Accountants’ role in safeguarding Hong Kong against money laundering and terrorist financing
Being one of the world’s freest economies, Hong Kong attracts money laundering and terrorist financing (ML / TF) activities. The latest Hong Kong ML / TF Risk Assessment Report published by the Hong Kong Government in July 20221 rates Hong Kong’s exposure as:
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ML Risk
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TF and Proliferation Financing (PF) Risk |
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Medium-High
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Medium-Low |
Since 1991, Hong Kong has been a member of the Financial Action Task Force2, an inter-governmental body that sets international anti-money laundering and counter-terrorist financing (AML / CTF) standards. Based on these standards, Hong Kong has put in place a robust and effective AML / CTF regime, in which accountants play an important role to prevent criminals from abusing our financial system. Accountants should thus be vigilant to prevent their unwitting involvement in criminal activities.
What is ML / TF / PF
Pursuant to the AML / CTF Ordinance (Cap. 615, AMLO), ML is an act intended to have the effect of concealing the origin and true nature of crime proceeds. In order to make proceeds from criminal activities (i.e. predicate crimes, e.g. drug trafficking, organized crime and bribery) look legitimate, money launderers will, in general, go through the following process:
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Placement
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Putting “dirty” money into the financial system. Criminals may, for example, break the proceeds of crime into small sums and deposit them into stooge accounts by recruiting money mules.
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Layering
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Concealing the money source through a series of transactions. Criminals may, for example, wire the funds through a number of accounts via different banks in multiple jurisdictions.
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Integration
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Re-entering laundered money into the financial system. Criminals may, for example, use the laundered funds to acquire real estate, businesses and luxury goods.
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TF is the provision or collection of any property to commit terrorist acts; or making available, collecting or soliciting any property or financial services for the benefits of terrorists or terrorist associates. PF refers to the provision of funds or financial services for developing weapons of mass destruction.
Unchecked ML / TF / PF activities can attract people to commit crimes. According to the International Monetary Fund3, ML / TF / PF are crimes with economic effects, that can threaten the integrity and stability of a country and its financial sector, as well as the international financial system; result in destabilizing “hot money” flows and banking crises; lead to ineffective revenue collection and broader governance weaknesses in a country; and have reputational risks for international financial centres.
Related laws and regulations
In Hong Kong, legislations relating to AML / CTF include:
- AMLO
- Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405, DTROP)
- Organized and Serious Crimes Ordinance (Cap. 455, OSCO)
- Weapons of Mass Destruction (Control of Provision of Services) Ordinance (Cap. 526, WMD(CPS)O)
- United Nations Sanctions Ordinance (Cap. 537, UNSO)
- United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575, UNATMO)
According to AMLO, accounting professionals (comprising of certified public accountants (CPAs), practising CPAs, firms of CPAs and corporate practices) are among the designated non-financial businesses and professions which are required to carry out the statutory customer due diligence (CDD), ongoing monitoring and record keeping procedures as set out in the Ordinance. The Accounting and Financial Reporting Council and the Hong Kong Institute of CPAs (HKICPA) are regulatory bodies of accounting professionals in connection with AML / CTF compliance and HKICPA is mainly responsible for publishing guidelines to the profession.
HKICPA has published Guidelines on AML / CTF for Professional Accountants (HKICPA AML Guidelines) which is Chapter F of the Code of Ethics for Professional Accountants. Pursuant to the HKICPA AML Guidelines, all practices are required to comply with requirements in connection with making suspicious transactions report (STR) and financial sanctions. If a practice provides certain services that are specified in the HKICPA AML Guidelines, it needs to also comply with other requirements in the guidelines including CDD, ongoing monitoring and record keeping.
STR and financial sanctions
DTROP, OSCO and UNATMO require any person who knows or suspects that any property represents the proceeds of or has connection with drug trafficking or an indictable offense, or is a terrorist property, he/she must make an STR to the Joint Financial Intelligence Unit (JFIU) which is jointly run by the Hong Kong Police Force and Customs and Excise Department. These laws also make “tip-off”, i.e. disclosing to any other person any matter that is likely to prejudice an investigation that might be conducted following the submission of the STR to the JFIU, an offense.
Other than reporting suspicious activities, accountants are also required to comply with legal obligations concerning financial sanctions, TF and PF. It is an offense to, among others, provide services to individuals and entities that are sanctioned or designated as terrorists by the United Nations. Therefore, it is important for accountants to perform name screening to check whether their clients are one of these individuals or entities.
CDD and ongoing monitoring
CDD is an important tool for accountants to mitigate ML / TF / PF risk. By performing CDD, accountants can form a reasonable belief of the true identity of their clients (e.g. whether they are / have connection with any politically exposed person (PEP), sanctioned subject or terrorist) and know the type of business and transactions that the clients are likely to undertake and the source and intended use of funds. A standard CDD includes the identification and verification of the client and, as appropriate, its beneficial owner(s) and other connected parties; and obtaining understanding the purpose and intended nature of the business relationship.
A risk-based approach is adopted when performing CDD, meaning that the type and extent of measures to be undertaken should be appropriate and reasonable having regard to the assessed ML/TF risks. Accountants are also required to monitor the business relationships on an ongoing basis to ensure that the information they have obtained are up-to-date and relevant; and that transactions that the clients undertake are consistent with the accountants’ knowledge.
Accountants the gatekeepers
Accountants are considered gatekeepers of the financial system. They provide a wide range of services, e.g. audit, tax, bookkeeping and advisory, and some services might expose them to higher ML / TF / PF risks. Criminals may abuse the services provided by accountants to launder money, e.g. holding crime proceeds in an accountant’s bank account, or engaging an accountant to create a company to launder crime proceeds. Any failure in identifying and reporting suspicious activities will make an accountant suffer from legal, regulatory and reputational damage.
As such, accountants should maintain a skeptical mind in accepting or continuing client relationships and stay alert for events or situations which are indicative of a suspicious activity. It is crucial for accountants to be familiar with AML / CTF related laws and regulations, including the HKICPA AML Guidelines, and keep abreast of the latest developments by regularly attending AML / CTF training.
Reference:
1.https://www.fstb.gov.hk/fsb/aml/en/risk-assessment.htm
2.https://www.fatf-gafi.org/en/the-fatf/who-we-are.html
3.https://www.imf.org/en/Topics/Financial-Integrity/amlcft
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About the author:
Dennis Chan, CAMS, CCAS, CPA, FCCA, MSc, is Founder and Director of Sensible Solutions Limited which offers AML independent audit function, consulting and training services to entities within the scope of AMLO. He is also a member of HKICPA Ethics Committee.
