Hong Kong's New AML Regulations: Implications for Your Organization and VASPs

Hong Kong's New AML Regulations: Implications for Your Organization and VASPs
On December 7, 2022, Hong Kong's Legislative Council made a significant move by amending the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to introduce a comprehensive licensing regime for virtual asset service providers (VASPs). This development marks a pivotal moment for financial institutions and VASPs operating in Hong Kong. In this article, we will dive into what these regulatory changes mean for your organization:

Hong Kong's Regulatory Objective
The driving force behind these amendments, as stated by Mr. Christopher Hui, the Secretary for Financial Services and the Treasury, is to reinforce Hong Kong's position as a global financial hub. The new licensing regime seeks to establish a robust and balanced regulatory framework for virtual asset activities. This framework aims to safeguard investors, strengthen the city's regulatory prowess in combating money laundering, and counter terrorist financing.

Read about FATF Report about AML in article: FATF Report Sheds Light on Money Laundering Amidst the Synthetic Opioid Epidemic: Insights and Implications

Key Highlights of the AMLO Amendments

Under the amended AMLO, VASPs will need to adhere to the following requirements:

1. Licensing from SFC: VASPs must apply for a license from the Securities and Futures Commission (SFC), a pivotal step in complying with AML/CFT regulations.

2. "Fit and Proper Test" Compliance: To obtain the license, VASPs must pass the "fit and proper test" and adhere to AML/CTF regulations, which include conducting customer due diligence (CDD) and maintaining meticulous record-keeping.

3. Financial Transparency: VASPs are required to submit audited accounts and financial information to the Securities and Exchange Commission (SEC).

4. Supervisory Oversight: Two designated officers within the VASP organization are responsible for ensuring compliance with the necessary regulations.

5. Premises Approval: VASPs must seek the SFC's approval for the premises used to maintain records, ensuring transparency and accountability.

Two-Tier Registration System for Precious Metals and Stones Dealers
The update also introduces a two-tier registration system for dealers in precious metals and stones. Dealers engaging in non-cash transactions exceeding HKD 120,000 fall into Category A and are exempt from specific CDD and record-keeping measures. However, those involved in cash transactions over $120,000 must adhere to AML/CTF regulations.

Additional AMLO Amendments
The AMLO amendments also encompass the banking sector and include:

• Politically Exposed Persons (PEPs): The updated definition aligns with FATF requirements.

• Digital Identification Systems: Companies must utilize recognized digital identification systems, especially when customers cannot provide identification in person.

• Beneficial Ownership Clarity: The amendments clarify who qualifies as a beneficial owner in cases involving trusts.

Policy Statement on the Development of Virtual Assets
These amendments align with a policy statement issued by the Hong Kong government during Hong Kong FinTech Week in October. This document outlines the government's plans for virtual assets, including regulatory initiatives and pilot programs.

Preparing for Compliance

To ensure compliance with these new regulations, VASP compliance teams should thoroughly understand their obligations under the AMLO, closely follow FATF's Recommendation 15, and refer to its interpretive note for clarity. Risk-based AML/CFT controls are designed to protect against potential financial losses, making customer due diligence (CDD), transaction monitoring, sanctions screening, and the use of smart technology tools essential components of compliance.

Additionally, organizations should remain vigilant for upcoming pilot projects and the Securities and Futures Commission's consultation on enhancing retail investors' awareness of virtual assets. Staying informed and proactive is key to navigating the evolving regulatory landscape in Hong Kong's financial sector.

 

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