Flaws in new SFC rules on financing

The Securities and Futures Commission (SFC) is set to enact new guidelines to counter money laundering and terrorist financing on April 1, but analysts say significant loopholes have yet to be plugged.

'Hong Kong is one of the easiest places to do business in the world and move money around,' said Chris Leahy, co-founder of Asian strategic advisory firm Blackpeak Group.

'If people are minded to break the law, such as with money laundering and financing terrorism, it is always going to be challenging for the authorities to stop them in an open business environment like Hong Kong,' he said.

The new guidelines, which will apply to all financial institutions, will replace the SFC's existing Prevention of Money Laundering and Terrorist Financing Guidance.

The new items in the guidelines include provisions for due diligence on customers of financial institutions and record-keeping requirements for the institutions.

However, the new guidelines are weaker in their punitive power than was expected. A person or company who fails to comply with the guidelines will not be liable for judicial proceedings, but the non-compliance 'may be used as evidence in court and may reflect adversely on the person or company's fitness' to do business, according to the SFC.

However, a report by auditing firm KPMG had expected non-compliance to become a criminal offence. International law firm Clifford Chance had also predicted that non-compliance might result in fines and criminal sanctions.

In 2008, the Financial Action Task Force (FATF), an international body to combat money laundering and terrorist financing, said the relevant laws in Hong Kong were good but needed improvement in some areas.

'[Hong Kong's] supervision is effective for the banking, insurance and securities sectors, but [is] weak or non-existent for non-financial businesses,' said the FATF, of which Hong Kong is a member.

KPMG had expected the new guidelines to cover non-financial businesses, including property agents, dealers in precious metals, lawyers and accountants. But the new SFC guidelines cover only financial institutions.

Since the September 11 terrorist attacks in 2001, money laundering had been increasing globally through non-financial services such as property and jewellery shops as a way of evading stricter controls in the finance sector, said Dane Chamorro, Asia-Pacific director of risk consultancy Control Risks.

'There is very little control [over money laundering] in these types of institutions,' Chamorro said.

'If we consider how much mainland money has flowed into Hong Kong real estate or Hong Kong-based private bank accounts, can we say all that money is clean? The answer is no.

'There is a huge demand to get money into an international finance centre like Hong Kong to make it look clean, especially from China.

'These non-financial service lines make it very easy to evade controls.'

In response to feedback from the financial sector, including international banks such as Morgan Stanley, the SFC has watered down some of the requirements of the new guidelines. It had previously wanted financial institutions to rigorously check all persons acting for a customer, but now a list of people for low-risk customers will suffice.

The SFC has also relaxed its requirements on the rigour of checks that financial institutions must conduct on companies incorporated overseas.