HKMA Investigations for Breaches of AML Guidelines

The Hong Kong Monetary Authority (“HKMA”) regulates banks, known as authorized institutions, in respect of their compliance with anti-money laundering laws, including the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”), and, by extension, the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Authorized Institutions) (“HKMA AML Guidelines”) and other guidance issued as to how banks should comply with these laws. Recent HKMA investigations suggest a high regulatory priority on ensuring bank compliance with the AMLO and the HKMA AML Guidelines. During the past 3 years, the HKMA imposed penalties totalling almost HK$85 million in penalties for AML deficiencies, in each case issuing public reprimands of their disciplinary decisions.

HKMA Investigation Powers

The HKMA has a broad range of statutory powers to ensure that banks regulated by it comply with anti-money laundering laws. These powers primarily arise under the AMLO and the Banking Ordinance (“BO”) but, in respect of banks registered with the Securities and Futures Commission (“SFC”) to undertake securities and futures related regulated activities (“SFC regulated activities”), the HKMA has supplemental powers under the Securities and Futures Ordinance (“SFO”).

Commencing an HKMA Investigation

Under the BO, the HKMA has the power, at any time, with or without prior notice to a bank, examine the books, accounts and transactions of a bank and, in the case of a bank incorporated in Hong Kong, any local branch, local office, overseas branch or overseas representative office or subsidiary, whether in or outside Hong Kong.

Under the AMLO, the HKMA can appoint investigators to ascertain whether a bank is complying with the AMLO.

• Routine inspection – An HKMA investigation may be conducted for the purpose of ascertaining whether a bank is complying with the AMLO and HKMA AML Guidelines.

• Formal Investigation - An HKMA investigation may be conducted for the purpose of investigating where there is reasonable cause to believe that an offence may have been committed under the AMLO or determining whether to take disciplinary action. In this case, the investigator may exercise its powers in respect of the bank as well as any person whom the investigator has reasonable cause to believe has (i) any record or document that contains or is likely to contain information relevant to the investigation, or (ii) any information relevant to the investigation.

In the latter case of a formal investigation, as will be described below, amongst other things, the privileges against self-incrimination will differ.

Routine Inspections

As part of a routine investigation, HKMA investigators can, at any reasonable time:

• enter the business premises of a bank, including the bank’s principal place of business, any local branch or office and any place of business used by the bank solely for administration, storage or transaction processing;

• inspect and make copies of any record relating to the business carried on or any transaction carried out by the bank and, if the investigator believes that a copy of such a record cannot be obtained from the bank, require any other person whom the investigator has reasonable cause to believe is in possession of such a record or who has information relating to such record, to give access to such record and to answer any questions regarding such record;

• make enquiries of the bank or, if the investigator believes such enquiries will not bear fruit, any other person whom the investigator has reasonable cause to believe either has information relating to any record relating to the business carried on or any transaction carried out by the bank or is in possession of such a record.

Document Production

As part of a formal investigation, under the AMLO, an HKMA investigator has the power to require a person to produce records or documents that is or may be relevant to the investigation and that is in the person’s possession.

Interview and Response to Queries

An HKMA investigator may, as part of a formal investigation, require a person to attend an interview to answer questions relating to any matter under investigation, to respond to any written question relating to any such matter and to give all other assistance to the investigator as the person is reasonably able to give.

Self-Incrimination

Given a banker’s implied duty of confidentiality to customers, where the HKMA exercises its investigative powers under the SFO, before requiring disclosure of any information or the production of any record or document relating to the affairs of a customer, the HKMA must certify that it is satisfied that the disclosure or production is necessary for the purposes of ascertaining compliance with the SFO and codes and guidelines issued thereunder.

Co-operation & Assistance

In general, in an HKMA investigation of a bank’s SFC regulated activities, the HKMA does not have a statutory power equivalent to that of the SFC to require a person to give all assistance which the person is reasonably able to give in an investigation (except for an investigation related to OTC derivatives trading).

Self-Incrimination

In responding to interview questions or other written questions relating to matters under investigation, a person does not have the right to refuse to answer any question on the ground that the answer may self-incriminate. In other words, the person must answer the question under compulsion of law. However, in answering, the person may make a claim of self-incrimination and on making such a claim, neither the question nor the answer is admissible in evidence against the person in criminal proceedings otherwise than in respect of the falsity of the answer.

Legal Professional Privilege

HKMA investigation powers do not enable an investigator to over-ride legal professional privilege. In other words, no one can be compelled to disclose the nature of legal advice given to him or instructions given to seek legal advice or to disclose information which has been produced for the dominant purpose of litigation.

