HONG KONG MONEY LAUNDERING AND TERRORIST FINANCING RISK ASSESSMENT REPORT April 2018 CONTENT FOREWORD BY i 6. SECTORAL RISK ASSESSMENT - 77 FINANCIAL SECRETARY DESIGNATED NON-FINANCIAL BUSINESSES AND PROFESSIONS HONG KONG’S ANTI-MONEY iii Overview LAUNDERING/COUNTER- Lawyers FINANCING OF TERRORISM POLICY Accountants Trust or Company Service Providers EXECUTIVE SUMMARY v Estate Agents Dealers in Precious Metals and Stones 1. INTRODUCTION TO HONG KONG 1 Next Steps Geographical Position Population 7. OTHER PAYMENT METHODS 89 Language Overview Government Structure Stored Value Facilities Legal System and the Judiciary Virtual Currencies Law and Order Next Steps Economy 8. LEGAL PERSONS AND 95 2. RISK ASSESSMENT 5 ARRANGEMENTS METHODOLOGY Legal Persons and Other Entities The World Bank Tool Legal Arrangements The Process Company Formation and Legal Organisation of Report Requirements Next Steps 3. OVERALL MONEY LAUNDERING/ 9 TERRORIST FINANCING 9. TERRORIST FINANCING 101 COMBATING ABILITY Terrorism Threat Anti-Money Laundering/Counter-Financing Terrorist Financing Threat of Terrorism Legal Framework Terrorist Financing Vulnerability High-level Commitment and Terrorist Financing Risk Institutional Framework Next Steps Prosecution and Judicial Process External and International Cooperation ANNEX A: LIST OF ABBREVIATIONS 109 Next Steps ANNEX B: LIST OF FIGURES/ 115 4. MONEY LAUNDERING THREAT 27 TABLES/BOXES Overview Major Predicate Offences Typologies Analysis and Money Laundering Trends Overall Money Laundering Threat 5. SECTORAL RISK ASSESSMENT - 41 FINANCIAL INSTITUTIONS Overview Banking Securities Money Service Operators Insurance Money Lenders FOREWORD BY FINANCIAL SECRETARY Like elsewhere in the world, Hong Kong is not immune from the threats of money laundering (“ML”) and terrorist financing (“TF”). As an international financial centre with a highly externally- oriented economy, we are alert to the fact that Hong Kong’s competitive advantages – orderly flows of capital, people, goods and information; well-established legal system; sophisticated market infrastructure; and advanced professional services – could also make it attractive for criminals seeking to hide or move funds. The fact that financial activities of criminal elements have become more sophisticated in the digital era and the prevalence of terrorist activities elsewhere call for additional vigilance. Hong Kong is committed to combating ML and TF together with the international community. Over the years we have put in place a robust anti-money laundering and counter-financing of terrorism (“AML/CFT”) regime having regard to international standards set by the Financial Action Task Force. To stay ahead of the curve, we put the AML/CFT regime under continuous review to ensure that it can live up to challenges posed by the fast-changing financial-market and security landscapes. As part of our ongoing efforts to strengthen the regime, we have conducted this risk assessment to examine the ML/TF threats and vulnerabilities facing various sectors, and the city as a whole. It also identifies areas for further work, so that more targeted responses can be formulated. Informed by the risk assessment, over the past year we have taken forward various enhancement measures. These include updating the legal and regulatory framework, reinforcing the adoption of a risk-based approach in preventive and supervisory measures, stepping up efforts to restrain and confiscate crime proceeds, and strengthening international cooperation. The risk assessment will be updated from time to time as we continue our work to enhance the AML/CFT regime. As ever, the Government will spare no efforts and devote the necessary resources to ensure that Hong Kong stays as a safe and clean place for living, work and doing business. Paul MP Chan, GBM, GBS, MH, JP Financial Secretary i HONG KONG’S AML/CFT POLICY The Hong Kong Special Administrative Region (“HKSAR”) Government adopts a multi-agency approach in constructing its AML/CFT regime. A high-level Central Coordinating Committee on AML/CFT (“CCC”), chaired by the Financial Secretary, steers the formulation of policies and implementation of the AML/CFT regime. It comprises members from the relevant Government bureaux and departments, financial regulators and law enforcement agencies (“LEAs”), which work together to take forward AML/CFT initiatives. The Government is committed to upholding a robust AML/CFT regime that: (a) Fulfills the international AML/CFT standards; (b) Deters and detects illicit fund flows in and out of the territory, through the financial system or otherwise; (c) Combats ML/TF and restrains and confiscates illicit proceeds effectively; (d) Reduces ML/TF vulnerabilities of both financial and non-financial sectors in Hong