Hong Kong's new anti-money laundering regulations come into effect, and the compliance points are fully sorted out

Refining the supervision of anti-money laundering on virtual asset trading platforms will help improve market transparency in Hong Kong and promote the long-term development of virtual asset transactions.

Written by: Xiao Sa Legal Team

On May 23, 2023, the Hong Kong Securities and Futures Commission (SFC) released the "Consultation Conclusions on Proposed Regulatory Requirements Applicable to Operators of Virtual Asset Trading Platforms Licensed by the Securities and Futures Commission". Looking at the regulatory system for virtual asset transactions, the regulatory framework in Hong Kong, China, was not achieved overnight. Since 2017, the SFC has supervised initial coin offerings (ICO) to raise funds through the identification of financial attributes. In 2018, it refined the rules for virtual asset investment providers. By 2019, it will provide virtual security token transactions. Asset trading platforms are included in the regulatory system. It is believed that while the Hong Kong region will liberalize the investment of retail investors in 2023, the detailed supervision of virtual asset trading platforms on anti-money laundering will help improve market transparency in Hong Kong and promote the long-term development of virtual asset transactions.

Three Stages of Money Laundering

1. The possible use of virtual asset business in the money laundering process

Generally, virtual asset transactions are conducted under pseudonyms or with enhanced anonymity. However, the borderless nature and near-instantaneous speed of transactions of virtual assets can be exploited by criminals or money launderers, as virtual assets are sometimes traded through enhanced anonymity services (e.g., mixers or coin switchers). (tumbler)) and other enhanced anonymity technologies or mechanisms (such as virtual assets with enhanced anonymity or private coins, private wallets, etc.) that obscure the identity of the remitter, payee, and actual owner of the virtual asset technology) to be cleaned.

In view of the pseudonymous nature and transaction speed of virtual assets, criminals and designated persons may use multiple wallets to conduct large or structured virtual asset transactions, easily obfuscating the flow of funds and complicating clues, thereby hiding the identity of their virtual assets. source and destination to avoid detection of their money laundering/terrorist financing or other illegal activities.

In addition, since virtual asset transactions can be conducted in a peer-to-peer manner, if there is no intermediary involved in implementing anti-money laundering/counter-terrorist financing measures such as customer due diligence and transaction monitoring, such transactions will also be exploited by criminals.

Therefore, customer due diligence is one of the important measures to prevent, combat and stop money laundering/terrorist financing. The following will focus on what is customer due diligence, what circumstances will trigger customer due diligence and additional due diligence required by cross-border agencies.

Second, customer due diligence

Considering the high anonymity of virtual asset transactions, identifying and verifying the identity of customers is the top priority of customer due diligence.

For natural person customers, financial institutions should at least obtain the following information to identify customers:

(a) full name;

(b) date of birth;

(c) nationality; and

(d) unique identification number (such as identity card number or passport number) and type of document.

For legal person customers, financial institutions should verify their name, legal form, existence at the time of verification, and the authority to regulate and bind the legal person, including the following information:

(a) full name;

(b) date of incorporation, establishment or registration;

(c) place of incorporation, establishment or registration (including address of registered office);

(d) unique identification number (eg registration number or business registration number) and type of document; and

(e) principal place of business (if different from the address of the registered office).

If the client is a club, society, charitable organization, religious organization, college, friendly mutual aid association, etc., the legal purpose of such organization must satisfy the financial institution.

The SFC also stipulates additional customer information to enable financial institutions to identify and manage the channels through which they establish business relationships with customers and/or their customers conduct virtual asset transactions:

(a) an Internet Protocol (IP) address together with an associated time stamp;

(b) geolocation data; and

(c) Device identifier.

