of the ICO. 2
5 1.12 Terrorists or terrorist organizations require financial support in order to achieve their aims. There is often a need for them to obscure or disguise links between them and their funding sources. It follows then that terrorist groups must similarly find ways to launder funds, regardless of whether the funds are from a legitimate or illegitimate source, in order to be able to use them without attracting the attention of the authorities. Vulnerabilities in insurance industry 1.12a The insurance industry is vulnerable to ML and TF. The inherent characteristics of insurance products may give rise to ML risks unique to the insurance industry. When a life insurance policy matures or is surrendered, funds become available to the policy holder or other beneficiaries (e.g. an assignee, where the policy has been assigned, or a trustee, where the policy has been placed in trust). The beneficiary to the contract may be changed possibly against payment before maturity or surrender, in order that payments can be made by the insurer to a new beneficiary. A policy might be used as collateral to purchase other financial instruments. These investments in themselves may only be one part of a sophisticated web of complex transactions with their origins elsewhere in the financial system. 1.12b Examples of the type of long term insurance contracts that are vulnerable as a vehicle for laundering money or financing terrorism are products such as: (a) (b) (c) (d) unit-linked or with profit single premium contracts; single premium life insurance policies that store cash value; fixed and variable annuities; and (second hand) endowment policies. 1.12c ML and TF using reinsurance could occur either by establishing fictitious (re)insurance companies or reinsurance intermediaries, fronting arrangements and captives or by the misuse of normal reinsurance transactions. Examples include: the deliberate placement via the insurer of the proceeds of crime or terrorist funds with reinsurers in order to disguise the source of funds; the establishment of bogus reinsurers, which may be used to launder the proceeds of crime or to facilitate terrorist funding; the establishment of bogus insurers, which may be used to place the proceeds of crime or terrorist funds with legitimate reinsurers. 1.12d Insurance intermediaries 2 are important for distribution, underwriting and claims settlement. They are often the direct link to the policy holder and therefore, intermediaries should play an important role in AML and CFT. The same principles that apply to insurers should generally apply to insurance intermediaries. The person who wants to launder money or finance terrorism may seek an insurance intermediary who is not aware of or does not conform to necessary procedures, or who fails to recognize or report information regarding possible cases of ML or TF. The 2 Insurance intermediaries refer to appointed insurance agents or authorized insurance brokers carrying on or advising on long term insurance business in Hong Kong. 3
6 intermediaries themselves could have been set up to channel illegitimate funds to insurers. Legislation concerned with money laundering and terrorist financing 1.13 The Financial Action Task Force (the FATF) is an inter-governmental body formed in 1989 that sets the international AML standards. Its mandate was expanded in October 2001 to combat the financing of terrorism. In order to ensure full and effective implementation of its standards at the global level, the FATF monitors compliance by conducting evaluations on jurisdictions and undertakes stringent follow-up after the evaluations, including identifying high-risk and uncooperative jurisdictions which could be subject to enhanced scrutiny by the FATF or countermeasures by the FATF members and the international community at large. Many major economies have joined the FATF which has developed into a global network for international cooperation that facilitates exchanges between member jurisdictions. As a member of the FATF, Hong Kong is obliged to implement the AML requirements as promulgated by the FATF, which include the 40 Recommendations and the Nine Special Recommendations (hereafter referred to collectively as FATF s Recommendations ) 3 and it is important that Hong Kong complies with the international AML standards in order to maintain its status as an international financial centre The four main pieces of legislation in Hong Kong that are concerned with ML/TF are the AMLO, the Drug Trafficking (Recovery of Proceeds) Ordinance (the DTROP), the Organized and Serious Crimes Ordinance (the OSCO) and the United Nations (Anti-Terrorism Measures) Ordinance (the UNATMO). It is very important that FIs and their officers and staff fully understand their respective responsibilities under the different legislation. AMLO s.23, Sch. 2 s.5, AMLO s.5, AMLO 1.15 The AMLO imposes requirements relating to customer due diligence (CDD) and record-keeping on FIs and provides RAs with the powers to supervise compliance with these requirements and other requirements under the AMLO. In addition, section 23 of Schedule 2 requires FIs to take all reasonable measures (a) to ensure that proper safeguards exist to prevent a contravention of any requirement under Parts 2 and 3 of Schedule 2; and (b) to mitigate ML/TF risks The AMLO makes it a criminal offence if an FI (1) knowingly; or (2) with the intent to defraud any RA, contravenes a specified provision of the AMLO. The specified provisions are listed in section 5(11) of the AMLO. If the FI knowingly contravenes a specified provision, it is liable to a maximum term of imprisonment of 2 years and a fine of $1 million. If the FI contravenes a specified provision with the intent to defraud any RA, it is liable to a maximum term of imprisonment of 7 years and a fine of $1 million upon conviction The AMLO also makes it a criminal offence if a person who is an employee of an FI or is employed to work for an FI or is concerned in the management of an FI (1) knowingly; or (2) with the intent to defraud the FI or any RA, causes or permits the FI 3 The FATF s Recommendations can be found on the FATF website 4
