HKMA’s Risk Assessment Guidelines for AML/CFT Compliance in the Banking Sector

In the past few years, global regulatory authorities have been laying new grounds for Anti-Money Laundering (AML) compliance and Counter-Financing of Terrorism (CFT). The primary goal of these authorities is to make use of the latest technological advancements in data analytics for developing solutions to counter crimes like money laundering and terrorist financing.

The Hong Kong Monetary Authority (HKMA) is one of the regulatory bodies making prominent efforts to improve AML/CFT technologies for preventing monetary fraud. In November 2021, HKMA plans to initiate sessions with the aim to use technological innovations to strengthen AML/CFT policies and practices. Along with real-world AML/CFT use cases, the first experiment of HKMA is set to work on Natural Language Processing (NLP).

After the FATF issued a report this June pertaining to the application of machine learning and NLP to enhance AML/CFT solutions, the HKMA said, “In line with global efforts, the HKMA plans to take further steps to support AML/CFT innovation and help strengthen [banks’] implementation of the risk-based approach to AML/CFT”.

Risk Assessment Guidelines for the Banking Sector

The HKMA’s anti-money laundering webinar of September 16th sheds light on risk assessment guidelines for the banking sector and also highlighted the advantages of partnerships between public and private institutions. Among the significant aspects that came to light in the webinar were ways to understand the risks in financial institutions and risk-based approaches to eliminate money laundering and terrorist financing.

A money-laundering syndicate was arrested by Hong Kong police in August for moving HK$30 million in a period of 10 months, which indicates the urgency that calls for HKMA’s recent updates in policies. As things stand, the HKMA justifiably labels the banking sector as being vulnerable to financial crimes. Considering international trends, there is a clear indication of increased difficulty in detecting and tracking money laundering with the mass adoption of online banking services and fund transfers.

Suggested read: AML Non-Compliance Penalties Soaring Sky High in the First Half of 2021

Risk-based Approach 

Money laundering and terrorist financing are often seen to shake things up in banks and stain their reputation. The HKMA’s guideline encourages banks operating through digital platforms to implement AML solutions in order to formulate risk-based strategies. These measures include customer due diligence as well as ongoing monitoring of existing customers to report suspicious transactions for investigation. 

According to the HKMA’s guidelines, the use of AI-based AML solutions can significantly assist banks and other financial institutions by analyzing different types of financial data and activities. That being said, there is a certain amount of autonomy provided to the banking sector when it comes to choosing and implementing AML compliance solutions according to their systems. Shufti’s AML Screening solution allows financial institutions to balance between risk-based strategies and efficiency while effectively analyzing the maximum number of datasets to eliminate money laundering.

Collaboration Between Financial Institutions

Another key aspect of the HKMA’s policy is the collaboration between banks and other financial institutions to improve the effectiveness of reporting suspicious activities. Banks working async enable improved tracking of money laundering and terrorist financing, as indicated by the interception of HK$3 billion by the ADCC in 2020. Furthermore, the recent COVID pandemic situation and the new risks it generated for the financial sector indicate the significance of collaboration and knowledge sharing when it comes to fraud prevention.

The HKMA report shows examples of financial institutions effectively collaborating with the stakeholders within their system. One of these institutions is the FMLIT (Fraud and Money Laundering Intelligence Taskforce), which provides feedback to external organizations to implement new techniques for the investigation of financial crimes like money laundering and terrorist financing.

Technological Innovations

The HKMA’s Fintech 2025 strategy has accounted for considerable progress in terms of AML RegTech adoption. For instance, the HKMA’s guidelines require banks to incorporate new, non-traditional datasets as well as digital footprints to keep track of transactions. Additionally, network analysis techniques are suggested to improve transaction monitoring and also assist in determining hidden linkages. Virtual banks are seen to work with the support of the HKMA by sharing their gathered information and assisting in calculating the upcoming risks.

The targeted mitigation of money laundering and terrorist financing risks is only possible with the unification of financial records and information from internal and external sources. Therefore, it doesn’t come as a surprise that financial institutions that use advanced technological solutions to gather external information show greater strength when identifying high-risk customers, collaborations, and transactions. The points put forth in HKMA’s guidance not only suggest the implementation of these strategies but also encourage steps to measure and analyze their effectiveness.

The Significance of On-going Monitoring

Where a majority of the Authorized Institutions (AIs) that come under the AMLO are seen to adhere to the AML regulations put forward by the HKMA, there are a number of institutions that have not integrated measures to monitor and analyze the effectiveness of the results. Consequently, the Hong Kong Monetary Authority has prompted financial institutions to instantly begin work on the development of systems to measure the performance of AML/CFT systems through the number of STRs (Suspicious Transaction Reports) as well as the impact on the banks’ reputation and customers. The HKMA AML guideline also highlights ongoing monitoring of the existing customers and employees of institutions. 

According to HKMA AML guidelines, the ongoing monitoring of transactions as well as resource allocation and business relationships are a significant factor in the AML/CFT solutions. While carrying out customer due diligence during account opening, financial institutions are encouraged to implement automated AML solutions for processing customer data and examine all the sources where the money was processed through. Shufti’s AML services allow financial institutions to perform enhanced due diligence for high-risk customers in order to eliminate criminal entities from the monetary system. 

In a Nutshell…

The HKMA is a renowned international financial hub and the central stream of monetary processes. The Hong Kong Monetary Authority supervises the integrity and security of the financial system through AML/CFT regulations in compliance with international standards. 

Targeting mainly the banking sector, the HKMA laid the foundations for AML processes that are now followed globally, including customer due diligence, enhanced due diligence, transaction monitoring to overcome money laundering, and terrorist financing.

Want to know how your business can comply with AML/CFT regulations?