As Hong Kong eagerly anticipates the release of the Financial Action Task Force’s (“FATF”) mutual evaluation report (“MER”), discussed at last month’s FATF Plenary, we decided the timing was right to take a quick look at the WHO, WHAT, WHERE, WHEN, HOW AND WHY of mutual evaluations.
WHO is FATF?
FATF is an inter-governmental body formed to combat money laundering, terrorist financing (“ML/TF”) and other related threats to the integrity of the international financial system. FATF consists of 39 member jurisdictions including Hong Kong. Specifically, FATF is a policy-making body whose objective is to set international standards and promote legal, regulatory and operational measures for effective anti-money laundering and counter financing of terrorism (“AML/CFT”) systems.
FATF “recommendations” are the internationally endorsed global standards for AML/CFT. The Recommendations were adopted in February 2012 and are regularly updated. The most recent update was in June 2019 with the addition of a new Interpretive Note (“IN”) to Recommendation 15 setting out the application of the FATF standards to virtual asset activities and service providers.[1] We commented on the new IN to Recommendation 15, in its draft form, in our previous Laundromat article available here. The draft was fully adopted in June.
WHAT is the MER?
FATF conducts peer reviews of members on an ongoing basis to assess whether they have implemented the Recommendations. Using an established methodology, FATF assesses a country’s technical compliance with the Recommendations and the overall effectiveness of their AML/CFT systems.
Through this mutual evaluation, countries deemed to be at a high risk of ML/TF (or who are deemed to require further monitoring) are identified.
WHEN did Hong Kong undertake their latest assessment?
The latest MER for Hong Kong was issued on 11 July 2008 (after an assessment was conducted in 2007). Hong Kong underwent its latest assessment in October/November 2018. An assessment typically takes 14 months to complete. The result of that evaluation is expected to be issued by FATF in September 2019.
WHERE does the assessment occur?
Hong Kong’s assessment included onsite visits in Hong Kong.
During an onsite visit, the assessment team is required to speak to a range of affected parties including government authorities, regulators, financial institutions, designated non-financial businesses and professions, law enforcement agencies and judicial authorities (“Affected Parties”).[2]
HOW is Hong Kong expected to do?
Conclusions for a MER must first be discussed and adopted by the FATF Plenary. The Plenary meeting was held recently from 16 to 21 June 2019 in Florida. The Plenary indicated that overall Hong Kong is expected to receive a positive MER.
In particular, the Plenary concluded that Hong Kong has a “strong legal foundation to underpin its AML/CFT regime”.[3] Hong Kong systems were said to be capable of understanding ML/TF risks, and have effective mechanisms in place to combat these risks, confiscate the proceeds of crime, and be willing to cooperate with international partners.
However, the assessment was said to have identified areas requiring improvement. In particular, the Plenary indicated that Hong Kong needs to prioritise efforts to “prosecute money laundering linked to foreign predicates, increase risk understanding and AML/CFT implementation by smaller institutions, and strengthen supervisory measures for some sectors”.[4] Whilst a seemingly reasonably generic comment, we expect an uptick in enforcement action going forward to address this concern; institutions would be well placed to consider the adequacy of their systems at this point, ahead of any Hong Kong Monetary Authority visits.
It remains to be seen whether FATF will include in the MER any action points related to virtual asset activities following the new IN to Recommendation 15 and associated guidance adopted on 21 June 2019 (“Virtual Asset Guidance”). However, regardless of whether FATF addresses the Virtual Asset Guidance in the MER, it is clear that moving forward, virtual asset service providers in Hong Kong will need to incorporate the Virtual Asset Guidance into their AML/CFT systems and that this will form part of future MER assessments. For an overview of the Virtual Asset Guidance paper – watch this space!
WHY do the results matter?
The results matter for two key reasons:
- Reputation: A positive MER will help reinforce Hong Kong’s status as an international financial sector. Countries who are not members of FATF or who do not do well in their MERs are often unable to attract work from the financial business sector.
- In particular, FATF issues an “FATF blacklist”, which is a list of jurisdictions that FATF believes are uncooperative with other jurisdictions in their efforts to combat ML/TF. Countries on the FATF blacklist generally are excluded from most finance markets.
- Like other major international financial centres, Hong Kong must maintain its reputation. Its lower tax status and free market status results in certain inherent vulnerabilities that make a robust AML/CFT regime that evolves with emerging risks essential.
- Identifying deficiencies and areas requiring improvement: the results provide Affected Parties with a useful specialist summary of how effective Hong Kong’s AML/CFT systems are. The MER is expected to be used as a starting point for a jurisdiction to strengthen and adopt new measures to tackle ML/TF in accordance with identified weaknesses. For example, after completion of the 2008 MER, Hong Kong undertook a number of consultations and implemented several changes to address identified deficiencies. In particular:
- statutory controls related to AML/CFT were expanded to include designated non-financial businesses and professions (including solicitors, accountants, real estate agents and trust and company service providers);
- a new licensing regime was established for trust and company service providers;
- corporate transparency was increased through the creation of a new register for beneficial owners of Hong Kong companies; and
- the beneficial owner diligence threshold was increased to a uniform 25%, assisting Hong Kong to align with other key markets.
Further detail regarding these changes can be found here.
Our role
We continue to support numerous innovative market participants in the financial services industry on ensuring compliance with AML/CFT regulation and best practice and responding to regulatory investigations. We would be delighted to answer any questions.
[1] The 2012 Recommendations are available here: https://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf .
[2] “Frequently asked questions: MERs”, FATF, available at: http://www.fatf-gafi.org/faq/mutualevaluations/#d.en.448461 (accessed 28 June 2019) .
[3] “Outcomes FATF Plenary, 16-21 June 2019”, FATF, available at: https://www.fatf-gafi.org/publications/fatfgeneral/documents/outcomes-plenary-june-2019.html (accessed June 2019).
[4] . Ibid.
