On 4 September 2019, the Financial Action Task Force (FATF) published their mutual evaluation report (the Report) on the level of compliance with the FATF recommendations and the effectiveness of Hong Kong’s anti-money laundering (AML) and counter-terrorist financing (CTF) system.
Overall, the Report is positive and concludes that Hong Kong has generally sound and effective AML and CTF measures in place. We have picked out below the key areas highlighted in the Report where further work needs to be done to strengthen the regime and where we believe further policy and supervisory work is in the pipeline:
- Focus on non-fraud related money laundering: Fraud-related money laundering, is extensively investigated, but there is an appreciable drop in the investigation of non-fraud money laundering cases, such as those relating to drugs, tax crimes and corruption. As a result, the Report recommends reviewing money laundering threats arising from foreign crimes such as corruption and tax crimes;
- Proportion of investigations to prosecutions: The Report notes that Hong Kong demonstrates an ability to prosecute all forms of money laundering and has a high conviction rate. At the same time, the number of prosecutions and convictions, at an average of 120 and 95 per year, was much lower than the 1,600 cases investigated on average per year. The generally low sentences imposed indicate that most money laundering cases were pursued at the lower end of the scale. Thus, whilst sentences may be proportionate and dissuasive in individual cases, there is concern as to whether the sanctions being applied are effective, proportionate and dissuasive at a systematic level;
- Number of outgoing international requests: Whilst Hong Kong has effectively dealt with increasing numbers of incoming international requests for mutual legal assistance and extradition, the low number of outgoing requests for co-operation is not consistent with Hong Kong’s risk profile. In particular, the Report notes that Hong Kong does not appear to be making enough proactive efforts to pursue proceeds of crime outside the jurisdiction and money laundering arising from foreign predicate offences through formal means; and
- Level of the private sector’s understanding: The private sector’s understanding of money laundering and terrorist financing risks is mixed and appears largely correlated to how long those sectors have been supervised. Large financial institutions and those belonging to international financial groups, for example, are largely familiar with the key threats and vulnerabilities specific to their sector and scored well in the Report. Smaller financial institutions, such as the lesser regulated money lenders and money service operators, and designated non-financial businesses (as well as their relevant supervisory bodies) have been identified in the Report as needing to develop a more robust risk-based approach. In particular, the level of reporting of suspicious transactions is heavily skewed towards large banks.