AML Updates

From the Secretariat: Amendments to Practice Direction P (“PDP”)  

The Anti-Money Laundering and Counter Terrorist Financing (Amendment) Ordinance 2022 (“Amendment Ordinance”) came into operation on 1 June 2023.

The Amendment Ordinance has introduced a number of changes to ensure alignment of the regulatory regime with the latest international standards set by the Financial Action Task Force (“FATF”). It has also addressed the deficiencies identified in the FATF Mutual Evaluation Report 2019.

To align with the amendments to the Amendment Ordinance and the FATF standards, the Law Society has updated PDP, which was gazetted on 25 May 2023. The major amendments to the PDP include the following:

1. Update the definition of politically exposed person (“PEP”) with guidance regarding the treatment of Non-Hong-Kong and Hong-Kong PEPs, as well as international organisation PEPs;
2. Allow for the exemption of enhanced client due diligence (“EDD”) requirements in respect of former PEPs, if risks of money laundering and terrorist financing are low, by permitting legal practitioners to determine the extent of client due diligence (“CDD”) required in respect of such persons;
3. Align the definition of “beneficial owner” in relation to a trust under the Amendment Ordinance with that of “controlling person” under the Inland Revenue Ordinance (Cap.112), by clarifying that, where a trust is concerned, it includes trustees, beneficiaries and class(es) of beneficiaries;
4. Add FATF’s definition of proliferation financing (“PF”) and requirement to identify, combat and report PF activities;
5. Recommend law firms to conduct a risk assessment in relation to new services, new business practices and use of new technologies, as well as periodic firm-wide risk assessments;
6. Provide additional guidance regarding the conduct of client risk assessment as part of the CDD process;
7. Align the definition of Simplified Due Diligence (“SDD”) with that in the Amendment Ordinance; and
8. Amend the name screening provision in relation to a client and a beneficial owner referring to the sanctions list and the PF requirements.

The Amendment Ordinance has also introduced “recognized digital identification system” as a new method to verify a client’s identity where the client is not physically present. If the CDD requirements have been met using reliable and independent digital identification system, the EDD requirements are not required. The Law Society published Circular 23-310 on 25 May 2023 with details of the above amendments. The Circular 23-310 can be also accessed here under the “Regulatory Framework” tab.

Click here for the summary of changes to the PDP.

From the President: Update on the Progress in Strengthening Anti-Money Laundering and Counter Terrorist Financing (“AML/CTF”) Risk-Based Supervision of Legal Practitioners 

I am pleased to inform members that the Financial Action Task Force (“FATF”) has completed its Follow-up Report and Technical Compliance Re-Rating 2023 (“Follow-up Report”) of the Mutual Evaluation Report 2019 (“MER”), resulting in an upgrade in respect of for Recommendation 28 (Supervision of DNFBPs) (“Recommendation 28”) from “Partially Compliant” to “Largely Compliant”. The Law Society, in particular the Anti-Money Laundering Committee under the supervision of Chairman Mr Michael Lintern-Smith worked closely with the Narcotics Division of the Security Bureau over the course of 2022 to address the FATF requirements set out in Recommendation 28, largely focusing on enhancement of the AML/CTF oversight capabilities. 

The Law Society has taken a series of measures towards developing robust risk-based supervision of legal professionals’ compliance with their AML and CTF requirements. These included rolling out the sector-wide AML risk assessment (“AML Review”) to all law firms in Hong Kong, developing AML/CTF learning materials, best practice templates and guidance, and delivering AML/CTF workshops and forums. 

All these efforts were acknowledged by the Security Bureau as well as the FATF, and contributed to the re-rating of Recommendation 28 from “Partially Compliant” in MER 2019 to “Largely Compliant”. I take this opportunity to thank the members of the AML Committee and all those who have worked hard to contribute to this favourable outcome. Although the Law Society has achieved a significant milestone for the profession and Hong Kong as a whole, further work is required to develop our risk-based supervision of the legal sector to fully address the FATF recommendations.

Please visit the Law Society’s Members’ Zone under the Weekly Updates tab to read the President’s Letter dated 23 February 2023.

Click here to access the Follow-up Report under the Mutual Evaluation Report of Hong Kong 2019 tab.