Kong; (e) Adopts a risk-based approach (“RBA”) in applying compliance obligations to businesses and individuals; (f) Fosters strong external and international collaboration to disrupt global ML/TF threats; and (g) Promotes the awareness and builds the capacity of private sector stakeholders in combatting ML/TF risks through engagements in AML/CFT efforts. In line with the above principles, and in response to risks and gaps identified in this assessment, the Government will focus efforts in five major areas to enhance its AML/CFT regime: (a) Enhancing the AML/CFT legal framework to address gaps in legislation in accordance with international standards and an RBA; (b) Strengthening risk-based supervision to ensure targeted regulation of the riskier areas faced by the financial and non-financial sectors; (c) Sustaining outreach and capacity-building to promote awareness and understanding of ML/TF risks by various sectors and the wider community on a continuous basis; (d) Monitoring new and emerging risks to respond promptly to evolving patterns of predicate offences or terrorism, and modes of ML/TF; and (e) Strengthening law enforcement efforts and intelligence capability to tackle domestic and international ML/TF, and enhance restraint and confiscation of the proceeds of crime, including through multi-agency cooperation/partnership. iii iv EXECUTIVE SUMMARY As an international financial centre, Hong Kong attaches great importance to safeguarding the integrity of its financial systems by implementing international AML/CFT standards to deter and detect inward and outward flows of illicit funds. Hong Kong is an active member of international AML/CFT organisations, having been a member of the Financial Action Task Force (“FATF”) since 1991 and a founding member of the Asia/Pacific Group on Money Laundering (“APG”) since 1997. Over the years, Hong Kong has built up a comprehensive AML/CFT regime comprising a robust legal framework, effective law enforcement, rigorous preventive measures, international cooperation, and public education and publicity. However, international standards have evolved quickly because of the changing global financial-market and security landscapes. Hong Kong therefore recognises the need to conduct the risk assessment in response to these developments. Hong Kong has made reference to the FATF Guidance on National Money Laundering and Terrorist Financing Risk Assessment and adopted the World Bank Tool in conducting its first territory- wide risk assessment. The purpose of the assessment is to identify, understand and update the ML and TF risks to which Hong Kong is exposed, which would then form the basis for the formulation of more targeted responses. This assessment draws on extensive consultation, quantitative and qualitative data examination and direct engagement with regulators, LEAs, government bodies and private sector entities. The aim is to canvas and consolidate collective knowledge to develop a list of specific threats or vulnerabilities that are the causes, sources or drivers of ML/TF risks in the context of Hong Kong. Action has been taken in the course of conducting the risk assessment to address these identified ML/TF risks. Key Findings Ability to combat ML Hong Kong’s ability to combat ML is assessed as medium-high, characterised by its robust legal framework, high-level political commitment, close partnerships among Government agencies and between the public and private sectors, fair and efficient prosecution and judicial process, and good external and international cooperation. ML threat As an international finance, trade and transport hub with strong links to Mainland China, Hong Kong is exposed to ML threats arising from both internal and external predicate offences. Internally, fraud and drugs-related crimes pose high and medium-high ML threats to Hong Kong. Externally, fraud again poses a high ML threat while drugs, corruption and tax evasion pose medium-high threats. Local and cross-border1 money launderers have exploited the high degree of free trade and efficient financial and banking systems. Corporate bank accounts and money service operators (“MSOs”) are common conduits exploited by ML syndicates so that the banking sector faces a high ML risk and MSOs a medium-high risk. 1 In this report, the term “cross-border” shall be interpreted as “between different jurisdictions”. v ML syndicates also abuse the efficient and open business environment, which allows easy formation of shell companies, to launder proceeds of crime. The ML threat to trust or company service providers (“TCSPs”) has a noticeable cross-border element. It is not uncommon for shell companies incorporated in Hong Kong under the control of transnational syndicates to be used to launder proceeds of crimes