as well as the opening of an account. it may subsequently emerge that there is a terrorist link. thus, success in the fight against terrorist financing depends in large measure on the overall quality of ais ’ controls against money laundering - in particular, their ability to detect suspicious transactions. the customer due diligence process this in turn depends on an institution ’ s knowledge of its customers and what is a normal pattern of account activity for a particular customer. it is crucial therefore for ais ’ to have effective systems for customer due diligence. the main essentials are already there in the hkma ’ s guideline, which requires ais to make reasonable efforts to determine the customer ’ s true identity. but the process may need to be articulated more clearly so that ais are in no doubt about what they should be doing. the fatf ’ s consultation paper is useful in spelling out the main elements of the due diligence process, namely : • to identify the direct customer ; • to verify the customer ’ s identity ; • to identify the person with beneficial ownership and control, who may be different from the direct customer ; • to verify the identity of the beneficial owner and / or the person on whose behalf a transaction is being conducted ; and • to conduct ongoing due diligence and scrutiny. a number of features stand out from this. first, the process of know your customer is a two - stage process - identification and verification. second, there is a clear obligation on institutions to look behind the corporate veil, nominee or trustee to the ultimate beneficial owner. if necessary, this means following the chain of ownership or control to the natural persons at the very end of the chain. there are obvious practical difficulties in this, which we can discuss with the industry. but the basic issue is whether it is safe for institutions to establish a banking relationship if they do not really know with whom they are dealing. the third point to note is that the due diligence process does not apply simply at the time the relationship with the customer is entered into. it must be an ongoing process using detection and reporting mechanisms that can pick up large or unusual transactions. the compliance officer appointed to take overall charge of the institution ’ s anti - money laundering efforts should play an active role in the monitoring process and should not simply be the passive recipient of ad hoc reports from front - line staff. it also follows that ais must not only know their customer but also know their customer ’ s business and the

laundering. our particular responsibility relates to ais. it is our job to verify that ais have adequate policies, procedures and controls in place to enable them to : • identify suspicious customers and transactions ; • report suspicious transactions to the joint financial intelligence unit ( “ jfiu ” ) ; and • assist the law enforcement authorities through providing an audit trail. we do this through issuing guidelines that lay down the minimum standards that institutions should incorporate in their anti - money laundering systems. we then carry out on - site examinations to check that these standards are being adhered to. this year we introduced a two - tier, risk - based approach towards examinations. in cases where ais may be at higher risk of money laundering, we conduct more in - depth examinations using specialist teams. this may involve sample testing and visits to branches to look at how controls actually work in practice and to ascertain at first hand the knowledge and awareness of staff. in more routine cases, higher level review of anti - money laundering controls is conducted, generally as part of our normal risk - based examinations. we intend to supplement our own examinations with a system of self - assessment by compliance officers of ais on risk indicators of money laundering within their own institutions and the quality of controls. this will be done using a structured self - assessment framework that we aim to release to the industry later this year. this should help the hkma to conserve its own resources and direct them where they are most needed. but it should also serve to remind ais that they have the primary responsibility for making sure that their own house is in order. the hkma guideline checking that standards are being observed is obviously important. but it is necessary to ensure that the standards themselves remain effective in dealing with risks. that is why we are currently engaged in reviewing our anti - money laundering guideline. in doing so, we are making particular reference to two main sources. the first is the paper on customer due diligence for banks issued by the basel committee in october 2001. the other is the consultation paper released by the fatf in may of this year on its review of the fatf forty recommendations that set the international standards on anti - money laundering. i would strongly recommend that all ais familiarise themselves with both documents. comments on the fatf consultation paper are due by the end of this month. the process of revising the fatf recommendations will probably not be completed until some time next year. final revisions to our own guideline