Paper No.: /99
For discussion by
LegCo Panel on Security
on 4 March 1999
LEGCO PANEL ON SECURITY
Regulation of Money Changers and
Remittance Agents Against Money Laundering
PURPOSE
This paper seeks Members' advice with regard to amending the Organized and Serious Crimes Ordinance (Cap 455) to introduce requirements for money changers and remittance agents to adopt anti-money laundering measures such as identifying customers and keeping transaction records.
BACKGROUND
Financial Action Task Force on Money Laundering
2. The Financial Action Task Force on Money Laundering (FATF) is an inter-governmental organisation established by the G-7 Summit in 1989 to examine measures to combat money laundering. It is internationally recognised as the pre-eminent world body concerned with money laundering issues. A condition of FATF membership is an undertaking to adopt the 40 Recommendations promulgated by FATF as far as practicable given local circumstances. The 40 Recommendations were last revised in 1996 to take into account the latest money laundering trends. Since 1990, Hong Kong has been an active member of FATF and has implemented most of its 40 Recommendations.
3. Money changers and remittance agents have been identified by FATF as an important link in the money laundering chain. Typologies exercises which provide FATF members with opportunities to discuss money laundering trends and exchange views on methods of investigation have also indicated an increasing use of money changers and remittance agents in money laundering operations. In addition to financial institutions, FATF also advises that the 40 Recommendations, where appropriate, should apply to non-bank financial institutions such as money changers and remittance agents. The relevant Recommendations of FATF are at Annex I.
Existing Regulation
4. At present, financial institutions in Hong Kong including banks, securities and insurance companies, etc, are subject to statutory control under various ordinances and administrative guidelines issued by financial regulators, i.e. the Hong Kong Monetary Authority, the Securities and Futures Commission and the Insurance Authority respectively. All the above sectors, as well as money changers and remittance agents, are required to report suspicious transactions under section 25 of the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap 405) and section 25 of the Organized and Serious Crimes Ordinance (Cap 455) in relation to possible money laundering offences.
5. Money changers are subject to the Money Changers Ordinance (Cap 34) which aims primarily to protect consumers by requiring money changers to produce transaction notes and display exchange rates for currency exchange transactions. However, Cap 34 does not contain any specific anti-money laundering regulations. Its customers protection regulations are, from the enforcement agencies' point of view, insufficient to serve as effective anti-money laundering regulations.
6. As regards remittance agents, they are not regulated under any particular legislation. However, they have frequently been found to have been involved or being used as a conduit in money laundering, and refused to self-regulate responsibly by keeping full customer and transaction records. According to the Police, none of the remittance agents has ever made any suspicious transaction report on money laundering despite the large amount of money dealt with by the industry (the average amount is about $830,000 per transaction per day according to a survey in November 1998).
Administrative Guidelines
7. In February 1997, the Police had issued administrative guidelines (Annex II) to money changers and remittance agents advising them to adopt anti-money laundering measures such as customer identification, record-keeping and reporting of suspicious transactions. Subsequent to the issue of those guidelines, the Police surveyed some of those institutions and found that although the majority of them did keep some information on their customers and transactions, the types and amount of details kept varied from one institution to another, and were generally not sufficient for the purpose of investigation into suspected money laundering operations.
PROPOSALS
8. In order to enhance Hong Kong's anti-money laundering regime, and to ensure that such regime will not fall short of FATF's Recommendations and international best practices, it is proposed that statutory requirements should be imposed on all persons carrying on money changing or remittance businesses to identify customers before engaging in transactions with them and to keep proper records of such transactions. Two key principles have been taken into consideration in drawing up the relevant proposal :-
- the new requirements should be simple and easy to enforce and yet effective in combating money laundering e.g. through the creation of an audit trail of the businesses or transactions conducted; and
- the requirements should not be too onerous or costly for the affected businesses to comply with.
9. The key features of the proposals are as follows :-
- before a transaction takes place, a money changer or remittance agent should record the name, identity card number (or travel document number and place of issue in case of a visitor), address and telephone number of his customer. He should also keep records of the transaction including the transaction serial number, date, time of the transaction and the currency, amount and rate of exchange involved. For remittance agents, it is proposed that additional information including the personal particulars of the instructor and sender of a remittance, method of delivery and acknowledgement, name and particulars of recipient(s) including bank account should be kept;
- to avoid causing too much unnecessary disruption, it is proposed that a threshold be set below which the requirements for client identification and record-keeping should not apply. Having regard to past operational experience, it is proposed that the threshold should be set at $20,000 for both money changers and remittance agents;
- money changers and remittance agents are required to keep the records mentioned in (a) above for at least 6 years, in line with FATF's Recommendations and the requirements set out in the current anti-money laundering guidelines issued by the Hong Kong Monetary Authority, the Securities and Futures Commission and the Insurance Authority to institutions under their respective purview;
- to ensure compliance, it is proposed that those who are convicted of breaching the requirements set out in paragraph 9(a) to (c) above should be liable to a maximum fine at level 6 (i.e. $100,000 ) and imprisonment for one month. It is also proposed that the law enforcement agencies should be empowered to carry out on-site inspections on suspicion that a money changer or remittance agent has breached the requirements, and examine the records kept by such money changer and remittance agent; and
- to enable the Government to keep a comprehensive and up-to-date register on money changers and remittance agents, it is suggested that existing money changers and remittance agents should notify a public officer to be appointed by the Secretary for Security of their existence within a stipulated time-frame after the legislation comes into force. The details to be provided will be kept to the minimum, and will mainly include the names and addresses of the money changers and remittance agents.
CONSULTATION
10. The Administration had consulted 92 money changers and 87 remittance agents on the proposed requirements through questionnaires and visits in November and December 1998. A response rate of 36% from money changers and 52% from remittance agents were registered respectively. More than 72% of the money changers and 66% of the remittance agents who responded to the questionnaires supported the proposed requirements to identify customers and keep transactions details. A summary of the views received in this consultation exercise is analysed at Annex III.
11. Apart from the trade, we have consulted the Action Committee Against Narcotics (ACAN) on the proposals. ACAN supported the proposals and, in particular, the introduction of a threshold in order to minimise inconvenience for clients and administrative burden for the trade.
12. We have also consulted the Hong Kong Bar Association, the Law Society of Hong Kong and the Privacy Commissioner for Personal Data on our proposals. In brief, they have no objection in principle to the broad proposals put forward to suppress money laundering through the money changing and remittance trade. All three parties took the view that minimum interference to private transactions should be imposed. In the context of other anti-money laundering measures, we are consulting the two legal professional bodies further. It is possible that they may have other detailed comments in about two weeks' time.
TIMETABLE
13. The proposed amendments are scheduled for introduction to the Legislative Council on 21 April 1999.
ADVICE SOUGHT
14. Members are invited to advise on the proposed amendments as set out in paragraph 9 above.
Security Bureau
February 1999
(draft-c/20-2leg2/pn)
