Lifting the Kimono – Hong Kong’s Enhanced Anti-Money Laundering Regime


The Bottom Line.

In this Insight, John Barclay and Teresa Tan (Primasia) comment on the recent enhancement of Hong Kong’s Anti-Money Laundering (AML) framework. Following an initiative from the very international Financial Action Task Force (FATF), Hong Kong has set up licensing requirements which will impact businesses. The question is how? Keep reading for more.

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Lifting the Kimono – Hong Kong’s Enhanced Anti-Money Laundering Regime

[By John Barclay and Teresa Tam]

 

Hong Kong is well-known for its low taxes and efficient company-formation procedures. Since 2002, the rate of incorporation of Hong Kong companies (and the number of Hong Kong companies on the Companies Registry) has roughly tripled (to just short of 1.4 million now on the register), versus a growth in real GDP of around one third, and a growth in population of less than 10% over the same period.

There is now about one Hong Kong company for every 5 Hong Kong people (vs. one for every 14 in 2002), and Hong Kong’s attractiveness as a place to do business and its suitability either as a corporate entry point for investment into China or as a regional head office have played a significant part in this. Despite bank account opening having become more challenging over recent years, in Hong Kong as elsewhere, that is.

Yet, the same ease of set-up can attract bad players as well as genuine businesses, and amongst 1.4 million companies there are bound to be some bad eggs. For this reason, the public authorities of Hong Kong have recently reviewed the applicable Anti-Money Laundering framework, in line with recent initiatives by the FATF.

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Anti-Money Laundering: What The FATF?

International standards on Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) have constantly been tightened under the Financial Action Task Force (FATF), an intergovernmental body established in 1989, of which Hong Kong is a member. In effect, many jurisdictions, including offshore jurisdictions, have already introduced legislation requiring more information about owners to be included in companies’ registers.

In this respect, Hong Kong is however merely catching up with enhanced due diligence around the world. The FATF carries out peer reviews on its members’ standards and, in order to be ready for its next peer review, Hong Kong has introduced new Anti-Money Laundering and Counter-Terrorist Financing legislation, effective March 1st of this year, for Designated Non-Financial Businesses or Professions (DNFBPs), including Trust or Company Services Providers (TCSPs – most of whom are company secretarial firms), accounting professionals, estate agents and lawyers.

Licensed To Bill?

A key part of the changes is the introduction of a licensing system for TCSPs, administered by the Companies Registry. Although the initial criterion for a licence is for the owners to be “fit and proper persons”, the change is just the starting point, and continual compliance by service providers with the Anti-Money Laundering and Counter-Terrorist Financing rules will be required in order to maintain the licence.

Company secretaries are therefore de facto now part of the Anti-Money Laundering enforcement regime. In fact, although the licence is required in order to be allowed to carry out work (and to bill), the real economic impact on service providers is the additional cost incurred in order to meet the additional regulation. More of a licence for TCSPs to be billed than a licence to bill.

Up Front And Personal.

The essence of the new rules is the requirement for each non-listed Hong Kong company to keep a Significant Controllers Register (SCR). The SCR is not public but must be available for inspection by law enforcement officers at the company’s registered office.

Put very simply, a Significant Controller (SC) is anyone who, directly or indirectly, controls more than 25% of the shares or voting rights of a company, or who otherwise exercises significant control over the company. The duty of ascertaining and recording this in the SCR falls on both the company itself and on its company secretary (which is a TCSP).

In other words, the real owners and controllers of a company must now be disclosed, and company secretaries must record it.

 

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Is There A ‘DR’ In The House?

A Designated Representative (“DR”) must also be appointed by each company to assist law enforcement officers with enquiries. A DR must be a member, director or an employee of the company who is a natural person resident in Hong Kong, or an accounting professional, a legal professional or a TCSP licensee.

Anti-Money Laundering in Hong Kong: Who Bares Wins

In 2015, sixteen percent of the Anti-Money Laundering-related cases leading to convictions in Hong Kong involved the use of TCSPs. Giving TCSPs responsibility for Anti-Money Laundering and Counter-Terrorist Financing checking therefore creates a “zone defence”, taking the fight against criminal activity to the front line.

This in turn means a fairer business environment for genuine businesses. Tax evaders create a higher tax burden for non-tax dodgers as well as an unlevel playing field: if you don’t pay your taxes, you can undercut those who are paying them for you. Opening up ownership information, by looking through nominee and trust arrangements, as well as complex structures, identifies beneficial ownership and control and hence who might be evading tax.

Eliminating these bad players can only be good for business in general, and doing so makes Hong Kong a better place to do business.

Some may be tempted to take short-cuts to compliance but, with the certainty of inspection by the regulator, this is just a short-cut to severe penalties under the legislation, both for clients’ Hong Kong entities, and for the service providers. Although there is an initial cost to business – to service providers and their clients – providing ownership information is an investment which will have a return. Grin and bare it, you might say.

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Teresa Tam | Business Development Director, Primasia Corporate Services Ltd.

 

Teresa Tam Primasia Asia Pacific Circle expert Profile

Teresa Tam is the Business Development Director at Primasia Corporate Services Limited, Hong Kong.

Teresa Tam started her career as an auditor at one of the prestigious international CPA firms in Hong Kong and has extensive experience in dealing with corporate accounting, tax structuring, market entry solutions (both Hong Kong and China) and company incorporation.

 

– Read more insights by Teresa Tam –

 


John Barclay | Managing Director, Primasia Corporate Services Ltd.

 

John Barclay Primasia Asia Pacific Circle expert Profile

John Barclay is the Managing Director of Primasia Corporate Services Limited, and a qualified accountant and barrister. He has held finance director-level positions with firms in his native U.K., as well as Africa, Hong Kong, China and elsewhere in Asia.

John Barclay has spent more than 20 years in Asia, mostly in Hong Kong and China. Before founding Primasia Corporate Services Limited, he was the finance director for the largest regional corporate services group at that time.

 

– Read more insights by John Barclay 


Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.


 

 

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