The 2015 FIFA scandal and associated arrests and downfall of key FIFA officials, are not only sporting issues. They highlight the use of international banking systems and the role of banks in identifying suspicious transfers of funds which may support money laundering.
The FIFA scandal serves as a reminder to Hong Kong banks and other financial institutions to ensure that their systems for monitoring and reporting suspicious transactions are strong enough to withstand scrutiny with the benefit of hindsight.
In this alert, we look at how these high profile corruption allegations interact with the obligations on Hong Kong financial institutions to detect and report activities that may be connected with such crimes.
The FIFA case
Charges have been laid in the United States against a number of high ranking officials within FIFA and arrests continue while other countries investigate criminal charges against individuals The charges laid by the United States relate to bribery, racketeering, wire fraud and money laundering and refer to a number of cash payments, property purchases and include the wire transfer of amounts through the United States, Hong Kong and the Cayman Islands.
How these charges play out and what the impacts are for the FIFA World Cup tournament more generally, the focus on financial systems and arrangements to identify suspicious transactions will become an enduring by-product of these significant events in world sport.
The legal obligations in Hong Kong
An obligation to identify and report suspicious transactions arises from a number of sources:
- Firstly, under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institution) Ordinance (Cap 615), financial institutions must continuously monitor their business relationship with a customer by identifying transactions that:
- are complex, unusually large in amount or of an unusual pattern; and
- have no apparent economic or lawful purpose,
and examine the background and purposes of those transactions. Findings must be set out in writing.
- Under the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap 405) and the Organized and Serious Crimes Ordinance (Cap 455), any person that knows, or has a suspicion, that any property in whole or in part directly or indirectly represents any person’s proceeds of, was used in connection with, or is intended to be used in connection with, drug trafficking or an indictable offence, must disclose that knowledge or suspicion to appropriate authorities as soon as reasonable.
- Under the United Nations (Anti-Terrorism Measures) Ordinance (Cap 575), any person who knows or suspects any property to be terrorist property must, as soon as practicable, disclose to an appropriate authority the information or other matter on which the knowledge or suspicion is based.
Failure to comply with reporting requirements attract criminal penalties. Penalties may be financial and may also include imprisonment. The reporting requirements apply in addition to the fundamental restrictions relating to laundering money, promoting terrorism, breaching sanctions and aiding in the proliferation of weapons of mass destruction.
For banks, these identification and reporting obligations are detailed in the Hong Kong Monetary Authority’s (“HKMA”) Guideline on Anti-Money Laundering and Counter-Terrorist Financing which also set out the HKMA’s expectations in respect of processes and systems that should be in place to ensure these obligations are met. Substantially the same guidelines apply to other financial sectors, including securities and futures houses, remittance agents, money changes and certain insurance companies.
Regulators are paying attention
Financial institutions must have a system for recognising and reporting suspicious transactions.
For example, shortly after the United States laid charges in connection with the FIFA officials, the HKMA’s head of Anti-Money Laundering and Financial Crime Risk stated :
“Recognising [the importance of effective systems to detect suspicious transactions], the HKMA has over the past years taken steps to require banks to implement better systems and controls to deter ML/TF and detect suspicious transactions. This is perhaps best reflected in our actions – we have increased our specialist resources threefold in 4 years, and formed a dedicated Division to consolidate that experience. We have ramped up our AML/CFT supervision and engagement with the banking sector and provided more guidance, in particular around transaction monitoring and the reporting of suspicious transactions.”
While FATF’s announcement in respect of FIFA was removed from its website shortly after publication, it is clear that the international body is paying attention and looking at the roles financial institutions have played in the saga.
Whether or not a particular transaction does, in fact, represent the proceeds of crime (or similar), this does not dictate whether or not the financial institution has complied with its obligations – the obligation is to report whether there is a suspicion. Of course, the benefit of hindsight is always influential. In the event that such charges are bought, such as in the FIFA proceedings, if the transactions had not been reported, this raises questions about the financial institution’s systems, procedures and reporting policies.
What should financial institutions be doing?
In any incident involving the cross-border movement of money, it is easy to point the finger at the banking sector and ask why this was not picked up earlier. The global efforts of the past 10 years or so to enhance anti-money laundering regulation may be seen to be ineffective when scandals such as FIFA break.
However, there will always be those that seek to avoid the layers of scrutiny of governments and their financial institutions place in front of them. Given this, financial institutions must ensure that:
- policies, procedures and red flags that reflect their client base, financial products, methods for distributing products and other business risks are in place;
- bribery and corruption risk is factored in from various sectoral angles – not just proximity to classic political structures;
- investment in IT systems is prioritised – there are increasing expectations of automation in screening and interaction between systems (not just in Hong Kong); and
- senior management oversight remains high on the agenda.
There is pressure on financial institutions is to ensure that these types of controls are flexible enough and regularly reviewed to adapt to new information and new risks and are able to withstand regulatory and public scrutiny.
We are seeing a significant uptick in AML/CTF-related investigations. Preparation is key.