7 to contravene a specified provision in the AMLO. If the person who is an employee of an FI or is employed to work for an FI or is concerned in the management of an FI knowingly contravenes a specified provision he is liable to a maximum term of imprisonment of 2 years and a fine of $1 million upon conviction. If that person does so with the intent to defraud the FI or any RA he is liable to a maximum term of imprisonment of 7 years and a fine of $1 million upon conviction. s.21, AMLO DTROP OSCO 1.18 RAs may take disciplinary actions against FIs for any contravention of a specified provision in the AMLO. The disciplinary actions that can be taken include publicly reprimanding the FI; ordering the FI to take any action for the purpose of remedying the contravention; and ordering the FI to pay a pecuniary penalty not exceeding the greater of $10 million or 3 times the amount of profit gained, or costs avoided, by the FI as a result of the contravention The DTROP contains provisions for the investigation of assets that are suspected to be derived from drug trafficking activities, the freezing of assets on arrest and the confiscation of the proceeds from drug trafficking activities upon conviction The OSCO, among other things: (a) gives officers of the Hong Kong Police and the Customs and Excise Department powers to investigate organized crime and triad activities; (b) gives the Courts jurisdiction to confiscate the proceeds of organized and serious crimes, to issue restraint orders and charging orders in relation to the property of a defendant of an offence specified in the OSCO; (c) creates an offence of money laundering in relation to the proceeds of indictable offences; and (d) enables the Courts, under appropriate circumstances, to receive information about an offender and an offence in order to determine whether the imposition of a greater sentence is appropriate where the offence amounts to an organized crime/triad related offence or other serious offences. UNATMO s.25, DTROP & OSCO s.6, 7, 8, 13 & 14, UNATM 1.21 The UNATMO is principally directed towards implementing decisions contained in Resolution 1373 dated 28 September 2001 of the United Nations Security Council (UNSC) aimed at preventing the financing of terrorist acts. Besides the mandatory elements of the UNSC Resolution 1373, the UNATMO also implements the more pressing elements of the FATF s special recommendations on terrorist financing Under the DTROP and the OSCO, a person commits an offence if he deals with any property knowing or having reasonable grounds to believe it to represent any person s proceeds of drug trafficking or of an indictable offence respectively. The highest penalty for the offence upon conviction is imprisonment for 14 years and a fine of $5 million The UNATMO, among other things, criminalizes the provision or collection of funds and making funds or financial (or related) services available to terrorists or terrorist associates. The highest penalty for the offence upon conviction is imprisonment for 5
8 O s.25a, DTROP & OSCO, s.12 & 14, UNATM O s.25a, DTROP & OSCO, s.12 & 14, UNATM O 14 years and a fine. The UNATMO also permits terrorist property to be frozen and subsequently forfeited The DTROP, the OSCO and the UNATMO also make it an offence if a person fails to disclose, as soon as it is reasonable for him to do so, his knowledge or suspicion of any property that directly or indirectly, represents a person s proceeds of, was used in connection with, or is intended to be used in connection with, drug trafficking, an indictable offence or is terrorist property respectively. This offence carries a maximum term of imprisonment of 3 months and a fine of $50,000 upon conviction Tipping off is another offence under the DTROP, the OSCO and the UNATMO. A person commits an offence if, knowing or suspecting that a disclosure has been made, he discloses to any other person any matter which is likely to prejudice any investigation which might be conducted following that first-mentioned disclosure. The maximum penalty for the offence upon conviction is imprisonment for 3 years and a fine. 6
9 Chapter 2 AML/CFT SYSTEMS AND BUSINESS CONDUCTED OUTSIDE HONG KONG AML/CFT systems s.23(a) & (b), 2.1 FIs must take all reasonable measures to ensure that proper safeguards exist to mitigate the risks of ML/TF and to prevent a contravention of any requirement under Part 2 or 3 of Schedule 2. To ensure compliance with this requirement, FIs should implement appropriate internal AML/CFT policies, procedures and controls (hereafter collectively referred to as AML/CFT systems ). Risk factors 2.2 While no system will detect and prevent all ML/TF activities, FIs should establish and implement adequate and appropriate AML/CFT systems (including customer acceptance policies and procedures) taking into account factors including products and services offered, types of customers, geographical locations involved. Product/service risk 2.3 An FI should consider the characteristics of the products and services that it offers and the extent to which these are vulnerable to ML/TF abuse. In this connection, an FI should assess the risks of any new products and services (especially