On 14 March 2022, the Securities and Futures Commission of Hong Kong (SFC) published a circular to Licensed Corporations (LCs) and Associated Entities (AEs) on three recent publications issued by the Financial Action Task Force (FATF), namely (i) the statement on High-Risk Jurisdictions subject to a Call for Action on 4 March 2022, (ii) the updated statement on Jurisdictions under Increased Monitoring (March 2022) and (iii) the outcomes from the sixth Plenary of FATF during 2-4 March 2022 (collectively, the FATF publications).
This Legal Update outlines the key points from the SFC Circular and the referenced FATF publications.
FATF Statement on High-Risk Jurisdictions Subject to a Call for Action
Due to the COVID-19 pandemic, FATF has not resumed their review process for countries on its list of ‘High-Risk Jurisdictions subject to a Call for Action’, i.e. Iran and the Democratic People's Republic of Korea. Financial institutions should refer to the FATF statement dated 21 February 2020 and apply appropriate measures to guard against money laundering (ML), financing of terrorism (FT) and the financing of proliferation of weapons of mass destruction (WMD).
FATF Statement on Jurisdictions under Increased Monitoring
In March 2022, FATF updated its statement on ‘Jurisdictions Under Increased Monitoring’ which sets out an updated list of jurisdictions and their progress in addressing strategic deficiencies as of March 2022. The changes to the list include:
- Zimbabwe – no longer subject to increased monitoring by FATF
- United Arab Emirates – added to the list of jurisdictions under increased monitoring by FATF. In total, there are 23 jurisdictions remaining on this list.
Outcomes from the Recent FATF Plenary
FATF held their sixth Plenary from 2-4 March 2022. The Plenary discussed a wide variety of issues. Key outcomes from the Plenary are summarised below with the first two points highlighted in the SFC's recent circular.
FATF issued a statement on the situation of Ukraine. In particular, FATF expressed their concerns regarding the current military invasion of Ukraine by the Russian government. FATF is currently reviewing Russia’s role at FATF and will consider the necessary steps to uphold the FATF core principles.
FATF asked all jurisdictions to provide advice and facilitate information sharing with their private sectors to assess and mitigate any emerging ML, TF, and WMD proliferation risks or other threats identified from the region. FATF also noted the recent malicious cyber activity targeting financial institutions which undermines financial integrity and stability. Finally, FATF reiterates the importance of ensuring non-profit organisations are able to provide timely humanitarian assistance needed in the region.
2. New Beneficial Ownership Rules
FATF announced the amendments to FATF Recommendation 24 and its Interpretive Note on transparency and beneficial ownership of legal persons, following two rounds of public consultations. Key requirements include, amongst others:
- Following a multi-pronged approach to ensure that competent authorities are able to obtain and access adequate, accurate and up-to-date beneficial ownership information in a timely fashion;
- Complying with minimum requirements for information to be obtained and recorded;
- Ensuring that beneficial ownership information is held by a public authority or body (e.g., a tax authority, financial intelligence unit, company registry, or beneficial ownership registry), or adopting an alternative mechanism that provides authorities with timely access to beneficial information;
- Assessing and addressing risks posed by both domestic and foreign-created persons which have sufficient links with their country;
- Prohibiting issuance of new bearer shares and bearer share warrants, and converting or immobilising existing ones; and
- Enhanced disclosure requirements for existing bearer shares and nominee arrangements.
3. ML/TF Risks Arising from Migrant Smuggling
FATF completed their research on ML/TF risks associated with migrant smuggling and published a report on 22 March 2022. FATF noted migrant smuggling has expanded, yet many jurisdictions do not consider it a high-risk crime for ML/TF and the associated financial flows are rarely investigated. The report aims to update the understanding of ML/TF risks associated with migrant smuggling, to help countries mitigate risks, and disrupt and recover the proceeds.
The report helpfully contains FATF’s findings on the common methods to transfer and launder the proceeds of migrant smuggling, such as the informal money transfer system ‘hawala’. The report further provides FATF’s recommendations and good practices to combat ML/TF from migrant smuggling. Finally, the FATF urged the strengthening of international and regional cooperation as well as cooperation with the private sector, to disrupt and recover the illicit profits from migrant smuggling.
4. Unintended Consequences of the FATF Recommendations
The FATF has completed work on this area to identify and examine unintended consequences of the FATF Recommendations such as de-risking, financial exclusion and undue targeting of non-profit organisations. As a next step, the FATF Working Groups will scope out and refine how FATF can mitigate the unintended consequences of FATF’s Standards without reducing the effectiveness of the global anti-money laundering and counter-financing of terrorism (AML/CFT) measures.
5. Strategic Review
FATF has completed its strategic review which finalised and approved the FATF Methodology for the upcoming fifth round of mutual evaluations. In the fifth round, jurisdictions should aim to prioritise their efforts in areas with the highest risk. There will be an increased focus on designated non-financial businesses and professions. The FATF Methodology and FATF Procedures will be published on the FATF website once ready.
Key Takeaways for Financial Institutions
Our suggested takeaways for financial institutions:
- Review and update existing screening lists and policies and procedures regarding AML/CFT requirements for persons connected with Zimbabwe and United Arab Emirates.
- Monitor the situation in Ukraine for ML/TF/PF risks and related risks such as sanctions and cybersecurity risks. To assist our clients, Mayer Brown’s portal on the Ukraine crisis provides regular updates and thought leadership on the rapid developments in Ukraine.
- Review existing AML/CFT policies and procedures on beneficial owners against the revised Recommendation 24 and Interpretive Note. These requirements are likely to be added to FATF member states' AML/CFT regulations.
- Consider FATF's recommendations and best practices on combating ML/TF risks associated with migrant smuggling and consider whether existing policies and procedures adequately manage such risks. Such a review would also align with financial institutions' ESG initiatives.