Hong Kong Regulator Updates Guidance on Transaction Monitoring, Screening, and Reporting

On February 9, 2023, the Hong Kong Monetary Authority (HKMA) published revised guidance relating to transaction monitoring, screening, and suspicious transaction reporting. The paper replaces previous versions that were published in 2013 and 2018, highlighting key observations from the HKMA’s recent thematic reviews, enforcement actions, and industry best practices. 

Announcing the paper’s release, HKMA Executive Director Carmen Chu noted that the key objective of the guidance is to support the greater use of data and technology. Specifically, Chu commented on the regulator’s aim for authorized institutions (AIs) to adopt a system that generates targeted alerts to deliver more actionable insights into the anti-money laundering and counter-financing of terrorism (AML/CFT) ecosystem.   

Updated Guidance

In Hong Kong’s 2022 Money Laundering and Terrorist Financing Risk Assessment Report, the government highlighted five focus areas to enhance its AML/CFT regime. The first relates to keeping pace with international standards by implementing updated standards and providing a legal framework for better implementation of risk-based regulation. The HKMA’s guidance paper follows this priority to improve the effectiveness of transaction monitoring, screening, and suspicious transaction reporting undertaken by AIs.

Transaction Monitoring

Practical guidance relating to the way in which firms adopt, design, and review their transaction monitoring systems consists of the following:

• Assessment: Before implementing a particular transaction monitoring system, AIs should conduct a robust assessment and document the rationale for adopting the system. This should include how compatibile the new system is with the AI’s existing IT infrastructure and how any necessary system changes will be executed and managed.
• Automation: A level of automation involving one or more rules-based or scenarios-based systems may help AIs produce alerts or management information system (MIS) reports to aid the identification of suspicious transactions that require further examination.
• Configurability: AIs are reminded that off-the-shelf systems provided by a vendor may not adequately take into account a firm’s specific risks. AIs should adopt a system that can be configured to their relevant contexts, such as the ability to adjust thresholds and customize rule sets to sufficiently meet legal and regulatory requirements.
• Customer segmentation: AIs are encouraged to have appropriate customer segmentation to allow the transaction monitoring system to operate effectively, and generate more targeted, higher-quality alerts. 

Screening

While the HKMA acknowledges there is no “one-size-fits-all” approach to customer screening, the regulator provides the following guidance to help AIs adopt a screening solution that is consistent with their risk appetite, and ensure compliance with relevant regulations:

• Up-to-date databases: Whether databases are maintained in-house or with support from a vendor, AIs should ensure they are complete, accurate, and updated in a timely manner. 
• Name matching: Appropriate settings should be applied to allow the screening system to identify common spelling alterations and variations, including the manipulation of names and keywords. AIs may also choose to use automated processes to handle names that use non-Latin script. 
• Ongoing review: Frequent monitoring, tuning and testing should be conducted on all aspects of screening systems, with testing results and analysis properly documented. Senior management should have sufficient oversight of screening systems and processes to ensure their efficiency and effectiveness. 

Suspicious Transaction Reporting

To meet their reporting obligations, AIs must maintain high levels of quality and consistency. When filing a suspicious transaction report (STR), the HKMA advises AIs to:

• Structure the content systematically
• Focus on the main subject and be concise
• Include digital footprints related to online banking activities
• Use of file attachments appropriately
• Avoid providing non-editable transaction records

Additional Focus Areas

The Hong Kong government’s four other priorities likewise respond to the risks and gaps identified in its 2022 assessment. These include:

• Strengthening the application of risk-based supervision to ensure targeted regulation is applied to high-risk areas, such as banking, money service operators, dealers in precious metals and stones, and trust or company service providers
• Enhancing outreach and capacity-building to promote awareness and understanding of money laundering and terrorist financing (ML/TF) risks by various sectors 
• Monitoring new and emerging risks to respond promptly to evolving patterns of predicate offenses or terrorism, and modes of ML/TF
• Strengthening law enforcement efforts and intelligence capability to tackle domestic and international ML/TF, and enhance confiscation of the proceeds of crime

Key Takeaways

Firms should review the updated guidance and implement any necessary operational, technical, and/or policy changes to align practices with those set out by the HKMA.

Additionally, compliance staff should review this guidance in conjunction with the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT Guideline), and other guidance issued by relevant competent authorities.