those that may lead to misuse of technological developments or facilitate anonymity in ML/TF schemes) before they are introduced and ensure appropriate additional measures and controls are implemented to mitigate and manage the associated ML/TF risks. Delivery/distribution channel risk 2.4 An FI should also consider its delivery/distribution channels and the extent to which these are vulnerable to ML/TF abuse. These may include sales through online, postal or telephone channels where a non-face-to-face account opening approach is used. Business sold through intermediaries may also increase risk as the business relationship between the customer and an FI may become indirect. Customer risk 2.5 When assessing the customer risk, FIs should consider who their customers are, what they do and any other information that may suggest the customer is of higher risk. 2.6 An FI should be vigilant where the customer is of such a legal form that enables individuals to divest themselves of ownership of property whilst retaining an element of control over it or the business/industrial sector to which a customer has business connections is more vulnerable to corruption. Examples include: (a) companies that can be incorporated without the identity of the ultimate underlying principals being disclosed; (b) certain forms of trusts or foundations where knowledge of the identity of the true underlying principals or controllers cannot be guaranteed; (c) the provision for nominee shareholders; and (d) companies issuing bearer shares. 7
10 2.7 An FI should also consider risks inherent in the nature of the activity of the customer and the possibility that the transaction may itself be a criminal transaction. For example, the arms trade and the financing of the arms trade is a type of activity that poses multiple ML and other risks, such as: (a) corruption risks arising from procurement contracts; (b) risks in relation to politically exposed persons (PEPs); and (c) terrorism and TF risks as shipments may be diverted. Country risk 2.8 An FI should pay particular attention to countries or geographical locations of operation with which its customers and intermediaries are connected where they are subject to high levels of organized crime, increased vulnerabilities to corruption and inadequate systems to prevent and detect ML/TF. When assessing which countries are more vulnerable to corruption, FIs may make reference to publicly available information or relevant reports and databases on corruption risk published by specialised national, international, non-governmental and commercial organisations (an example of which is Transparency International s Corruption Perceptions Index, which ranks countries according to their perceived level of corruption). Effective controls 2.9 To ensure proper implementation of such policies and procedures, FIs should have effective controls covering: (a) senior management oversight; (b) appointment of a Compliance Officer (CO) and a Money Laundering Reporting Officer (MLRO) 4 ; (c) compliance and audit function; and (d) staff screening and training 5. Senior management oversight 2.10 The senior management of any FI is responsible for managing its business effectively; in relation to AML/CFT this includes oversight of the functions described below Senior management should: (a) be satisfied that the FI s AML/CFT systems are capable of addressing the ML/TF risks identified; (b) appoint a director or senior manager as a CO who has overall responsibility for the establishment and maintenance of the FI s AML/CFT systems; and (c) appoint a senior member of the FI s staff as the MLRO who is the central reference point for suspicious transaction reporting In order that the CO and MLRO can discharge their responsibilities effectively, senior management should, as far as practicable, ensure that the CO and MLRO are: (a) subject to constraint of size of the FI, independent of all operational and business 4 5 The role and functions of an MLRO are detailed at paragraphs For some FIs, the functions of the CO and the MLRO may be performed by the same staff member. For further guidance on staff training see Chapter 9. 8
11 functions; (b) normally based in Hong Kong; (c) of a sufficient level of seniority and authority within the FI; (d) provided with regular contact with, and when required, direct access to senior management to ensure that senior management is able to satisfy itself that the statutory obligations are being met and that the business is taking sufficiently robust measures to protect itself against the risks of ML/TF; (e) fully conversant in the FI s statutory and regulatory requirements and the ML/TF risks arising from the FI s business; (f) capable of accessing, on a timely basis, all available information (both from internal sources such as CDD records and external sources such as circulars from RAs); and (g) equipped with sufficient resources, including staff and appropriate cover for the absence of the CO and MLRO (i.e. an alternate or deputy CO and MLRO who should, where practicable, have the same status). Compliance officer and money laundering reporting officer 2.13 The principal function of the CO is to act as the focal point within an FI for the oversight of all activities relating to the prevention and detection of ML/TF and providing support and guidance to the senior management to ensure that ML/TF risks are adequately managed. In particular, the CO should assume responsibility for: (a) developing and/or continuously reviewing the FI s AML/CFT systems to ensure they remain up-to-date and meet current statutory and regulatory requirements; and (b) the oversight of all aspects of the FI s