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Slide back to legal updates SFC's Latest Consultation Paper on Anti-Money Laundering and Counter Financing Terrorism Guidelines September, 2020 On 18 September 2020, the SFC issued a consultation paper (the Consultation Paper") on the proposed amendments to the (1) Guidelines on Anti-Money Laundering (AML) and Counter Financing Terrorism (CFT) (for licensed corporations); and (2) Prevention of Money Laundering and Terrorist Financing Guideline (for associated entities) (the "Proposed Revised Guideline(s)"). It seeks to incorporate the relevant guidance currently set out in its circulars to licensed corporations and associated entities, and to provide additional guidance to facilitate licensed corporations in complying with existing AML/CFT obligations. Proposed amendments
As a quick overview, we have set out some of the key proposed amendments below:
1. Governance and processes for institutional risk assessments

The SFC proposes to incorporate the guidance set out in the SFC’s circulars dated 26 January 2017 (Compliance with AML/CFT Requirements); and 31 August 2018 (AML/CFT Measures and Controls Inspection Findings) in the Guidelines for AML/CFT.

It also seeks to provide elaborative guidance for conducting institutional risk assessment:

• Both quantitative and qualitative information should obtained from relevant internal and external sources;

• Additional guidance on the range of risk factors, including country risk, customer risk, product/ service/ transaction risk, delivery/distribution channel risk, to be taken into account is given.

• Periodic review should be conducted at least once every two years or more.

• If licensed corporation has overseas branch or subsidiaries – group-wide risk assessment should be conducted.

• If the licensed corporation is part of a financial group – it may make reference to or rely on a group-wide or regional institutional risk assessment.
2. Risk indicators for institutional and customer risk assessments An expanded list of illustrative examples of relevant and useful risk indicators for country risk, customer risk, product/ service/ transaction risk and delivery/ distribution channel risk would be set out in the proposed amended guidelines. 3. Risk mitigation To further mitigate risks, cross-border correspondent relationships provisions to transactions in securities, futures contracts as well as leveraged foreign exchange contracts, were proposed.

Application: These provisions would apply to cases where:

1. the licensed corporation provides brokerage services to an overseas portfolio manager and the licensed corporations does not have a business relationship with the investment vehicle for which the portfolio manager acts; or

2. the licensed corporation receives or processes fund subscription or redemption orders placed by an overseas distributor for or on behalf of the underlying investors.

These provisions do not apply to the business relationship between a domestic assets management firm which acts as a delegated asset manager and provide services to an overseas delegating management company which is its customer.

Additional guidance on due diligence measures will also be provided in relation to:

• Collection of information;

• Assessment of information collected;

• Additional steps to be taken when a licensed corporation allows direct access to the correspondent account by the underlying customer of a respondent institution;

• Prohibition against cross-border correspondent relationships involving shell financial institutions.

*Note: “Securities” includes transferable securities, money market instruments, investment funds, options, futures, swaps, forward rate agreements and nay other derivative contracts relating to securities, commodities, currencies, interest rates or yields or other derivatives instrument, financial indices or financial measures.
4. Simplified and enhanced measures under risk-based approach To assist licensed corporations in strengthening the risk-based application of customer due diligence (CDD) and ongoing monitoring measures, the SFC proposes to incorporate into the Proposed Revised Guideline an expanded list of illustrative examples of possible simplified and enhanced measures. Some of these additional examples are: Simplified measures • Limiting the type or extent of CDD measures. Enhanced measures • Evaluating information provided by customers.

• Proceeds be paid to customers’ bank account from which the funds for investments were originally transferred.

• Obtaining additional customer information when the licensed corporation acts as a delegated asset manager does not have a business relationship with the underlying customers.
5. Red-flag indicators of suspicious transactions and activities To assist licensed corporations in fulfilling their statutory obligations for suspicious transaction reporting, and help them develop and enhance their transaction monitoring systems and controls, the SFC proposes to enhance the list of red-flag indicators for suspicious transactions and activities in the current AML/CFT Guideline, by:

• Adding new red-flag indicators; and

• Re-categorising red-flag indicators into 6 groups to better differentiate the types of transactions or activities to which they relate.
6. Third-party deposits and payments Customers using third parties to pay for or receive investment proceeds may expose licensed corporations to heightened risks given the inherently high risk nature of third-party deposits and payments which may be used to disguise the true beneficial owner or the source of funds, and are linked to predicate offences in securities markets or used to launder illicit proceeds obtained elsewhere.

To mitigate the money laundering and terrorist financing risks associated with these transactions, the SFC's proposal seeks to include more guidance in this area by publishing in the Proposed Revised Guidelines:

• a new chapter regarding policies, procedures and measures for handling transactions involving third-party deposits and payments; and

• guidance permitting delayed third-party deposit due diligence.
7. Others Other areas in which the SFC has proposed more elaborate guidelines include:

• Scenarios in which persons purport to act on behalf of the customer;

• Establishing source of funds and sources of wealth;

• Rearranging provisions for risk-based approach, and AML/CFT systems; and

• Rearranging illustrative examples.
The full Consultation Paper can be found: here Our Observations • The proposed amendments continue to support the application of a risk-based approach to AML/CFT measures, and provide more guidance for licensed corporations to identify and address the ever-changing regulatory scrutiny related to AML/CFT issues.

• The proposals will be subject to a three-month public consultation.

• The consultation period ends on 18 December 2020.
Takeaway It is advisable to re-evaluate your existing procedures to ensure continued compliance with the requirements, and implement procedures, tools and techniques for mitigating risks across your diverse business lines.

Contact us to find out how we can help:

1. Design and implement AML/CFT risk assessment;

2. Enhance your AML/CFT compliance programmes;

3. Perform regulator-mandated lookbacks and other transaction reviews; and

4. Deliver webinar training on AML/CFT to your licensed representatives and compliance personnel.

Thanks for tuning in to our latest SFC update. We hope it was useful to you and worthy of your time. We will let you know if and when we see any new legal or regulatory developments to draw your attention on.

In the meantime, please do not hesitate to contact us if you have any questions or would like further information.
Sincerely,

Alfred Leung
Partner, YTL LLP
Contact us YTL LLP YTL LLP Suites 2606-08 China Resources Building 26 Harbour Road Wanchai, Hong Kong (+852) 3468 7200 admin@hkyt.com Suites 2606-08 Alfred Leung Partner (+852) 3468 7202 alfredleung@hkyt.com China Resources Building 26 Harbour Road Wanchai, Hong Kong (+852) 3468 7200 admin@hkyt.com Alfred Leung Partner (+852) 3468 7202 alfredleung@hkytl.com New Layer New Layer New Layer James Yeung Partner (+852) 3468 7203 jamesyeung@hkyt.com New Layer New Layer New Layer
Partner (+852) 3468 7203 jamesyeung@hkyt.com James Yeung