Policy Statement & Submission

14 December 2020

Mr Ashley Alder, SBS, JP
Chief Executive Officer
Securities and Futures Commission
54/F, One Island East
18 Westlands Road, Quarry Bay
Hong Kong

Dear Mr Alder,

Re: Consultation Paper on Proposed Amendments to the Securities and Futures
Commission’s Anti- Money Laundering and Counter-Terrorist Financing Guideline (the Guideline)

The Hong Kong General Chamber of Commerce welcomes the opportunity to express our views on the subject consultation.

The Chamber supports the proposed amendments to the Commission’s Guideline subject to these being proportionate and conducive to licensed corporations’ ability to comply with existing obligations under the city’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615). To achieve these, we believe that any additional compliance requirements should be facilitative in nature, as well as being reasonably practicable to achieve rather than overly prescriptive.

We hope you will give our comments your due consideration.

Yours sincerely,

George Leung

CEO

Encl.

Securities and Futures Commission’s Consultation Paper (CP) on Proposed Amendments to its Anti- Money Laundering and

Counter-Terrorist Financing Guideline (the Guideline) September 2020

Response by The Hong Kong General Chamber of Commerce

(HKGCC)

Introduction

1. HKGCC welcomes this opportunity to respond to the CP.
    
2. While the proposed amendments to the Guideline would have a direct impact on businesses in the financial services sector that are licensed by the Securities and Futures Commission (what the CP refers to as “licensed corporations”, abbreviated to “LCs”), they could also have a wider indirect potential impact on Hong Kong’s position as a global financial centre, and regional financial hub.
    
3. Having such a position, Hong Kong needs to, and should, be part of the global efforts to combat money laundering and terrorist financing. The Anti-Money Laundering and Counter- Terrorist Financing Ordinance (Cap 615) (“the AMLO”) is an important instrument to achieve this objective. Any valuable and proportionate guidance that can be provided to LCs in complying with their existing obligations under the AMLO is therefore welcome. Such guidance not only benefits LCs by helping them to comply (and thereby avoid the potential sanctions for non-compliance). By maximising compliance, it also helps to promote Hong Kong’s reputation as a reliable place to do business.
    
4. We note that the Consultation Questions do not invite comments generally on the CP’s proposals, but only on specific aspects of them. For example, Question 1 invites comments on the frequency with which institutional risk assessments should be conducted, but does not invite comments on other aspects of the proposed new “elaborative guidance” on institutional risk assessments. We have views on such other aspects of the CP’s proposals, and not just on the specific issues on which answers have been invited. We have therefore set out our views on these other aspects under “General Comments” below, before going on in the following section to address the Consultation Questions.
   
   General Comments
    
5. We have two general comments on the CP’s proposals:

   i. the suggested compliance actions in the proposed amended Guideline should be facilitative, not (as is current proposed for many of them) mandatory; and

   ii. these suggested compliance actions should be reasonably practicable to achieve, and not excessively granular.

6. We elaborate on each of these comments in turn.
   
   1) The suggested compliance actions in the proposed amended Guideline should be facilitative, not mandatory
    
7. It is important that the amendments to the Guideline are confined to helping LCs to comply with their existing legal obligations, and do not purport to impose new legal obligations, or to strengthen the existing ones. Any proposed change to the existing legal requirements would clearly be a matter for determination by LegCo, or (if it concerned amendments to Schedule 2 of the AMLO) by the Secretary for Financial Services and the Treasury,[1] (in either case after appropriate consultation). This is the position, whether or not some of the SFC’s proposed amendments are in part (as they appear to be) designed to comply with the guidance from the international Financial Action Task Force.
    
8. In this respect, we are concerned that many of the proposed amendments to the Guideline purport to impose additional, new requirements on LCs, as opposed to helping them to comply with their existing legal obligations. This is a result of the Guideline’s statement that “the use of the word ‘must’ or ‘should’ in relation to an action, consideration or measure referred to in this Guideline indicates that it is a mandatory requirement” (emphasis added),[2] combined with the fact that many of suggestions and examples in the proposed amended Guideline are indeed prefaced by the word “should”. (We refer below to examples of the Guideline’s use of the word “should” in this way). The result is that, instead of being merely (as we submit they should be) suggestions and examples to assist LCs in considering what actions to take to meet their existing mandatory legal requirements (what the CP refers to as “facilitative guidance”), the proposed amended Guideline purports (perhaps unintentionally) to make these suggestions and examples new mandatory requirements in themselves.
    
