The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) (Amendment) Bill 2017 became effective on 1 March, stepping up the roles of professional accountants, auditors, lawyers and other gatekeepers in preventing financial and white-collar crime. Nicky Burridge finds out the opportunities and challenges the new laws will bring to small- and medium-sized firms
Illustrations by Roberto Cigna
Moore Stephens is going through a particularly busy period. The firm has to create a Significant Controllers Register for every client for which it does company secretarial work. On top of that, it is having to compile an Anti- Money Laundering Manual and put in place internal policies and systems to ensure it complies with new laws on the issue.
Staff need to be trained on the new procedures, and a compliance officer and reporting officer also need to be appointed. “It all creates a lot of work,” Helen Tang, a member of the Institute’s Small and Medium Practitioners Committee, and Managing Director of Moore Stephens, says. New laws to combat money laundering and terrorism financing are creating opportunities and challenges for small and medium-sized practitioners (SMPs) in Hong Kong.
The Anti-Money Laundering and Counter-Terrorist Financing Ordinance 2018 (AMLO), which came into force on 1 March, extends the scope of previous money laundering laws to cover designated non-financial businesses and professionals.
The change means accountants, lawyers, real estate agents, and trust or company service providers are covered by the updated rules. As a result, accountancy firms that handle clients’ money or other assets, offer company management or legal person services, or provide trusts now have to have systems in place to detect money laundering, while they also need to perform due diligence on their customers.
The new rules have created significant additional workload for SMPs that are active in the areas covered. Johnson Kong, Chairman of the Institute’s Small and Medium Practitioners Committee and Managing Director – Non Assurance at BDO, explains that under the AMLO and amendments to the Companies Ordinance, all trust or company service providers have 120 days from 1 March to apply to the Companies Registry for a licence. “There are a lot of requirements and documents we need to supply to support the application. This creates additional work for SMPs,” he says. He adds that most SMPs have separate business entities that provide company secretarial services, and they need to make separate applications for these entities.
Nominee companies that provide nominee shareholders and nominee directors will also fall under the scope of the legislation and require a separate licence. The licence is valid for three years, after which firms will have to apply to renew it.
“Going forward, if there is any change in particulars regarding the company, then they need to inform the Companies Registry about the changes,” Kong says. Tang agrees: “It will increase the workload in the sense that we need to create a Significant Controllers Register for every client that we represent. That takes a lot of time and effort.” She adds that while some clients are fairly straightforward, others have more complex trust structures.
Alongside registration, a key requirement of the new legislation is that all service providers must also put in place internal policies and procedures to address money laundering and counter terrorist financing. Matthew Li, Founding Partner of Nova CPA & Company, explains: “According to the requirements, we will need to do risk assessment, customer due diligence, ongoing monitoring and record keeping, as well as some compliance management for anti-money laundering.”
As a result, firms must create manuals and checklists, and have appropriate record keeping systems in place. Staff need to be trained on the new procedures and, in some cases, firms are likely to have to hire new personnel to handle the requirements. They also have to appoint a dedicated compliance officer and a money laundering reporting officer, or someone who can be both. “It is not just a doubling, or tripling – but probably a quadrupling of the work involved,” Kong says. Some firms have expressed concerns that they will face higher costs as a result of the new requirements, much of which they will not be able to pass on to clients.
Thomas Wong, Managing Director of Nexia Charles Mar Fan, says: “Complying with the customer due diligence requirements and record keeping will definitely increase costs, and there will be additional training costs for staff to make sure they are familiar with the AML law and requirements.”
Customer due diligence
One area of the new law that needs a lot of attention from firms is the customer due diligence (CDD) requirements. For some firms, this is not a significant change, with Tang pointing out that Moore Stephens already does CDD for its audit clients, so it has appropriate systems in place. It uses Thomson Reuters’ World-Check and a local Hong Kong search tool to see if any legal action has been brought against a particular person or company.
Wong points out that it would be helpful if the Companies Registry or the Joint Financial Intelligence Unit prepared a database of the lists, and stated which ones should be checked as a minimum. “We are scratching our heads because there are so many lists we have to check,” he says. He adds that the regulator has said firms can use external third-party service providers to do the checks on their behalf, but it has not specified which service providers can be used.
“According to the requirements, we will need to do risk assessment, customer due diligence, ongoing monitoring and record keeping, as well as some compliance management for anti-money laundering.”
While SMPs support the aims of the rules to combat money laundering and terrorist financing, some feel that by extending the scope of the legislation to non-financial businesses and professionals, the regulator is moving some of its role on to firms. “To be frank, I think the legislation is more or less shifting some of the regulatory responsibility on to the shoulders of the profession,” says Wong.
He adds that the work carried out by accountants is very different to the services provided by financial institutions. Li adds that while accountants have a responsibility to act in the public interest, there are no actual benefits to SMPs for carrying out the AML work.“We are not paid for helping the monitoring authorities to do their work. To comply, we need to add to our headcount and set up more systems and internal procedures, without any actual returns,” he says.
