The Financial Action Task Force (FATF) conducts mutual evaluations, which are in-depth reports analysing a country’s measures to combat money laundering and terrorist financing (ML/TF).
Following the mutual evaluation of Hong Kong in June 2019, the FATF has recently released a follow-up report analysing Hong Kong’s progress in addressing the technical compliance deficiencies identified in its mutual evaluation report, as well as its progress in implementing new requirements relating to FATF Recommendations. This article explores the key considerations.
What is technical compliance?
Mutual evaluations have two basic components, effectiveness and technical compliance.
Technical compliance relates to the laws, regulations and any other legal instruments a country has in place to combat ML/TF. There are four possible levels of technical compliance: compliant, largely compliant, partially compliant, and non-compliant.
While the main focus of a mutual evaluation is on how effective a country’s measures are in delivering the right results, the recent follow-up report does not address what Hong Kong has done to improve its effectiveness.
Hong Kong’s progress in improving technical compliance
The FATF Recommendations set out a comprehensive framework of measures which countries should implement to combat ML/TF.
Recommendation 28 (R.28) relates to the regulation and supervision of Designated Non-Financial Businesses and Professions (DNFBPs). Hong Kong was previously rated partially compliant on R.28 due to risk-based AML/CFT supervision not having been established in most DNFBP sectors. These technical deficiencies have now been addressed. Trust or Company Service Providers (TCSPs), real estate agents and accountants are now subject to the full range of risk-based supervision.
Some other deficiencies are in the process of implementation. Risk-based supervision of the legal sector has commenced but has not yet been fully implemented.
As Hong Kong has addressed its technical deficiencies to a large extent, it has now been re-rated largely compliant on R.28.
Progress on Recommendations which have changed
Recommendation 15 (R.15) relates to measures countries should take to combat ML/TF risks associated with new technologies.
In June 2019, R.15 was revised to include obligations related to virtual assets (VAs) and virtual asset service providers (VASPs). These include:
- Requirements to identify, assess and understand ML/TF risks associated with VA activities or operations of VASPs.
- Requirements for VASPs to be licensed or registered.
- Requirements for countries to apply adequate risk-based AML/CFT supervision (including sanctions) to VASPs.
- Requirements to apply measures to VASPs related to preventive measures and international cooperation.
While Hong Kong meets many of the revised requirements of R.15 in relation to VAs and VASPs, major deficiencies related to the scope of VASPs remain. On this basis, R.15 is re-rated partially compliant.
Key takeaways
Overall, Hong Kong has made progress in addressing the technical compliance deficiencies identified in its mutual evalusation report and has been upgraded to largely compliant on R.28. However, R.15 is downgraded to partially compliant because Hong Kong has not sufficiently met the new requirements.
