19 August, 2015
What you need to know
The Hong Kong Monetary Authority (HKMA) has recently instituted its first ever disciplinary action under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO).
The HKMA has fined the State Bank of India's Hong Kong branch (SBIHK) HK$7.5m, issued it a formal reprimand, and required it to submit a report by an independent adviser on the adequacy and effectiveness of its remedial plan.
While the HKMA's focus on AML/CFT since the AMLO came into force in 2012 is well known, this case shows for the first time that the HKMA will impose significant sanctions in appropriate cases.
Its press release states that the HKMA wants to send a clear message that all authorised institutions should have effective AML/CFT systems and controls in place, including to detect and report suspicious transactions based on their knowledge of their customers.
What you should do
Revisit the adequacy of your firm's AML/CFT compliance – with a critical eye – in light of the Statement of Disciplinary Action in this case.
If there are potential shortcomings, this case can be used to generate additional support for additional investment in AML/CFT, especially the detection and reporting of suspicious transactions.
Overview of the enforcement action
On 31 July 2015, the HKMA instituted its first ever disciplinary action under the AMLO. SBIHK has been fined HK$7.5m, issued with a formal reprimand, and is required to submit to the HKMA a report to be prepared by an independent adviser in respect of the adequacy and effectiveness of SBIHK's remedial plan.
This enforcement action follows an investigation by the HKMA into whether SBIHK had sufficient internal controls to ensure compliance with the AMLO. Through the investigation, the HKMA established that SBIHK had breached a number of core provisions of the AMLO, including failing to:
a) carry out customer due diligence requirements required under the AMLO before establishing business relationships with 28 corporate customers;
b) continuously monitor business relationships with customers;
c) establish effective procedures for identifying whether its customers or their beneficial owners were politically exposed persons; and
d) establish effective compliance procedures in respect of its obligations under the AMLO.
In its press release, the HKMA has noted that in setting its penalty it had taken into account a variety of mitigating factors, including that SBIHK had already undertaken "very positive and intensive" remedial measures, confirmed that there were no problem accounts on-boarded as a result of its failures, that no suspicious transactions had been identified, and that SBIHK fully co-operated with the HKMA's investigation.
Analysis
The Banking Ordinance does not empower the HKMA to impose fines on the banks it regulates. Nevertheless, it has been increasingly active since 2008, investigating allegations of mis-selling and, more recently, the adequacy of AML/CFT compliance.
However, much of its enforcement activity takes place out of the public eye, with banks being investigated and privately being required to undertake self- investigations and remediation exercises. As a result, the HKMA has not traditionally been viewed as a conduct regulator.
However, since the AMLO came into force in 2012, the HKMA has had the power under section 21 to impose fines of up to HK$10m or three times the profits gained or costs avoided as a result of a contravention, as well as to issue formal reprimands and require remedial measures to be taken. The HKMA is now also able to take similar disciplinary action in respect of OTC derivatives matters under section 203A of the Securities and Futures Ordinance. These powers for anti-money laundering and OTC derivatives place the HKMA in a similar position to the Securities and Futures Commission with its enforcement powers for misconduct.
The HKMA has been increasingly active in investigating and carrying out inspections under the AMLO in recent times. It is not surprising that this is a core focus of its enforcement activity. Money laundering is viewed as a serious issue by the regulatory community and there have been increasing international efforts directed towards it.
The action taken against SBIHK is informative of the HKMA's approach for a number of reasons.
First, it was established through the investigation that no problem accounts had actually been on-boarded and no suspicious transactions had been identified. The focus of the HKMA's investigation was therefore very much directed towards the lack of effective systems and controls within SBIHK, notwithstanding that no actual money laundering had been allowed to occur as a result of these deficiencies. The focus on systems and controls is further highlighted by the HKMA requiring SBIHK to engage an independent, external adviser to carry out an assessment of whether its remedial measures are adequate to address the contraventions identified through the investigation and the effectiveness with which its remedial measures had been implemented. Engaging an external adviser (such as an accounting or law firm) to carry out such a review will no doubt be a costly exercise for SBIHK.
The level of the fine imposed by the HKMA is also of note. While the HKMA has not provided a breakdown of how the fine of HK$7.5m was calculated, contraventions of four specific provisions of the AMLO were identified through the investigation. The maximum available fine was therefore arguably as high as HK$40m. That SBIHK's failure to carry out due diligence related to only 28 corporate accounts suggests that banks with bigger operations and more customers face the possibility of much higher fines, especially where systems and control failures have allowed money laundering to occur. The costs of remediation for banks with larger operations will also be (proportionally) greater .
Given the HKMA's focus on anti-money laundering issues in recent times, it is likely that further enforcement action will be taken in future with potentially large fines to be imposed. Banks with operations in Hong Kong should therefore revisit the adequacy of their AML/CFT compliance – with a critical eye – in light of the Statement of Disciplinary Action in this case.
Questions to ask include:
• What are the firm's main areas of risk?
• Are the firm's policies and procedures current and sufficiently tailored to the firm's business operations?
• Have the policies and procedures been adequately socialised (including through regular training)?
• Are the firm's controls, monitoring and surveillance working effectively?
• Is the firm detecting and reporting suspicious transactions as it should?
If there are potential shortcomings, this case can be used to generate additional support for additional investment in AML/CFT, especially the detection and reporting of suspicious transactions.
For further information, please contact:
Gareth Hughes, Partner, Ashurst
gareth.hughes@ashurst.com