9. We have three recommendations to rectify the proposed amended Guideline in this respect:

   i. The use of the word “must” or “should” should be confined to references to LCs’ existing legal requirements, or at most to actions that are a necessary consequence of complying with these requirements. For example, the statement in the proposed amended Guideline that “FI’s should have in place a process to identify and understand the ML/TF risks to which they are exposed…”[3] seems unobjectionable since, without such a process, it is difficult to see how LCs can comply with their duty under the AMLO to “take all reasonable measures…(a) to ensure that proper safeguards exist to prevent a contravention of any requirement under Part 2 or 3 of this Schedule”.

   ii. Where actions are required by an existing legal requirement, or are a necessary consequence of complying with such a requirement, the Guideline should refer to the relevant statutory provision. This would help make a clear distinction between actions that are mandatory, and those that are merely suggested actions for LCs to consider.

   iii. Where the suggestions and examples of actions that might be taken by LCs are not expressly required by the legislation, or implied as a necessary consequence of compliance with it, the use of the word “should” needs to be avoided, and the wording should be expressed as facilitative, rather than mandatory. In the Annex, we give a non-exhaustive list of examples of how the use of the word “should’’ in the proposed amended Guideline should be changed to facilitative language such as “may wish to consider”. As this is a general point about how the proposed amended Guideline should be changed, we have not sought to produce an exhaustive list of precisely where the changes need to be made.

   2) The suggested compliance actions should be reasonably practicable to achieve, and not excessively granular

10. Even with the word “should” replaced by facilitative language, as recommended above, it is important that all suggested actions, whether in the body of the proposed amended Guideline, or in its Appendices, are reasonably practicable to achieve, and not excessively granular (i.e. detailed).This is because, although the Guideline is not in itself legally binding, it is admissible as evidence in any court proceedings for breach of the AMLO, and the court must take its provisions into account if they are relevant to the issue in question.[4] Moreover, as the Guideline itself notes, LCs which fail to comply with the Guideline may also be subject to disciplinary or other actions under the Securities and Futures Ordinance for non-compliance with the relevant requirements.[5] Imposing expected actions on LCs that are impracticable or excessive would risk harming, rather than promoting Hong Kong’s position as a global financial centre, by impeding capital flows into Hong Kong.
     
11. The AMLO imposes in general terms a duty on LCs to take all reasonable measures
    (a) to ensure that proper safeguards exist to prevent a contravention of the AMLO and
    (b) to mitigate money laundering and terrorist financing risks.[6] It is ultimately a matter for the court, in each case where a breach of this requirement is alleged, to determine whether measures taken by the LC were all that could reasonably be expected, and whether proper safeguards existed. However, given the court’s obligation to take account of the Guideline in any such proceedings, the fact that a certain compliance action was suggested in the Guideline, but was not taken by the LC (even although it had taken alternative measures to comply), has the potential to count against the LC in such proceedings, or at least place the onus on the LC to explain why it was not taken.
     
12. It is therefore firstly very important to ensure that the steps suggested in the proposed amended Guideline are reasonably practicable to achieve. While the LCs themselves are best-placed to assess and comment on this, we have concerns on at least two suggested steps in this regard, both in the section dealing with cross-border correspondent relationships:

    i. Obtaining detailed information about a respondent institution’s business, and in particular its underlying customers;[7] and

    ii. Obtaining detailed information for assessing whether the AML/CTF controls of the respondent institution are effective.[8]

13. Neither of these steps are within the power of the LC itself to secure, since they require the consent and cooperation of the respondent institution. If these suggested steps are to remain in the new Guideline, we therefore recommend that it contain an explicit recognition of the fact that these steps may not always be practicable, depending partly on the respective negotiating positions of the parties, and that disclosure of the information might legitimately be refused on grounds of commercial confidentiality.
     
