18 April, 2018
Late last week, the HKMA published a circular to provide feedback to authorised institutions (AIs) on its thematic review of their sanctions screening systems, which took place in the past few months. While the review indicated that the screening systems examined were in general performing on par with industry benchmarks, the HKMA wishes to draw AIs’ attention to various issues and good practices identified during the review, which it has set out in the annex to the circular.
The HKMA will collect information from all AIs in the third quarter of 2018 on individual action plans and consider conducting further reviews.
The HKMA also issued a circular to stored value facility (SVF) licensees on the same day to provide guidance regarding sanctions screening. It plans to conduct a thematic review on various SVF licensees in the coming months.
The HKMA has indicated that the adequacy of sanctions screening systems and controls is one of its supervisory priorities, especially in light of the recent geopolitical developments.
STEPS TO BE TAKEN BY AUTHORISED INSTITUTIONS FOLLOWING REVIEW
Where weaknesses were detected during the review, the relevant AIs were required to undertake remedial action.
All AIs are expected to:
- consider adopting the good practices identified in the circular to them (where appropriate) and, at a minimum, perform a gap analysis;
- (if they haven’t already done so) put in place regular sanctions screening system testing that provides robust reporting and quality assurance to senior management that the regulatory expectations set out in the annex to the circular (see below) are being met – this should be conducted by a party having subject matter expertise, whether internally or externally.
The HKMA will hold a seminar for AIs on 23 April 2018 to further discuss its regulatory expectations and the key observations from its thematic review.
In the third quarter of 2018, the HKMA will collect information from all AIs on their individual action plans and consider conducting further reviews on the relevant data in due course following a risk-based approach.
REGULATORY EXPECTATIONS SET OUT IN THE ANNEX TO THE CIRCULAR TO AUTHORISED INSTITUTIONS
The following regulatory expectations set out by the HKMA in the annex to the circular can be used by AIs as self-assessment questions:
- AIs’ senior management should consider the risk of sanctions breaches and determine the appropriate level of sanctions screening to manage the risk for the AIs.
- New systems or upgrades to existing systems need to be thoroughly tested and tuned prior to deployment, with sufficient levels of reporting and oversight.
- Ongoing monitoring, tuning and testing should be conducted on all aspects of sanctions screening systems, lists and processes on a regular and frequent basis.
- AIs are expected to have a clear and demonstrable understanding of the system filters utilised in their screening technology, and to employ / equip staff with the right skills and knowledge to support the deployment of effective sanctions screening systems.
- AIs are expected to conduct ongoing tuning of system filters to reduce the level of false positives without compromising effectiveness.
The HKMA elaborates on its expectations and sets out its key observations as well as some examples of good practices.
UPCOMING REVIEW ON SVF LICENSEES
In the circular to SVF licensees, the HKMA reminds SVF licensees of their obligations relating to sanctions screening, and indicates its plan to conduct a thematic review on a number of licensees "in the coming months".
To assist licensees in optimising the performance of their screening systems and in preparing for the upcoming review, the HKMA has attached to the circular its findings from the thematic review on AIs. While the sanctions compliance policies and risk appetite of SVF licensees may differ to those of AIs, SVF licensees are encouraged review the good practices outlined and consider adopting them where applicable.
For further information, please contact:
Will Hallatt, Partner, Herbert Smith Freehills
will.hallatt@hsf.com
