In June the Hong Kong Government published a bill which, if passed, could potentially impact thousands of luxury goods manufacturers, importers, exporters, distributors and retailers in Hong Kong.
Whether dealing in precious metals, precious stones or anything containing these, including clothes, all traders (and yes, there is even a provision covering hawkers,) need to be aware of the new requirements under the Bill and how it might apply to them.
Planned to come into force on January 1, 2023, the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022[i] (the “AML Bill”) is aimed at enhancing Hong Kong’s regulatory regime for combating money laundering and terrorist financing (“AML/CTF”.)
It also addresses a number of AML/CTF issues identified in the Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report[ii] published by the Government pursuant to periodic assessment requirements of the Financial Action Task Force (“FATF”).
While a lot of attention has been drawn to the AML Bill’s regulation of virtual asset service providers, in particular the introduction of a licensing regime for crypto-asset exchanges, the section introducing a registration regime for all dealers in precious metals and stones (“DPMS”) in Hong Kong seems to have slipped under the radar.
Anthony Leung focuses on the details.
Key Takeaways
- The AML Bill currently going through the legislative process will implement a registration system for all dealers in precious metals and stones trading in Hong Kong (“DPMS”).
- The definition of DPMS is drawn widely and covers all manufacturers, distributors, importers, exporters, wholesalers and retailers of jewellery, luxury watches or accessories, including hawkers.
- All DPMS in Hong Kong will have to apply for either a Category A registration or a Category B registration by 1 October 2023.
- Category A registrants are NOT allowed to conduct cash transactions (whether a single transaction or a series of related transactions) at or above HK$120,000.
- A Category B registration will be required if a dealer intends to carry out cash transactions above HK$120,000. Any director or ultimate owner (i.e. any natural person owning more than 25% shares or voting rights) of the registrant will need to go through a “fit and proper person” test to obtain such registration.
- Category B registrants will also be mandated to carry out anti-money laundering/counter-terrorism financing checks for any cash transaction/transactions above HK$120,000.
The AML Bill
The AML Bill, which will amend the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615, “AMLO”), is at the time of writing, still at the Bills Committee stage.
Two more Bills Committee meetings are scheduled in October and November 2022. As such, it is questionable whether the law can come into effect as planned on 1 January 2023.
The definition of “dealing in precious metals and stones” is drawn widely under the AML Bill.
It covers not only precious metal exchanges but also anyone who trades in precious metals, including metals commonly used in luxury goods like gold, silver, or platinum, precious stones including diamonds, common gemstones, pearls, both natural and artificial.
It also covers precious goods like jewellery, watches, apparel, accessories, or ornaments made up of precious metals and precious stones and with at least 50% of the transaction price attributable to the precious metals and stones.
In effect, it covers all jewellery and luxury watch manufacturers, importers, exporters, distributors, and retailers. There is even a provision in the Bill expressly covering hawkers.
The three key components of the AML Bill in relation to DPMS are: –
- the implementation of a two-tier registration regime for DPMS.
- the implementation of the “fit and proper person” test for Category B registrants; and
- mandatory AML/CTF requirements for certain cash transactions.
Two-tier Registration Regime
The AML Bill introduces a two-tier registration arrangement for DPMS: Category A, which is more lenient and straightforward; and Category B, which is subject to tighter scrutiny. The registration regime will be operated by the Hong Kong Customs and Excise Department.
Under the Bill, any DPMS is required to obtain either a Category A or a Category B registration by 1 October 2023[i].
It will become an offence for anyone to conduct trade in precious metals or stones in Hong Kong without registration and offenders could be liable to a fine of HK$100,000 and six-months imprisonment.
A Category B registration will be required for any DPMS who intends to conduct any cash transaction (whether a single transaction or a series of linked transactions) for precious stones/metals of HK$120,000 or more. It will be an offence for anyone else, including Category A registrants, to conduct such transactions.
“Cash” is not specifically defined under the AML Bill or the AMLO, but by the letter of the law, this restriction should only apply to transactions using paper currency and not, say, cheques, EPS, credit cards or wire transfers[ii].
In a briefing section hosted by the Customs and Excise Department dated 27 October 2022[iii], Customs officials stated it is the department’s position that “cash transactions” refer only to transactions involving fiat currency.
A Category B registration is not required for transactions by other means, even if it exceeds HK$120,000.
Category A
The requirements for obtaining a Category A registration are quite straightforward, requiring only a valid business registration, a small three-figure annual fee to be paid and a declaration from the applicant it will carry out its trade for a lawful purpose. As of the time of writing, there are no special conditions or procedures that Category A registrants must abide by other than having and publicly displaying such a registration.