Kong is also cautious about the consequences for professionals of unwittingly associating with money laundering or terrorist financing activities, which he points out include not just fines but also regulatory sanctions and reputational loss.
He adds that with the evolution of blockchain technology and cryptocurrencies forcing professionals to become more creative when devising adequate controls, some SMPs are concerned they do not have the knowledge or resources needed to ensure they are not associated with illicit activities.
Despite their concerns, the new legislation does create opportunities for SMPs. Kong says: “All of these changes create a little bit of extra work for the service provider, which we can charge clients a fee for.” He adds SMPs that have the resources can gear up their internal capabilities to provide a new advisory service to their clients to assist them in creating a Significant Controllers Register.
Tang agrees, pointing out that creating a Significant Controllers Register and providing a designated representative for every company is a new additional service for which SMPs can charge. “There are definitely opportunities for us to make some money,” she says.
Support from the Institute
The Institute has provided a lot of support to its members to help them gear up for the change. As well as producing general guidelines on the AMLO requirements, it has also held a number of seminars, some in conjunction with the Companies Registry, and created a dedicated webpage of resources on the issue. The new rules have also been incorporated into the Institute’s Code of Ethics for Professional Accountants.
To help members comply with the KYC requirements, it has negotiated discounted subscription rates with Dow Jones and Thomson Reuters to use their services for screening clients. Kong says the Institute is also considering producing a compliance manual, with sample policy templates for members to use.
Li of Nova has found the support from the Institute extremely helpful, pointing out that it is hard for SMPs to know all of the details of the new requirements on their own.
Experience from other jurisdictions
Firms in Hong Kong are not alone in having to get to grips with new AML legislation. Monica Foerster, Chair of the International Federation of Accountants’ Small and Medium Practices Committee, says keeping up with new regulations and standards is consistently one of the top challenges facing SMPs identified in the IFAC Global SMP Surveys.
She says when AML regulations have been introduced in other jurisdictions, it has taken SMPs time to understand the requirements and establish the necessary procedures, time which could have been used for fee-earning work or business development. She adds that many firms have also needed to employ additional staff, which has had a resulting impact on profitability. “The compliance burden has meant that in some cases, a practice will now not take on a certain client as the fee achieved will not cover the costs of complying with the rules,” she says.
But despite the impact the rules have had on SMPs, Foerster thinks they are a force for good. She points out that practitioners can now inform their clients that they have a legal duty to report them, which may lead these clients to stop undertaking wrongful or suspicious practices or transactions. “It is very important that Hong Kong implements these laws and regulations to enhance transparency and accountability,” she says. “Professional accountants play a major, positive role in reducing corruption, along with other key actors in the global economy that support strong governance structures.”
“Professional accountants play a major, positive role in reducing corruption, along with other key actors in the global economy that support strong governance structures.”
The case for legislation
To enhance Hong Kong’s regulatory regime for combating money laundering and terrorist financing the AMLO and the Companies (Amendment) Ordinance 2018 (C(A)O) were enacted by the Legislative Council in January 2018. Their introduction was preceded by public and stakeholder consultations in early 2017, which recorded broad support for the enhancement of anti-money laundering and counter-terrorist financing regulations by the government.
The AMLO applies statutory CDD and record-keeping requirements to designated non-financial businesses and professions, including accountants, when they engage in specified transactions. It also introduces a licensing regime for trust or company service providers, requiring them to apply for a licence from the Registrar of Companies and satisfy a “fit-and-proper” test before they can provide trust or company services. The C(A)O requires companies incorporated in Hong Kong to maintain beneficial ownership information through a Significant Controllers Register. “The amendment ordinances represent the governments latest efforts to bring Hong Kong’s regulatory regime up to date in line with the recommendations of the Financial Action Task Force (FATF),” said a spokesperson from the Financial Services and the Treasury Bureau. FATF is an inter-governmental body that sets international standards on combating money laundering and terrorist financing. Hong Kong has been a member of the FATF since 1991.
The spokesperson continued, “Hong Kong is committed to combating money laundering and terrorist financing together with the international community. Over the years we have in place a robust anti-money laundering and counter-terrorist financing regime having regard to international standards. The two amendment ordinances are pertinent to our fulfilment of the relevant FATF obligations, and will further reduce the risk of money laundering and terrorist financing in Hong Kong. This will safeguard the integrity of Hong Kong as an international financial centre, and add to our credibility as a trusted and competitive place for doing business.”
On 19 June, the Institute will host a seminar covering practical implementation of anti-money laundering and counter-terrorist financing internal policies, procedures and controls that mitigate the money laundering and terrorist financing risks and comply with the legal requirements. Members can visit the Institute’s website for more details.