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.

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.