To get a brief background on this topic, please see the video above that we used when we were invited as a guest speaker at an Anti-Money Laundering (AML) seminar for Money Service Operators (MSOs).
The finance industry has 3 levels;
Top Level – Banks and Financial institutions that are very big
Mid Level – Financial Institutions and MSOs that do wholesale business, might have a lot of retail outlets, and usually have upper-level connections (i.e. bank account)
Bottom Level – Usually institutions and MSOs that focus on retail business, might have mid level business connections
Our Industry has been relatively unregulated since 2012. Until this point there have been some MSOs that have been functioning without any basic money laundering policies for decades. All of a sudden in 2012 we were asked to follow a policy booklet containing over 75 pages. It is now 2017 and the Financial Action Task Force (on money laundering), also know as FATF, will be stopping by Hong Kong next year to check on us, so how have we done so far?
The top level is regulated by authorities such as the Hong Kong Monetary Authority (HKMA) for banking institutions, who have put a lot of pressure on them. Banks in turn have put a lot of pressure on mid level businesses that they have connections with such as MSOs because of their stringent regulations and high degree of responsibility and accountability.
MSOs are regulated by the Customs and Excise Department (CED). They are in charge of vetting and monitoring our industry. The problem is they themselves are understaffed and are lacking knowledge and understanding of the industry and applicable laws, as a result their enforcement has been found wanting in quality and quantity. There are many MSOs in the market who still don’t know what they are doing and unwilling to comply, and new entrants who are able to obtain a MSO licence from the CED with relative ease but with no real knowledge and motivation to carry out their AML duties.
To add to this the release of the Panama Papers showing Hong Kong to have the most number of intermediaries has now really put pressure on us. With as many as 70 countries having free ports and for Hong Kong to be ranked no.1 is bad news and renders the ‘free port’ argument moot. On top of that we are the only country in FATF not to have a cross-boarder currency declaration system, a proposal that was surprisingly shot down in 2015 by Legco because it was “unfriendly to cash-toting mainland tourists”. Now with FATF breathing down our neck, it has gone through its first and second reading in Legco, and it is only a matter of time before it is passed and introduced into law, just in time for FATF’s inspection next year.
We as an industry have been forced towards the private sector in an attempt to restore confidence in our profession, getting AML audits in an attempt to restore confidence in the market. But now there are companies who lack understanding about the industry and AML laws giving AML audit certificates to MSOs who don’t deserve one, or to those who don’t have a complete AML program. With profiteering the main drive, all we can do for now is to select a reputable and knowledgeable auditing company and hope their endorsement ensures bank and market satisfaction.
For Hong Kong to be at the forefront of the finance industry, we should have been on top of this issue from the very start. Instead we used lax laws as an unfair competitive advantage, something the market is still very dependent on. At the end of the day, if the authorities find it hard to preach compliance by choice, they only have themselves to blame and will have no other option than to use force, something the CED will find hard given their shortcomings.