AML/CFT systems which include monitoring effectiveness and enhancing the controls and procedures where necessary In order to effectively discharge these responsibilities, a number of areas should be considered. These include: (a) the means by which the AML/CFT systems are managed and tested; (b) the identification and rectification of deficiencies in the AML/CFT systems; (c) reporting numbers within the systems, both internally and disclosures to the Joint Financial Intelligence Unit (JFIU); (d) the mitigation of ML/TF risks arising from business relationships and transactions with persons from countries which do not or insufficiently apply the FATF Recommendations; (e) the communication of key AML/CFT issues with senior management, including, where appropriate, significant compliance deficiencies; (f) changes made or proposed in respect of new legislation, regulatory requirements or guidance; (g) compliance with any requirement under Part 2 or 3 of Schedule 2 in overseas branches and subsidiary undertakings and any guidance issued by RAs in this respect; and (h) AML/CFT staff training The MLRO should play an active role in the identification and reporting of suspicious transactions. Principal functions performed are expected to include: 9
12 (a) reviewing all internal disclosures and exception reports and, in light of all available relevant information, determining whether or not it is necessary to make a report to the JFIU; (b) maintaining all records related to such internal reviews; (c) providing guidance on how to avoid tipping off if any disclosure is made; and (d) acting as the main point of contact with the JFIU, law enforcement, and any other competent authorities in relation to ML/TF prevention and detection, investigation or compliance. Compliance and audit function 2.16 Where practicable, an FI should establish an independent compliance and audit function which should have a direct line of communication to the senior management of the FI The compliance and audit function of the FI should regularly review the AML/CFT systems, e.g. sample testing, (in particular, the system for recognizing and reporting suspicious transactions) to ensure effectiveness. The frequency and extent of the review should be commensurate with the risks of ML/TF and the size of the FI s business. Where appropriate, the FI should seek a review from external sources. Staff screening 2.18 FIs must establish, maintain and operate appropriate procedures in order to be satisfied of the integrity of any new employees. Business conducted outside Hong Kong s.22(1), 2.19 A Hong Kong-incorporated FI with overseas branches or subsidiary undertakings should put in place a group AML/CFT policy to ensure that all branches and subsidiary undertakings that carry on the same business as an FI in a place outside Hong Kong have procedures in place to comply with the CDD and record-keeping requirements similar to those imposed under Parts 2 and 3 of Schedule 2 to the extent permitted by the law of that place. The FI should communicate the group policy to its overseas branches and subsidiary undertakings. s.22(2), 2.20 When a branch or subsidiary undertaking of an FI outside Hong Kong is unable to comply with requirements that are similar to those imposed under Parts 2 and 3 of Schedule 2 because this is not permitted by local laws, the FI must: (a) inform the RA of such failure; and (b) take additional measures to effectively mitigate ML/TF risks faced by the branch or subsidiary undertaking as a result of its inability to comply with the above requirements. s.25a, OSCO & DTROP 2.21 Suspicion that property in whole, or partly directly or indirectly represents the proceeds of an indictable offence, should normally be reported within the jurisdiction where the suspicion arises and where the records of the related transactions are held. 10
13 However, in certain cases, e.g. when the account is domiciled in Hong Kong, reporting to the JFIU 6 may be required in such circumstances, but only if section 25A of OSCO/DTROP applies. 6 Section 25(4) of the OSCO stipulates that an indictable offence includes conduct outside Hong Kong which would constitute an indictable offence if it had occurred in Hong Kong. Therefore, where an FI in Hong Kong has information regarding money laundering, irrespective of the location, it should consider seeking clarification with and making a report to the JFIU. 11
14 Chapter 3 RISK-BASED APPROACH Introduction 3.1 The risk-based approach to CDD and ongoing monitoring (RBA) is recognized as an effective way to combat ML/TF. The general principle of an RBA is that where customers are assessed to be of higher ML/TF risks, FIs should take enhanced measures to manage and mitigate those risks, and that correspondingly where the risks are lower, simplified measures may be applied. The use of an RBA has the advantage of allowing resources to be allocated in the most efficient way directed in accordance with priorities so that the greatest risks receive the highest attention. General requirement 3.2 FIs should determine the extent of CDD measures and ongoing monitoring, using an RBA depending upon the background of the customer and the product, transaction or service used by that customer, so that preventive or mitigating measures are commensurate to the risks identified. The measures must however comply with the legal requirements of the AMLO. The RBA will enable FIs to subject customers to proportionate controls and oversight by determining: (a) the extent of the due diligence to be performed on the direct customer; the extent of the measures to be undertaken to verify the identity of any beneficial owner and any person purporting to act on behalf of the customer; (b) the level of ongoing monitoring to be applied to the relationship; and (c) measures to mitigate any risks identified. For example, the RBA may require extensive CDD for high risk customers, such as an individual (or corporate entity) whose source of wealth and funds is unclear or who requires the setting up of complex structures. FIs should be able to demonstrate to the RAs that the extent of CDD and ongoing monitoring is appropriate in view of the customer s ML/TF risks. 