Hong Kong's Money Laundering and Terrorist Financing Risk Assessment Report

The Hong Kong Financial Services and the Treasury Bureau (FSTB) published its second Money Laundering and Terrorist Financing Risk Assessment Report in July 2022.

The FSTB periodically conducts a comprehensive risk assessment to identify money laundering and terrorist financing threats and to assess the effectiveness of their efforts to address these threats. The latest assessment shows that the landscape continues to evolve, particularly concerning digital financial technologies and virtual asset offerings.

This article will focus primarily on the report’s background screening and hiring process aspects.

Overview

In their latest report, the FSTB found that Hong Kong is exposed to a medium-high level of money laundering threats and medium-low levels of terrorist financing and proliferation financing threats.

However, it also observed that Hong Kong’s ability to combat money laundering and terrorist financing threats is high due to its robust legal framework, rigorous preventive measures, and significant political commitment.

The bureau identified the banking sector and money service operators as particularly vulnerable to higher risks for illicit activities due to frequent attempts to misuse corporate bank accounts and other financial and investment services, e.g. stocks and real estate.

The bureau’s report recommends several “ways forward” to continue mitigating money laundering and terrorist financing threats:

enhancing the anti-money laundering/counter-financing of terrorism (AML/CFT) legal framework
strengthening risk-based supervision
stepping up outreach and awareness
monitoring new and emerging risks, and
strengthening law enforcement efforts and intelligence capability.

The FSTB recognises that the global payment landscape has been developing rapidly, even since 2018, when the previous risk assessment was conducted.

The growth of the internet and mobile payment services, along with general technological advancements, has equated to similar growth in the range of techniques used by criminals to achieve their money laundering and terrorist financing aims, particularly during the pandemic.

Virtual assets (VAs) are also becoming increasingly popular tools for criminals, even though they are not legal tender and are not generally accepted as a means of payment in Hong Kong. Their increasing scale has seen an increased number of VA-related fraud cases and is an area of concern for the FSTB.

Fit and proper tests – who is affected?

One mechanism the FSTB proposes for mitigating money laundering and terrorist financing risks is requiring certain professionals to be subject to a fit and proper test before practising in their role.

This test is applied in various ways depending on the given profession and sector, but overarchingly the test ensures that employees are assessed as having a suitable level of integrity and background to fulfil their assigned role.

Fit and proper guidelines are in place for the following businesses and professions:

financial institutions
trust or company service providers
money service operators
legal professionals
accounting professionals
estate agents, and
dealers in precious metals and stones.

Following the recognition that VAs are becoming increasingly popular in Hong Kong and that the sector is particularly vulnerable to money laundering and terrorist financing threats, the bureau proposes the introduction of a licensing regime for virtual asset service providers (VASPs).

They suggest that any person seeking to conduct a VASP should be subject to a fit and proper test before receiving a licence. The fit and proper test will cover all responsible officers, executive directors, and ultimate owners of the VASP.

Licensed VASPs will then be required to observe AML/CFT requirements and associated regulatory requirements, similar to other financial institutions.

Impacts on the financial sector

The bureau’s report is wide-ranging and encompasses many sectors – including financial, legal, accounting, real estate, and retail (precious metals and stones). All sectors have relevant administrative bodies that assess that businesses’ regulatory requirements are being met, including the implementation of fit and proper checks and licensing for the given sector.

The threats of money laundering and terrorist financing are understandably most prevalent in the financial sector, affecting banking, securities, insurance, money service operators, stored value facilities, money lenders, and virtual assets.

The first five subsets are covered by regulations under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). They are supervised by relevant authorities, whilst the money lender sector is managed under the Money Lenders Ordinance (MLO) and subject to a rigorous regulatory regime by the Companies Registry.

The last remaining sector to be regulated is the virtual asset service provider (VASP) sector, which is subject to some multidisciplinary oversight by regulators. Still, the government plans to further enhance its regulatory efforts by including licensing of VASPs in the AMLO with supervision by the Securities and Futures Commission.

How background screening comes into play

It is clear from the comprehensive risk assessment report that the FSTB takes its role very seriously in mitigating money laundering, terrorist financing, and proliferation of financing threats in Hong Kong.

An important way in which they seek to achieve this mitigation is by regulating the licensing and fitness of professionals working in certain sectors that are particularly vulnerable to threats. The reasoning is that by filtering the integrity of people working in these sectors, the prospect of collusion between employees and criminals, or prospective employees being the criminals themselves, is minimised.

Therefore, a fit and proper test is a requirement for many professions in Hong Kong. Candidates and hiring businesses in these sectors need to be abreast of the scope of the application of the test in their respective sectors, as employees will only be able to practice if they are assessed as fit and proper.

To minimise the risk associated with employees failing the fit and proper test, hiring businesses can conduct pre-emptive due diligence when verifying candidates and hiring new employees. They can do this by implementing a rigorous background screening process to ensure that the candidate will likely pass the sector’s fit and proper test and will indeed be able to practice in the role they have applied for.

Without conducting this due diligence, a candidate may be hired – with all the time and money involved in such a process – and then fail to pass the fit and proper test set by the regulator. This would create a problematic situation where an unsuitable candidate has been hired and onboarded but is unable to fulfil their given role. Hiring teams would then need to remove or relocate the employee and replicate the process to hire a candidate that can pass the fit and proper test and complete the assigned role.

Conducting pre-emptive due diligence through background screening is particularly relevant for VASPs who are new to the realm of fit and proper tests and will require additional guidance in honing their hiring processes.

Employers in other regulated sectors, such as financial, legal, accounting, real estate, and retail (precious metals and stones), who do not currently employ a background screening program should also seriously consider implementing one in order to decrease the risk to their business and workforce, and the flow-on factors of time, cost, and reputational loss.

Due to the high level of risk involved in hiring new employees, the increased demand for employees in these highly regulated sectors, and at a time when most onboarding and employment now occurs remotely, background screening has become a vital step in any Hong Kong business’s hiring process.

Sterling RISQ can help

Background screening in Hong Kong requires awareness and consideration of various legal and cultural nuances. This knowledge helps to ensure the suitability of a business’s screening program to Hong Kong’s laws and the respective sector’s regulations and guidelines.

Sterling RISQ is a global expert in conducting background screening and identity verification in Hong Kong. We offer a wide range of screening services, including identity employment, education, professional memberships verification, criminal background, credit history, financial regulatory AML and PEP, adverse media and directorship searches and social media screening.

We have significant experience operating in Hong Kong and a local office with staff who have a nuanced understanding of relevant screening requirements and regulations. Contact us at info@sterlingrisq.com if you want to discuss a background screening package for your business or have any questions about conducting background screening in Hong Kong.