14. In terms of the granularity of the suggested actions (or suggested factors to take into account) in the body of the Guideline and its Appendices, a balance has to be struck between giving facilitative guidance, i.e. guidance that helps LCs comply with their legal obligations, and imposing expectations on them that may (if they are not met) count against them in any legal proceedings (as explained above). While the LCs themselves are in the best position to comment on whether the proposed amended Guideline strikes the right balance, it seems to us that the parts of the document attached in Annex 2, by way of example, may be excessively granular and detailed, and limit the LC’s opportunity to argue that it had taken all reasonable precautions to avoid a contravention, albeit not having followed all of the Guideline’s suggested steps. We recommend that consideration be given to either removing these sections, or considerably simplifying them to make them more general and less specific.
    
    Answers to the Consultation Questions
    
    Question 1: Do you agree that the institutional risk assessment should be subject to periodic review at least once every two years or more frequently upon the occurrence of trigger events? Please explain.
    
    We agree that the institutional risk assessment should be reviewed at regular intervals, but suggest that the two-year period in the Guidelines be referred to as an example of the timeline for review. LCs may wish to conduct their review more frequently, and this should be recognised. Moreover, LCs should be given the discretion to decide whether one trigger event in itself should trigger the need for review, or whether two or more events should trigger a review, depending on the precise circumstances. This should be accommodated in the drafting of the Guideline.

    Question 2: Do you consider the expanded list of illustrative examples of risk indicators to be sufficiently comprehensive? Please state your views.

    We believe that the expanded list is sufficiently comprehensive. But we defer to the views of LCs on whether all the examples are (a) reasonably practicable for them to achieve and/or (b) not excessively granular (see our General Comment (2) above). In other words, whether any of the examples should be reviewed or modified.

    Question 3: Do you agree with the scope of application for the cross-border correspondent relationships provisions for the securities sector? Please explain.

    Yes.

    Question 4: Do you have any views on the additional due diligence and other risk mitigating measures applied to cross-border correspondent relationships in the securities sector? Please state your views.

    Please see our General Comments 1 and 2 above. As explained in General Comment 1, the word “should” in respect of many of the suggested actions in section 4 on cross-border relationships is inappropriate, and should be replaced by facilitative language, so as not to purport to create additional legal obligations. Moreover, as explained in General Comment 2, some of these suggested actions may be impracticable to be achieve or excessively granular, and should be simplified or removed.

    Question 5: Do you have any views on the expanded list of illustrative examples of possible simplified and enhanced measures under a risk-based approach? Please state your views.

    We defer to the views of LCs on this question, being those directly affected by these examples and in the best situation to assess their potential impact in practice.

    Question 6: Do you have any views on the list of illustrative red-flag indicators of suspicious transactions and activities set out in Appendix B to the Proposed Revised Guideline? Please state your views.

    We defer to the views of LCs on this question, being those directly affected by these examples and in the best situation to assess their potential impact in practice.

    Question 7: Do you have any views on the facilitative guidance permitting delayed third-party deposit due diligence? Please state your views.

    Please see our General Comments 1 and 2 above. As a minimum, the word “should” be removed and replaced by facilitative language. But even if this is done, we believe that many of the suggested compliance actions in the relevant section of the CP (section 11) are excessively granular, and could be simplified or removed, as explained in our General Comment 2.

    Conclusion

15. We hope that these comments will be useful in producing a Guideline which will achieve the important objective of facilitating compliance by LCs with their existing obligations under the AMLO, while avoiding imposing additional requirements.

HKGCC Secretariat

December 2020

[ANNEX]

[1] AMLO s 6.

[2] Guideline para 1.8.

[3] Paragraph 2.1. The term “FI” as used in the proposed amended Guideline appears to equate to the term “LC” as used in the CP.

[4] AMLO s 7(4).

[5] Para 1.4.

[6] AMLO Schedule 2 s 23.

[7] Paras 4.20.6 and 4.20.7.

[8] Para 4.20.9.