3.3 There are no universally accepted methodologies that prescribe the nature and extent of an RBA. However, an effective RBA does involve identifying and categorizing ML/TF risks at the customer level and establishing reasonable measures based on risks identified. An effective RBA will allow FIs to exercise reasonable business judgment with respect to their customers. An RBA should not be designed to prohibit FIs from engaging in transactions with customers or establishing business relationships with potential customers, but rather it should assist FIs to effectively manage potential ML/TF risks. Customer acceptance/risk assessment 3.4 FIs may assess the ML/TF risks of individual customers by assigning a ML/TF risk rating to their customers. 12
15 3.5 While there is no agreed upon set of risk factors and no one single methodology to apply these risk factors in determining the ML/TF risk rating of customers, relevant factors to be considered may include the following: 1. Country risk Customers with residence in or connection with high-risk jurisdictions 7 for example: (a) those that have been identified by the FATF as jurisdictions with strategic AML/CFT deficiencies; (b) countries subject to sanctions, embargos or similar measures issued by, for example, the United Nations; (c) countries which are vulnerable to corruption; and (d) those countries that are believed to have strong links to terrorist activities. In assessing country risk associated with a customer, consideration may be given to local legislation (United Nations Sanctions Ordinance (UNSO), UNATMO), data available from the United Nations, the International Monetary Fund, the World Bank, the FATF, etc. and the FI s own experience or the experience of other group entities (where the FI is part of a multi-national group) which may have indicated weaknesses in other jurisdictions. 2. Customer risk The following are examples of customers who might be considered to carry lower ML/TF risks: (a) customers who are employment-based or with a regular source of income from a known legitimate source which supports the activity being undertaken; and (b) the reputation of the customer, e.g. a well-known, reputable private company, with a long history that is well documented by independent sources, including information regarding its ownership and control. However, some customers, by their nature or behaviour might present a higher risk of ML/TF. Factors might include: (a) the public profile of the customer indicating involvement with, or connection to, PEPs; (b) complexity of the relationship, including use of corporate structures, trusts and the use of nominee and bearer shares where there is no legitimate commercial rationale; (c) a request to use numbered accounts or undue levels of secrecy with a transaction; (d) involvement in cash-intensive businesses; (e) nature, scope and location of business activities generating the funds/assets, having regard to sensitive or high-risk activities; and (f) where the origin of wealth (for high risk customers and PEPs) or ownership cannot be easily verified. 7 Guidance on jurisdictions that do not or insufficiently apply the FATF s Recommendations or otherwise pose a higher risk is provided at paragraphs
16 3. Product/service risk Factors presenting higher risk might include: (a) services that inherently have provided more anonymity; and (b) ability to pool underlying customers/funds. 4. Delivery/distribution channel risk The distribution channel for products may alter the risk profile of a customer. This may include sales through online, postal or telephone channels where a non-face-toface account opening approach is used. Business sold through intermediaries may also increase risk as the business relationship between the customer and an FI may become indirect. Ongoing review 3.6 The identification of higher risk customers, products and services, including delivery channels, and geographical locations are not static assessments. They will change over time, depending on how circumstances develop, and how threats evolve. In addition, while a risk assessment should always be performed at the inception of a customer relationship, for some customers, a comprehensive risk profile may only become evident once the customer has begun transacting through an account, making monitoring of customer transactions and ongoing reviews a fundamental component of a reasonably designed RBA. An FI may therefore have to adjust its risk assessment of a particular customer from time to time or based upon information received from a competent authority, and review the extent of the CDD and ongoing monitoring to be applied to the customer. 3.7 FIs should keep its policies and procedures under regular review and assess that its risk mitigation procedures and controls are working effectively. Documenting risk assessment 3.8 An FI should keep records and relevant documents of the risk assessment covered in this Chapter so that it can demonstrate to the RAs, among others: (a) how it assesses the customer s ML/TF risk; and (b) the extent of CDD and ongoing monitoring is appropriate based on that customer s ML/TF risk. 14