Search and Seizure

Though the HKMA’s dealings with banks tend to be cordial rather than hostile, if necessary, an HKMA investigator may obtain a search warrant from court if there are reasonable grounds to suspect that there are, or likely to be, any record or document related to the investigation in a specific premise. A search warrant authorizes the investigator, police officer or other persons authorized under the warrant to enter those premises to search for, seize and remove any record or document for which there is reasonable cause to believe may be required to be produced as part of the investigation.

HKMA Investigation Procedures

Where an HKMA investigator exercises its powers to investigate, whether as part of a routine inspection or a formal investigation, he or she must produce a copy of his appointment (i.e. his or her authority to investigate). Typically, the investigator will do so in conjunction with a notice setting out the alleged breach being investigated.

Controlling the Narrative

From the beginning of an HKMA investigation, it is important to control the narrative as much as possible. Particularly given the nature of the relationship between banks and the HKMA, it is important from the first investigation contact for banks to tell a compelling story which emphasizes facts which favour compliance. Such a proactive approach, rather than a mechanical approach to responding to enquiries, offers the best chance to dissuade the formation of a negative impression and to bring an end to the investigation. At the same time, such an approach offers the opportunity to contest the allegations without being argumentative about the applicable law and thus, the appearance of being uncooperative.

Disciplinary Procedures

Where the HKMA investigation concludes that a bank has breached the AMLO, before exercising any disciplinary power under the AMLO, the HKMA must give the bank a reasonable opportunity of being heard. The HKMA does so by issuing a Notice of Intention to take Disciplinary Action (“NID”). A bank receiving an NID has an opportunity to contest the HKMA’s findings.

Statutory Secrecy

Under the AMLO, subject to prescribed exemptions, a person assisting an HKMA investigator must not communicate any matter that comes to the person’s attention in the course of an investigation and must not allow any other person to have access to a document which has came into the person’s possession by reason of the investigation. One exemption is to seek legal advice. Another exemption may arise where the HKMA consents to disclosure.

HKMA Disciplinary Powers

Where the HKMA determines that a bank has breached customer due diligence or record keeping requirements under the AMLO (e.g. by breaching HKMA AML Guidelines), the HKMA will issue a Notice of Disciplinary Decision (“NDD”). The NDD will set out the reasons for the HKMA’s decision to discipline the bank. Under the NDD, the HKMA may:

• publicly reprimand the bank;

• order the bank within a specific timeframe to take any action as specified for the purpose of remedying the breach; and

• order the bank to pay a pecuniary penalty, such penalty to be no more than the greater of (i) HK$10 million, or (ii) 3 times the amount of the profit gained, or costs avoided, by the bank as a result of the contravention.

Interviews

Interviews in HKMA investigations are generally conducted by 2 authorized persons. The person being interviewed will normally need to produce identification documentation to confirm his or her identity. This interviewee may be accompanied by a lawyer. It is generally advisable for a lawyer to be present as, at any time during the interview, the interviewee may request a private conference with the lawyer and, conversely, the lawyer may request a private conference with the interviewee. Such a private conference may be desirable whenever the line of questioning evolves in an unexpected fashion or in a manner that may be prejudicial to the interviewee or the bank. In this case, legal advice as to the concerns being raised by the interviewer and the presentation of facts optimal to address these concerns may be valuable.

Effect of Cooperation

In determining the penalty for a breach of the AMLO, the HKMA applies its Guidance Note on Cooperation with the HKMA in Investigations and Enforcement Proceedings (“HKMA Cooperation Guideline”). In broad terms, the HKMA may reduce the penalty if a bank is cooperative. The reduction in penalty will typically be greatest prior to the issuance of an NID.

The HKMA may regard a bank as being uncooperative if it:

• delays the reporting of a breach or misconduct without reasonable excuse;

• intentionally prolongs the investigation;

• fails to comply, within the stipulated timeline and without reasonable excuse, with notices to produce information and attend interviews;

• lacks care in ensuring that information provided in response to investigation notices is accurate and complete;

• conceals relevant information relating to the breach or misconduct; and

• is evasive in the investigation.

Appeals

If a bank is dissatisfied with a NDD, it may apply to the Anti-Money Laundering and Counter-Terrorist Financing Review Tribunal (“AML Tribunal”) for a review. An application must be made within 21 days after the NDD unless, on an application of the bank, the AML Tribunal extends the time.

Settlement

The HKMA may agree to settle the disciplinary matter through a resolution agreement. A resolution agreement is an agreement between the bank and the HKMA to resolve the HKMA’s concerns. A bank may approach the HKMA at any time after regulatory concerns have been identified, until the NDD issuance, to attempt to reach a resolution agreement.