Asian regulators bare teeth in anti-money laundering enforcement

Coutts: Hong Kong

The HKMA's investigation found that between April 2012 and June 2015, Coutts contravened five specified provisions, namely, sections 3(1), 10(2), 15, 19(1), and 19(3) of Schedule 2 to the Anti-money Laundering Ordinance (AMLO). The bank was reprimanded and ordered to pay a penalty of HK$7 million.

The breaches found were as follows:

Section 3(1) of Schedule 2 to the AMLO:

This requires a financial institution to carry out the customer due diligence measures set out in section 2 of Schedule 2 in certain circumstances. The investigation uncovered a case whereby Coutts failed to comply, before commencing a business relationship with a corporate customer, with taking reasonable measures to understand the ownership and control of the legal persons and trust involved in the structure of the client. The measures taken by Coutts were deemed not adequate given the particular facts of the case involving complex structures.

Section 10(2) of Schedule 2 to the AMLO:

If a financial institution comes to know, from information either publically accessible or in its possession, that an existing customer or its beneficial owner is a politically exposed person (PEP) or has become a PEP, it must not continue its business relationship with the client unless it has complied with the requirements, one of which is to get approval from its senior management. In the Coutts case, it was discovered that obtaining approval had been delayed for a period between four to 34 months after the bank became aware that nine customers were PEPs.

Section 15 of Schedule 2 to the AMLO:

This requires a financial institution to take certain measures in a situation that may involve a high risk of money laundering or terrorist financing activity. For example, if a business relationship has already been set up, approval from senior management is required to continue the relationship once the risk is identified. Coutts had failed to seek approval from its senior management to continue the relationship with a corporate customer that raised red flags (one of its clients' beneficial owners was a charity with close ties to a high-risk country, and nobody knew who controlled the charity). The bank was therefore penalized for failing to lower or eliminate the risk.

Section 19(1) of Schedule 2 to the AMLO:

This section requires a financial institution to establish and maintain effective procedures for determining whether a customer or its beneficial owner is a PEP. Deficiencies were found in Coutts' procedures. The HKMA found four cases where individuals were not identified and determined by Coutts to be PEPs, despite the fact that relevant identifiable information had been available at the time, either on a commercial database or from publicly available sources. These individual customers were not classified as high-risk clients and their status as PEPs therefore remained undiscovered for several years. The HKMA's findings showed that these cases were symptomatic of procedural deficiencies, and that Coutts failed to set up and maintain an effective system to identify PEPs.

Section 19(3) of Schedule 2 to the AMLO:

Under this section, the financial institution is required to set up and maintain effective procedures consistent with AMLO obligations for each type of customer, business relationship, product and transaction. Under the facts of this case, the HKMA discovered Coutts had insufficient controls for ensuring its staff follow up on confirmed PEP alerts received from a commercial database. Moreover, the HKMA further concluded that there was a lack of management information and reporting system to track the progress of obtaining senior management approval to continue business with a PEP. The HKMA found that the bank failed to promptly seek approval in nine PEP-related cases. In five of these, the bank had received PEP alerts but failed to follow up in a timely manner. The regulator further commented that the oversight on Coutts' part to act on PEP alerts is considered a serious failure because it exposes the bank to significant legal and reputational risks.

In determining disciplinary actions, the HKMA had taken into account a few key factors:

1. The need to send a clear message to other financial institutions on the importance of effective internal AML and counter terrorist financing controls;
2. The bank has engaged an external consultant to conduct a major review to remediate the situation;
3. The bank has taken major actions to respond to the deficiencies identified by the regulator; and
4. The bank co-operated with the HKMA during the investigation.

This case is evidence that significant penalties for AML compliance breaches are no longer limited to cases brought in the U.S. and UK. Less aggressive jurisdictions, such as Hong Kong, are witnessing a change in enforcement attitudes. Banks now have little choice but to adopt compliance procedures that are consistent with international standards or otherwise risk being the focus of an unwanted and potentially damaging enforcement action—as Coutts was in Hong Kong, Switzerland, and Singapore.

Meanwhile, some argue that China, the world's second-largest economy, has yet to catch up—a claim supported by the Bank of China case in Italy in 2015 and the Industrial and Commercial Bank of China (ICBC) case in Spain in 2016.

Bank of China: Italy

In June 2015, the Italian authority in Florence took legal action against 297 individuals who were involved in a money laundering case. The prosecution found that from 2006 to 2010, EUR4.5 billion was remitted through a company in Milan to a number of private individuals and companies in China. The remittance company, named “M2M”, was owned by some Chinese residents in Italy. The money was generated from illegal activities, such as sales of counterfeit goods, prostitution, deprivation of illegal workers, and tax evasion. Bank of China's Milan banch remitted EUR2.2 billion on behalf of M2M, earning a commission of EUR758,000. M2M had entered into contract with the Milan branch, which was to be the sole agent for remitting funds on behalf of M2M. The Italian prosecution pointed out that the four senior management members of the branch had not reported the suspicious transactions to the police and helped M2M launder the money. The prosecution believed that the money remitted to China was used for purchasing counterfeit goods that were later transported to Europe or the U.S., and further indicated that the Italian authorities were unable to trace the whereabouts of the funds remitted to China because the Chinese authorities were not cooperative. In the end, Bank of China paid a settlement of EUR600,000 to avoid prosecution. The four senior managers were sentenced to two years' imprisonment, subject to probation.

ICBC: Spain

In June 2016, the Spanish police searched the ICBC Madrid branch and arrested six members of senior management involved in money laundering activities. The Spanish authority indicated that ICBC had received large volumes of cash proceeds from criminal gangs in Spain. The proceeds were remitted to bank accounts in China through telegraphic transfers. It was discovered that, in order to disguise their source, many of the funds were remitted to China using shell company websites. The Spanish police found the ICBC Madrid branch was involved in injecting funds that were generated from illegal activities, including illegal immigration, tax evasion, and deprivation of illegal workers, into the financial system, and transferring them to China using legal channels.

Although the reputations of ICBC and Bank of China have been tarnished overseas, no further actions have been taken by regulators in China against the two banks.

China's AML regime

PRC law requires Chinese banks to apply stringent AML rules. China is a member of the FATF, as well as the Asia Pacific Group of Money Laundering, and the Eurasian Group on Combating Money Laundering. When China was evaluated upon entering into the FATF in 2007, its AML framework was deemed partially compliant and was then placed in an enhanced follow-up regime. In 2012, the FATF decided that sufficient progress had been made such that China could be released from the regular follow-up regime.

Chinese money laundering regulations establish a comprehensive system comparable with rules in the EU, where such controls are among the world's most stringent. The main activities of money laundering are criminalized with heavy penalties entailed. There are also many strict rules on customer due diligence and reporting suspicious transactions. Enforcement is a separate matter, however, and a more proactive approach taken by the Chinese regulators may increase confidence in the nation's AML system.

Johnny K.W. Cheung
Former Asia general counsel, Generali
Hong Kong