3. When is due diligence on customers required

Paragraph 4.1.9 of the Anti-Money Laundering Guidelines sets out the general circumstances under which financial institutions are required to conduct customer due diligence on customers:

(a) before commencing a business relationship with that client;

(b) prior to the execution of an extraordinary transaction which:

(i) involves an amount equivalent to $120,000 or more (or the same amount converted into any other currency),

(ii) involving an amount equivalent to $8,000 or more (or the equivalent amount in any other currency) and is a telex transfer

whether the transaction is executed as a single operation or as several operations that appear to the financial institution to be connected;

(c) when the financial institution suspects that the client or the client's account is involved in money laundering/terrorist financing; or

(d) When a financial institution has doubts about the authenticity or adequacy of information previously obtained for the purpose of identifying or verifying a customer's identity.

Non-recurring transactions are transactions between a financial institution and its customers with whom the institution has no business relationship. However, licensed virtual asset trading platforms should not conduct such transactions (4.1.11).

In addition, in terms of virtual assets, non-recurring transactions may also include virtual asset transfers and virtual asset exchanges. Therefore, 4.1.9(b) should cover virtual asset transfers and virtual asset exchanges. However, before the transfer of virtual assets involves non-recurring transactions of virtual assets equivalent to not less than HK$8,000, the SFC also requires financial institutions in paragraph 12.3 to perform customer due diligence on the customer, regardless of whether the transaction is performed in a single operation, Or it may be executed on a number of operations that the financial institution considers to be related.

4. Cross-border Agency: Additional Due Diligence, Continuous Monitoring, and Shell Virtual Asset Service Providers

A cross-border agency relationship specifically refers to a financial institution (“Agent”) providing services to another virtual asset service provider or financial institution located outside Hong Kong (“Agent”) in the process of providing virtual asset services, and The relevant transactions performed in the business relationship are initiated by the agency as principal or agent. For example, a Hong Kong-based financial institution (acting as an agent) executing a transaction to buy or sell virtual assets for a virtual asset service provider operating outside Hong Kong and acting as an agent for its local customers may constitute a cross-border agency.

*Note: The virtual asset service here includes (1) an offer to buy or sell virtual assets or (2) people often introduce or identify each other in order to negotiate or complete the sale of virtual assets, and negotiate or complete the transaction in this way Waiting for the sale to form a binding transaction. *

Considering the high anonymity and immediacy of virtual asset transactions, cross-border agents may cause risks such as transaction authenticity identification, money laundering, and foreign exchange evasion. Therefore, it is particularly important for the SFC to impose additional due diligence measures to control and control: financial institutions should know whether the agency has engaged in transactions involving virtual assets that provide a higher level of anonymity, and any such activities for non-resident customers of the agency or the extent of the transaction. In addition, financial institutions need to interview compliance officers, conduct on-site visits, or review the results of internal or external auditor reports to in-depth assessment of the anti-money laundering/terrorist financing control measures implemented by virtual asset transfers, and the security of virtual asset transactions and related wallet addresses. Whether the screening is adequate and effective.

Moreover, in cross-border transactions, the transaction of virtual assets and related wallet addresses will also be continuously monitored by financial institutions.

As for shell virtual asset service providers, namely:

(a) incorporated outside Hong Kong;

(b) is approved to operate a virtual asset business in that place;

(c) has no physical presence at the place; and

(d) an associate of a regulated financial group that is not effectively supervised by the group as a whole.

It is expressly prohibited from establishing and implementing cross-border agency, and financial institutions are not allowed to establish cross-border agency relationship with it.

Write at the end

In recent years, with the continuous expansion of the global scale of virtual asset business, the use of virtual assets to conceal criminal proceeds and money laundering has gradually increased. FATF has also issued virtual asset anti-money laundering warnings and provided corresponding anti-money laundering regulations for various countries/regions suggestion. The newly revised "Anti-Money Laundering and Terrorist Financing Regulations" in the Hong Kong region of my country also specifically regulates the anti-money laundering compliance issues of virtual assets in detail. Old friend, when engaging in corresponding businesses in Hong Kong, especially when it involves cross-border transactions of virtual assets, you must pay attention to the construction of anti-money laundering compliance, and perform due diligence, continuous monitoring and other obligations to avoid falling into legal risks.