17 Chapter 4 - CUSTOMER DUE DILIGENCE 4.1 Introduction to CDD The AMLO defines what CDD measures are (see paragraph 4.1.3) and also prescribes the circumstances in which an FI must carry out CDD (see paragraph 4.1.9). As indicated in the AMLO, FIs may also need to conduct additional measures (referred to as enhanced customer due diligence (EDD) hereafter) or could conduct simplified customer due diligence (SDD) depending on specific circumstances. This chapter sets out the expectations of RAs in this regard and suggests ways that these expectations may be met. Wherever possible, the guideline gives FIs a degree of discretion in how they comply with the AMLO and put in place procedures for this purpose CDD information is a vital tool for recognising whether there are grounds for knowledge or suspicion of ML/TF. s.2, The following are CDD measures applicable to an FI: (a) identify the customer and verify the customer s identity using reliable, independent source documents, data or information (see paragraphs 4.2); (b) where there is a beneficial owner in relation to the customer, identify and take reasonable measures to verify the beneficial owner s identity so that the FI is satisfied that it knows who the beneficial owner is, including in the case of a legal person or trust 8, measures to enable the FI to understand the ownership and control structure of the legal person or trust (see paragraphs 4.3); (c) obtain information on the purpose and intended nature of the business relationship (if any) established with the FI unless the purpose and intended nature are obvious (see paragraphs 4.6); and (d) if a person purports to act on behalf of the customer: (i) identify the person and take reasonable measures to verify the person s identity using reliable and independent source documents, data or information; and (ii) verify the person s authority to act on behalf of the customer (see paragraphs 4.4) The term customer is not defined in the AMLO. Its meaning should be inferred from its everyday meaning and in the context of the industry practice a For the insurance industry, the term customer refers to policy holder In determining what constitutes reasonable measures to verify the identity of a beneficial owner and reasonable measures to understand the ownership and control structure of a legal person or trust, the FI should consider and give due regard to the ML/TF risks posed by a particular customer and a particular business relationship. Due consideration should also be given to the measures set out in Chapter 3. 8 For the purpose of this guideline, a trust means an express trust or any similar arrangement for which a legal-binding document (i.e. a trust deed or in any other forms) is in place. 15
18 4.1.6 FIs should adopt a balanced and common sense approach with regard to customers connected with jurisdictions which do not or insufficiently apply the FATF recommendations (see paragraphs 4.15). While extra care may well be justified in such cases, unless a RA has, through a notice in writing, imposed a general or specific requirement (see paragraph ), it is not a requirement that FIs should refuse to do any business with such customers or automatically classify them as high risk and subject them to EDD process. Rather, FIs should weigh all the circumstances of the particular situation and assess whether there is a higher than normal risk of ML/TF. s.1, Business relationship between a person and an FI is defined in the AMLO as a business, professional or commercial relationship: (a) that has an element of duration; or (b) that the FI, at the time the person first contacts it in the person s capacity as a potential customer of the FI, expects to have an element of duration. s.1, The term occasional transaction is defined in the AMLO as a transaction between an FI and a customer who does not have a business relationship with the FI. 9 s.3(1), CDD requirements should apply: (a) at the outset of a business relationship; (b) before performing any occasional transaction 10 : (i) equal to or exceeding an aggregate value of $120,000, whether carried out in a single operation or several operations that appear to the FI to be linked; or (ii) a wire transfer equal to or exceeding an aggregate value of $8,000, whether carried out in a single operation or several operations that appear to the FI to be linked; (c) when the FI suspects that the customer or the customer s account is involved in ML/TF 11 ; or (d) when the FI doubts the veracity or adequacy of any information previously obtained for the purpose of identifying the customer or for the purpose of verifying the customer s identity FIs should be vigilant to the possibility that a series of linked occasional transactions could meet or exceed the CDD thresholds of $8,000 for wire transfers and $120,000 for other types of transactions. Where FIs become aware that these thresholds are met or exceeded, full CDD procedures must be applied The factors linking occasional transactions are inherent in the characteristics of the transactions for example, where several payments are made to the same recipient from one or more sources over a short period, where a customer regularly transfers It should be noted that occasional transactions do not apply to the insurance and securities sectors. Occasional transactions may include for example, wire transfers, currency exchanges, purchase of cashier orders or gift cheques. This criterion applies irrespective of the $120,000 threshold. 16