Category B
The requirements for obtaining a Category B registration are much more onerous. The Customs and Excise Department will conduct a “fit and proper person test” to determine if the applicant is eligible to be a Category B registrant. The department will consider: –
- whether the Applicant has been convicted of any money laundering/terrorism financing offences, serious criminal offences or any offence involving fraud, corruption, or dishonesty anywhere in the world;
- whether the Applicant is the subject of any bankruptcy/winding up/liquidation proceedings;
- whether the Applicant has failed to comply with any requirements under the AMLO or any regulations the Customs and Excise Department has imposed under the Bill.
If the applicant is a company, the Customs and Excise Department will also consider whether all the company’s directors and ultimate beneficial owners (defined as any natural person holding 25% or more shares or voting rights over the company) are “fit and proper persons”.
Any new directors or ultimate beneficial owners will also be subject to the same “fit and proper persons” test and the registration may be cancelled if the department considers them no longer “fit and proper persons”.
In addition, the applicant will also need to supply the addresses of each premises that the applicant intends to be used as the business premises, together with consent for customs officials to enter such premises for inspection.
The AML Bill also empowers the Commissioner of Customs and Excise to enact subsidiary regulations and to cancel registrations granted if any registrant is in contravention of those regulations.
It also empowers the Commissioner to impose any new conditions on both Category A and B registrants, although so far, no subsidiary regulations have been proposed and the Customs and Excise Department has not published any guidelines on the intended application process, so it’s not clear what, if any, new conditions might be imposed.
The AML Bill is meant to come into operation on 1 January 2023. Existing DPMS will have a nine-month transition period, until 1 October 2023, to obtain registration. All existing DPMS will be deemed to be Category B registrants (please see below) and can continue trading during the transition period.
Mandatory AML/CTF Requirements
A cornerstone of the new AML regime is that for any cash transactions at or above HK$120,000 with any entity which is not itself a Category B registrant (i.e., other Category B DPMS)[iv], Category B registrants shall be subject to anti-money laundering/counter-terrorism financing requirements (“AML/CTF Requirements”) imposed on Designated Non-Financial Businesses and Professions (“DNFBP”) under Schedule 2 of the AMLO.
This includes: –
- having a clear AML/CTF policy in place;
- conducting customer due diligence checks to ascertain and verify the identities of customers;
- continuously monitoring customers;
- conducting special checks under certain circumstances (e.g. for high-risk customers or politically exposed persons); and
- maintaining records of customers and transactions for at least five years.
These measures are not entirely new.
The AML Bill essentially codifies the AML/CTF Requirements recommended by the Narcotics Division of the Hong Kong Police in Anti-Money Laundering and Counter-Terrorist Financing Guideline for Dealers in Precious Metals and Stones (2018)[v].
Again, it remains to be seen whether the AML/CTF Requirements apply to “non-cash” transactions over HK$120,000.
Conclusion
If the AML Bill passes into law in its current form, which seems likely, all DPMS, including jewellery and luxury watch retailers, will be required to obtain either a Category A or Category B registration.
As of the time of writing, the Customs and Excise Department appears to take the position that cash transactions only mean transactions involving fiat currency and no other.
It should be noted, however, that this article is based solely on the current AMLO and the AML Bill as currently drafted.
The AML Bill may be subject to changes before passing, and the Commissioner of Customs and Excise may enact further regulations for both Category A and B registrants in the future.
It would be a good idea to keep an eye on the passage of this legislation (as well as any subsequent developments) and then decide how to address the situation.
For further information, please contact:
Anthony Leung, Haldanes
anthony.leung@haldanes.com
[i] The AML Bill is meant to come into effect on 1 January 2023 but a 9-month transition period is provided.
[ii] It also appears that from the FATF Guidelines that the restriction is meant to cover only cash/paper currency transactions. Further, in the Strategic Analysis Report on Dealers in Precious Metals and Stones published by the Financial Intelligence and Investigation Bureau of the Hong Kong Police in December 2021 (https://www.fstb.gov.hk/fsb/aml/en/doc/2nd%20HK%20ML%20TF%20Risk%20Assessment%20Report_e.pdf), it is acknowledged that use of cash in the modern e-payment era has diminished. Hence it does appear that these measures are intended to cover only cash/paper currency transactions.
[iii] “貴金屬及寶石交易商註冊制度簡介會”, hosted by the Hong Kong Federation of Industries on 27 October 2022.
[iv] Under the Bill, the AML/CTF Requirements currently do not appear to apply to cash transactions below HK$120,000, even if conducted by Category B registrants.
[v] https://www.nd.gov.hk/pdf/DPMS_Guideline_E.pdf[vi] Under the Bill, the AML/CTF Requirements currently do not appear to apply to cash transactions below HK$120,000, even if conducted by Category B registrants. [vii] https://www.nd.gov.hk/pdf/DPMS_Guideline_E.pdf
