AML/CTF Sectoral Risk Assessment

Background

The Law Society of Hong Kong is a regulatory body responsible for the oversight of law firms’ compliance with the Anti-Money Laundering, Counter-Terrorist and Proliferation Financing (AML/CTF/CPF) requirements. As a regulatory body, it must identify, assess and understand the international and domestic risks of Money Laundering (ML), Terrorist Financing (TF) and Proliferation Financing (PF) impacting its members to:

• apply AML/CFT/CPF supervision that corresponds to the level of risk, referred to as the risk-based approach (RBA);
• reduce ML/TF/PF vulnerabilities of the legal sector in Hong Kong by applying mitigating measures, as necessary; and
• monitor new emerging risks to respond promptly to evolving patterns of predicate offences or terrorism, and modes of ML/TF/PF in order to effectively combat ML/TF/PF.

In 2022, the Law Society of Hong Kong conducted its first sector-wide AML/CTF Risk Assessment referred to as the 2022 AML/CTF Risk Assessment of the Legal Sector in Hong Kong.

The AML/CTF risk assessment is a process that analyses the legal sector’s risk of exposure to financial crime. The process aims to identify which aspects of the firms’ activities are at risk of exposure to ML or TF. This is achieved by identifying, assessing and classifying known vulnerabilities, referred to as Key Risk Indicators (KRIs), that might attract criminals and money launderers.

The AML/CTF sectoral risk assessment considers various reports, guidelines and typologies issued by authorities such as the Hong Kong Government, the Financial Actions Task Force (FATF) and the Joint Financial Intelligence Unit (JFIU), including: 

• Hong Kong's Money Laundering and Terrorist Financing Risk Assessment Report 2022 (the HK ML/TF Report 2022) 
• Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals, FATF (2013)
• Guidance for a Risk-Based Approach - Guidance for Legal Professionals, FATF (2019)
• COVID-19-Related Money Laundering and Terrorist Financing Risks, FATF (2020)
• Asia Pacific Group on Money Laundering Yearly Typologies Report (2022)
• ML/TF typologies identified by the JFIU in regards to the Hong Kong legal sector
• Data from the AML Review 2022.

The AML/CTF sectoral risk assessment focuses on assessing inherent risks specific to the legal profession in Hong Kong before any AML/CTF controls have been applied to reduce the risk (residual risk). In order to identify inherent risks, the Law Society of Hong Kong undertook an assessment across the below five risk categories:

• Client Risk
• Geographical Risk
• Products and Services
• Delivery Channels
• Type of Transactions

The 2022 AML/CTF Risk Assessment of the Legal Sector in Hong Kong is now available for legal professionals in the Member’s Zone under the tab “Support for Members / Law Firms”, “AML/CTF Sectoral Risk Assessment”, please click here to access the document. 

The Practice Direction P stipulates that a firm-wide risk assessment should be performed by law firms to identify, assess and understand their ML/TF risks, and to apply mitigating controls and procedures commensurate with those risks to effectively manage such risks. It means that firms should assess their risks and target their resources to the areas or services that are most likely to be used to launder money.

Legal professionals should take into account the results of the 2022 AML/CTF Risk Assessment of the Legal Sector, as well as the HK ML/TF Report 2022 when carrying out their own money laundering and terrorist financing risk assessments at a practice-wide, client and matter level.