19 funds to one or more destinations. In determining whether the transactions are in fact linked, FIs should consider these factors against the timeframe within which the transactions are conducted. 4.2 Identification and verification of the customer s identity s.2(1)(a), The FI must identify the customer and verify the customer s identity by reference to documents, data or information provided by a reliable and independent source 12 : (a) a governmental body; (b) the RA or any other RA; (c) an authority in a place outside Hong Kong that performs functions similar to those of the RA or any other RA; or (d) any other reliable and independent source that is recognized by the RA. 4.3 Identification and verification of a beneficial owner s.1 & s.2(1)(b), A beneficial owner is normally an individual who ultimately owns or controls the customer or on whose behalf a transaction or activity is being conducted. In respect of a customer who is an individual not acting in an official capacity on behalf of a legal person or trust, the customer himself is normally the beneficial owner. There is no requirement on FIs to make proactive searches for beneficial owners in such a case, but they should make appropriate enquiries where there are indications that the customer is not acting on his own behalf Where an individual is identified as a beneficial owner, the FI should endeavour to obtain the same identification information as at paragraph The verification requirements under the AMLO are, however, different for a customer and a beneficial owner The obligation to verify the identity of a beneficial owner is for the FI to take reasonable measures, based on its assessment of the ML/TF risks, so that it is satisfied that it knows who the beneficial owner is. s.1 & s.2(2), FIs should identify all beneficial owners of a customer. In relation to verification of beneficial owners identities, except where a situation referred to in section 15 of Schedule 2 exists ( high risk ), the AMLO requires FIs to take reasonable measures to verify the identity of any beneficial owners owning or controlling 25% or more of the voting rights or shares, etc. of a corporation, partnership or trust. In high risk situations referred to in section 15 of Schedule 2, the threshold for the requirement is 10% For beneficial owners, FIs should obtain the residential address (and permanent address if different) and may adopt a risk-based approach to determine the need to take reasonable measures to verify the address, taking account of the number of See Appendix A which contains a list of documents recognised by the RAs as independent and reliable sources for identity verification purposes. In circumstances where an existing customer is reclassified as high-risk under section 15 of Schedule 2, FIs may consider delaying taking reasonable measures to verify the beneficial owner s identity according to the enhanced threshold (i.e. remediate from 25% to 10%) where a risk of tipping-off exists. 17
20 beneficial owners, the nature and distribution of the interests in the entity and the nature and extent of any business, contractual or family relationship. 4.4 Identification and verification of a person purporting to act on behalf of the customer s.2(1)(d), If a person purports to act on behalf of the customer, FIs must: (i) identify the person and take reasonable measures to verify the person s identity on the basis of documents, data or information provided by- (A) a governmental body; (B) the relevant authority or any other relevant authority; (C) an authority in a place outside Hong Kong that performs functions similar to those of the relevant authority or any other relevant authority; or (D) any other reliable and independent source that is recognised by the relevant authority; and (ii) verify the person s authority to act on behalf of the customer The general requirement is to obtain the same identification information as set out in paragraph In taking reasonable measures to verify the identity of persons purporting to act on behalf of customers (e.g. authorized account signatories and attorneys), the FI should refer to the documents and other means listed in Appendix A wherever possible. As a general rule FIs should identify and verify the identity of those authorized to give instructions for the movement of funds or assets. s.2(1)(d)(ii ), s.2(1)(d), FIs should obtain written authority 14 to verify that the individual purporting to represent the customer is authorized to do so FIs may on occasion encounter difficulties in identifying and verifying signatories of customers that may have long lists of account signatories, particularly if such customers are based outside Hong Kong. In such cases, FIs may adopt a risk-based approach in determining the appropriate measures to comply with these requirements; for example in respect of verification of account signatories related to a customer, such as an FI or a listed company 15, FIs could adopt a more streamlined approach. The provision of a signatory list 16, recording the names of the account signatories, whose identities and authority to act have been confirmed by a department or person within that customer which is independent to the persons whose identities are being verified (e.g. compliance, audit or human resources), may be sufficient to demonstrate compliance with these requirements. Another option, mainly relevant to overseas customers and which may be considered in conjunction with or separately from reducing the signatories list, is the use of intermediaries in accordance with section 18 of Schedule a Special requirements for insurance policies s.11(1), 4.4a.1 An II must, whenever a beneficiary or a new beneficiary is identified or designated by the policy holder of an insurance policy: (a) if the beneficiary is identified by name, record the name of the beneficiary; For corporation, FIs should obtain the board resolution or similar written authority. Having regard to the advice provided at paragraphs Or equivalent. 18
