Supplement to the Guideline on Prevention of Money Laundering

1. Supplement to the Guideline on Prevention of Money Laundering Hong Kong Monetary Authority 8 June 2004

2. Background (1) • The current Guideline on Prevention of Money Laundering was issued in 1997 and updated in 2000 • Since then, a number of significant developments have taken place, including: • the Basel Committee on Banking Supervision’s paper on “Customer Due Diligence for Banks” (Oct 2001) • the FATF Eight Special Recommendations on Terrorist Financing (Oct 2001) • the revised FATF Forty Recommendations (June 2003) • the new anti-terrorism law in HK - United Nations (Anti-Terrorism Measures) Ordinance (July 2002)

3. Background (2) • As a member of FATF, Hong Kong has a good reputation internationally as a financial centre that takes seriously the need to combat money laundering and terrorist financing • The HKMA needs to keep its regulatory requirements in line with international standards • The Supplement on the Guideline on Prevention of Money Laundering has been prepared • In collaboration with the Industry Forum, a set of Interpretative Notes has also been developed to provide implementational guidance

4. Background (3) • The Industry Forum comprised representatives from HKMA, HKAB and the DTCA • The Forum met three times from May to September 2003 • Three subgroups were formed on (i) Public Education, (ii) Correspondent Banking and (iii) Private Banking • Following finalisation of the Forum’s proposals, consultation was undertaken with HKAB and the DTCA

5. Customer due diligence • First priority is for banks to have effective systems for customer due diligence (CDD) • This involves the following steps: • identify the direct customer • verify the customer’s identity • identify the person with beneficial ownership and control (if different from the direct customer) • verify the identity of the beneficial owner • conduct on-going due diligence and scrutiny • The basic issue is whether it is safe for banks to establish a banking relationship with a customer

6. Customer acceptance policies • Banks should develop policies and procedures to identify higher risk customers: • apply enhanced due diligence • approve at senior management level • Factors to be considered in risk assessment: • who the customer is • what he does • where he comes from • where he does business • how he operates the account

7. Risk-based approach (1) • Higher risk customers should be subject to enhanced CDD process while lower risk customers may be subject to simplified CDD process • Examples of higher risk customers: • politically exposed persons • correspondent banks (particularly “shell banks” or those from non-cooperative countries and territories) • corporate vehicles (particularly offshore companies where the objective may be to disguise the beneficial ownership)

8. Risk-based approach (2) • Examples of lower risk customers: • domestic retail customers (identity data to be verified include: name, number of Hong Kong Identity Card, date of birth and residential address) • entities regulated by supervisory authorities (such as the SFC and the Insurance Authority) • listed companies

9. Other specific types of customers • The Supplement also sets out detailed due diligence process for the following types of customers: • customers introduced by intermediaries • client accounts • trust and nominee accounts • non-face-to-face customers (such as internet accounts)

10. Existing accounts • While the Supplement applies to new customers in general, banks are also to review existing accounts periodically in line with the new standards • based on certain trigger events (e.g. a large or unusual transaction) • a risk-based approach with focus on higher risk customers • where necessary obtain additional evidence for verification of identity

11. Control measures for combatingterrorist financing • Establish criteria for identifying high risk customers relating to terrorist financing • Maintain database of terrorist names (or access commercially available databases) for name checks purpose • Provide sufficient details of the originator’s information in the remittance messages • Report suspicious transactions to both the JFIU and the HKMA

12. Implementation of the Supplement • The Supplement should be read in conjunction with the relevant parts of the Guideline and the Interpretative Notes • Locally incorporated authorized institutions should apply the Supplement on a group-wide basis (including overseas branches/subsidiaries) • Implementation no later than 31 Dec 2004

13. Enforcement of the Supplement • The Supplement and the Interpretative Notes are issued under s.7(3) of the Banking Ordinance • The HKMA will monitor AIs’ compliance via: • self-assessment • on-site examination • off-site review (such as reviewing the number of suspicious transaction reports made to the JFIU) • In our experience, AIs pay close attention to anti-money laundering matters and are co-operative in implementing anti-money laundering measures • Supervisory actions may be taken in cases of non-compliance

14. Information leaflet • To promote customers’ awareness, an information leaflet “Fighting Crime and Terrorism: How You Can Help” was released in March 2004 • The leaflet, jointly developed by the HKMA, HKAB and the DTCA, is to explain to bank customers why AIs may require them to provide identification documents and how this can help combat money laundering and terrorist financing • It covers identification documents required for both personal and business customers

15. Closing remarks • Given Hong Kong’s position as an international financial centre, it is important that we have anti-money laundering controls that meet the best international standards • Hong Kong has a robust and effective framework for combating money laundering and terrorist financing. We need, however, to remain alert to new developments, and ensure that the legal and regulatory measures keep up to date • At the same time, we need to ensure that customers are not unduly inconvenienced, and that we remain “business-friendly”