Hong Kong – HKMA Draws First Blood As Bank Is fined For AMLO Breaches.

On 31 July 2015, the Hong Kong Monetary Authority (HKMA) announced that it had reprimanded and fined the State Bank of India, Hong Kong Branch (SBI) HK$7.5 million for contravening four provisions under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO).

 

The HKMA further ordered SBI to submit a report prepared by an independent external advisor assessing the adequacy and effectiveness of its remedial plan in rectifying the contraventions identified by the HKMA.

 

This is the first case since the AMLO came into force (on 1 April 2012) in which the HKMA has exercised its power under the AMLO to impose a pecuniary penalty on a bank. The HKMA's actions clearly demonstrate how seriously it takes such failures. The outcome underscores the importance of having in place effective anti-money laundering and counter-terrorist financing (AML/CFT) internal controls and procedures.

 

Details of the disciplinary action can be found in the HKMA’s press release of 31 July 2015 and statement of disciplinary action.

 

1. Factual Background

 

The disciplinary action follows the HKMA’s investigation, which found that, between April 2012 and November 2013 (a period of about 20 months), SBI contravened four specified provisions of the AMLO.

 

It was found that SBI had failed to: 

 

• obtain the information necessary to carry out customer due diligence measures and identify or verify the identities of the beneficial owners in respect of 28 corporate customers, contrary to section 3(1) of Schedule 2 to the AMLO; 
• continuously monitor its business relationships with its customers, contrary to section 5(1) of Schedule 2 to the AMLO; 
• establish and maintain effective procedures for determining whether its customers (or their beneficial owners) were politically exposed persons before establishing business relationships and on a periodic basis thereafter, contrary to section 19(1) of Schedule 2 to the AMLO; and 
• establish effective procedures to ensure compliance with the AMLO, contrary to section 19(3) of Schedule 2 to the AMLO. 

 

In determining that SBI contravened these provisions of the AMLO, the HKMA had regard to the Guideline on Exercising Power to Impose Pecuniary Penalty and took into account all relevant circumstances of the case, including but not limited to several mitigating factors such as: 

 

• the very positive and intensive remediation work undertaken by SBI to address the contraventions identified in the HKMA’s investigation and other weaknesses identified in the HKMA’s onsite examination; 
• SBI’s proactive engagement of an external consultant to conduct an extensive review and an audit firm to carry out an internal audit on an on-going basis; 
• the fact that SBI's external consultant confirmed that neither actual problem accounts nor suspicious transactions had been identified; 
• SBI's implementation of a remedial plan as recommended by the external consultant; 
• SBI's lack of any prior disciplinary record and its co-operation with the HKMA.

 

2. Comments

 

It is unclear whether SBI will make use of the review avenue afforded by section 59 of the AMLO for persons aggrieved by decisions made in relation to disciplinary action.

 

Under section 59 of the AMLO, a person who is aggrieved by the decision of a relevant authority (defined in the AMLO to include the HKMA, Securities and Futures Commission (SFC), Insurance Authority (IA) and Commissioner of Customs and Excise (C&E)) will have 21 days to apply to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Review Tribunal for a review of that decision.

 

We note that this action comes shortly after steps taken by the Monetary Authority of Singapore (MAS) to enhance the AML/CFT regime in Singapore, in particular, in relation to the financial sector. Amongst other things, the reforms introduce enhanced information sharing powers between the MAS and foreign AML/CFT regulators.

 

3. Practical tips

 

The HKMA has obviously sought to send a strong message of deterrence to authorized institutions by means of this case. The HKMA has vowed to take appropriate enforcement action to deter any AML/CFT-related lapses. But those regulated by the SFC, IA and C&E should also be mindful of AMLO obligations as these regulatory bodies are capable of taking disciplinary actions under the AMLO as well.

 

We expect that the SFC, IA and C&E will take on an equally robust approach as the HKMA to promoting compliance amongst their regulated populations. We therefore advise all those regulated by these bodies to proactively review their AML/CFT policies, procedures, systems and controls to ensure that these are effectively able to mitigate the particular AML/CFT risks faced by the business