21 (b) if the beneficiary is designated by description (e.g. by characteristics or by class) or other means (e.g. under a will), obtain sufficient information about the beneficiary to satisfy itself that it will be able to establish the identity of the beneficiary: (i) at the time the beneficiary exercises a right vested in the beneficiary under the insurance policy; or (ii) at the time of payout or, if there is more than one payout, the time of the first payout to the beneficiary in accordance with the terms of the insurance policy, whichever is the earlier. s.11(2), s.11(3)(a), 4.4a.2 4.4a.3 An II must carry out the measures specified in paragraphs 4.4a.3 and 4.4a.4: (a) at the time a beneficiary exercises a right vested in the beneficiary under an insurance policy; or (b) at the time of payout or, if there is more than one payout, the time of the first payout to a beneficiary in accordance with the terms of an insurance policy, whichever is the earlier. An II must verify the beneficiary s identity by reference to documents, data or information provided by a reliable and independent source: (a) (b) (c) (d) a governmental body; the RA or any other RA; an authority in a place outside Hong Kong that performs functions similar to those of the RA or any other RA; or any other reliable and independent source that is recognized by the RA. s.11(3)(b), 4.4a.4 4.4a.5 4.4a.6 Where the beneficiary is a legal person or trust, an II must: (i) identify its beneficial owners; and (ii) if there is a high risk of ML or TF having regard to the particular circumstances of the beneficial owners, take reasonable measures to verify the beneficial owners identities so that the II knows who the beneficial owners are. Where an II is unable to comply with paragraphs 4.4a.1 to 4.4a.4 above, it should consider making a suspicious transaction report. If payments made under the terms of the policy are to be paid to persons or companies other than the customers or beneficiaries, then the proposed recipients of these monies should also be the subjects of identification and verification. 4.4b Requirements for reinsurance 4.4b.1 Reinsurers are subject to the CDD and record-keeping requirements set out in Schedule 2. The customers in relation to whom the reinsurers should carry out the CDD measures are the ceding insurers. 4.5 Characteristics and evidence of identity No form of identification can be fully guaranteed as genuine or representing correct identity and FIs should recognise that some types of documents are more easily 19
22 forged than others. If suspicions are raised in relation to any document offered, FIs should take whatever practical and proportionate steps are available to establish whether the document offered is genuine, or has been reported as lost or stolen. This may include searching publicly available information, approaching relevant authorities (such as the Immigration Department through its hotline) or requesting corroboratory evidence from the customer. Where suspicion cannot be eliminated, the document should not be accepted and consideration should be given to making a report to the authorities. Where documents are in a foreign language, appropriate steps should be taken by the FI to be reasonably satisfied that the documents in fact provide evidence of the customer s identity (e.g. ensuring that staff assessing such documents are proficient in the language or obtaining a translation from a suitably qualified person). 4.6 Purpose and intended nature of business relationship s.2(1)(c), An FI must understand the purpose and intended nature of the business relationship. In some instances, this will be self-evident, but in many cases, the FI may have to obtain information in this regard Unless the purpose and intended nature are obvious, FIs should obtain satisfactory information from all new customers as to the intended purpose and reason for opening the account or establishing the business relationship, and record the information on the account opening documentation. Depending on the FI s risk assessment of the situation, information that might be relevant may include: (a) nature and details of the business/occupation/employment; (b) the anticipated level and nature of the activity that is to be undertaken through the relationship (e.g. what the typical transactions are likely to be); (c) location of customer; (d) the expected source and origin of the funds to be used in the relationship; and (e) initial and ongoing source(s) of wealth or income This requirement also applies in the context of non-residents. While the vast majority of non-residents seek business relationships with FIs in Hong Kong for perfectly legitimate reasons, some non-residents may represent a higher risk for ML/TF. An FI should understand the rationale for a non-resident to seek to establish a business relationship in Hong Kong. 4.7 Timing of identification and verification of identity General requirement s.3(1), An FI must complete the CDD process before establishing any business relationship or before carrying out a specified occasional transaction (exceptions are set out at paragraph 4.7.4). s.3(4), Where the FI is unable to complete the CDD process in accordance with paragraph 4.7.1, it must not establish a business relationship or carry out any occasional transaction with that customer and should assess whether this failure provides grounds for knowledge or suspicion of ML/TF and a report to the JFIU is appropriate. Delayed identity verification during the establishment of a business relationship 20