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The Hong Kong Monetary Authority (HKMA) has published the results of a thematic review of money laundering risks at stored value facility (SVF) firms.
The anti-money-laundering (AML) review looked at the way in which managers oversee anti-money laundering (AML) controls, compliance functions, risk assessments, customer due diligence (CDD), transaction monitoring, name screening and enhanced due diligence or extra due diligence (EDD) in highly risky situations.
The regulator found that SVF licensees have AML control policies that are in line with their legal and regulatory obligations, but also noticed some room for improvement in the steps that they take in highly risky situations.
The HKMA observed that, in some cases, licensees did not understand their transaction monitoring systems well enough, especially since some bought theirs from outside. Its expectations in this area are as follows:
- SVF licensees should make staff understand the ways in which transaction monitoring systems perform, even if software vendors provide them.
- They should review their transaction monitoring systems and processes regularly, taking into account their risk assessments and making the systems appropriate for their operations and context. Every review should look at the handling of transaction monitoring alerts, the coverage of scenarios (e.g., the pattern of frequent and substantial cash withdrawals in foreign jurisdictions), taking into account previous business operating data.
- If a firm plans to offer new products and functions, it might look at more scenarios and generate new types of management information system (MIS) report.
- A look at the HKMA's “Guidance Paper on Transaction Screening, Transaction Monitoring and Suspicious Transaction Reporting” is advisable, even though the regulator wrote it for banks.
- As criminal techniques and money laundering/terrorism financing risks evolve over time, SVF licensees should make reference to the latest typologies available.
- Before making major changes to transaction monitoring systems, licensees should test them.
- In respect of transaction-related "alerts and reports clearance processes", SVF licensees should be sceptical of customers’ explanations of their transactions.
On the subject of CDD, the review examined a case in which a customer made relatively substantial payments for goods and services in various jurisdictions. Although the system worked correctly to spot these significant transactions, the SVF licensee did not take appropriate action, e.g., by obtaining further information about the customer’s background such as occupation, nature of business and source of funds, to assess their risk profile and transactions. The HKMA blamed a bad appreciation of risk and shortcomings in the firm's policy and procedures.
Its expectations in this area are as follows:
- Apart from staying aware of risk and understanding the performance of their control systems, SVF licensees should set up good internal procedures and guide and train staff well, so that they can assess the risks that customers pose and do CDD well.
- The compliance function should conduct regular reviews to monitor the effectiveness of relevant controls and, where necessary, suggest improvements to senior managers.
- Although an assessment of the money laundering risk that a customer poses is of great help to an SVF licensee, the firm should also realise that, for some customers, risks may only become evident through monitoring after customers have started to use the SVF products. SVF licensees should, therefore, update their assessments of the risks that each customer poses from time to time as new information comes in.
