Due diligence you can bank on

By Melissa Tan

Banks, financial institutions and other professional services firms have been given a timely reminder about the importance of complying with Hong Kong’s strict anti-money laundering (AML) laws. Lack of due diligence with regard to the source of a client’s funds can be extremely costly.

Just recently, the Hong Kong Monetary Authority (HKMA) announced it had fined an errant bank HK$16 million for contravening the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO). It was the fourth such action taken against non-compliant banks in less than a year, with fines totalling HK$37 million.

The AMLO clearly defines what is expected with regard to customer due diligence (CDD) and record-keeping from financial institutions, licensed corporations, virtual asset service providers and so-called designated non-financial businesses and professions. But it is not the only piece of legislation governing AML: other laws concerning drug trafficking, organised and serious crime, terrorism, sanctions and weapons of mass destruction must also be observed.

The scale of money laundering is truly staggering. The International Monetary Fund estimates it to be 2-5% of global GDP – this amounts to between US$800 billion and US$2 trillion. In the UK, the National Crime Agency believes ￡90 billion is laundered annually. In the US, it is thought the sums seized in AML operations are less than 0.2% of all laundered money. Here in Hong Kong, the Joint Financial Intelligence Unit – a task force run by the police and customs – handled more than 68,000 reports of suspicious financial activity in 2022. That’s a 33% increase over the last three years.

Banks, financial institutions and financial services companies have always been the traditional targets for criminals engaged in money laundering activities. But as these institutions have put measures in place, so rogue actors look for alternatives. Non-financial businesses – for example, law firms or insurance companies – are especially attractive.

All institutions should have robust and effective know your client protocols. Typical red flags include, among other behaviours, customers who are: overly secretive, reluctant to meet in person, unable to provide data or documents, vague about sources of money, prepared to make high-value cash transactions, acting through third parties or willing to pay substantially higher fees.

The HKMA’s latest enforcement action following an investigation into EFG Bank AG, Hong Kong Branch (EFGHK). The probe identified issues in conducting CDD on clients transferred from another financial institution from 2016-18, plus on-boarding CDD and on-going CDD measures on other clients from 2012-18. The regulator further found that the bank had failed to maintain effective procedures for CDD and on-going monitoring of business relationships with customers.

In imposing the HK$16 million fine, the HKMA took into account the seriousness of its findings and the need to send a deterrent message to the industry. Executive Director (Enforcement and AML) Carmen Chu remarked: “CDD and continuous monitoring of business relationships with customers are crucial measures for Authorised Institutions [AIs] to protect accounts from being abused for financial crime and safeguard banking system integrity. AIs are key stakeholders in the anti-money laundering and counter-terrorist financing ecosystem and should uphold the international standards incorporated in the AMLO as well as the relevant guidelines and circulars issued by the HKMA in their conduct of business.”

If that sounds rather daunting, Headland Intelligence can assist. One of our core specialities is due diligence and background searches, whether in the context of know your client, stock market listing applications, dispute resolution or risk assessment. We are thorough, efficient and discreet. We are also, it is safe to say, way more cost-effective than an eye-watering fine from the HKMA.

Melissa Tan is Managing Director of Headland Intelligence, having founded the company in 2021. She takes pride in being the first port of call for many business owners, not-for-profits and professional parties when problems arise.