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HK banks may need to retain due diligence flexibility amid COVID-19 resurgence: HKMA

HKMA Asian Private Banker
The Hong Kong Monetary Authority
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The Hong Kong Monetary Authority (HKMA) has said that interim measures adopted by authorised institutions (AIs) to cope with the strain caused by COVID-19 on their due diligence processes may need to remain in place for longer than expected.

The circular, penned by Carmen Chu, executive director (Enforcement and AML) at the HKMA, was sent to chief executives of Hong Kong’s AIs addressing the virus resurgence in the city and the disruption it is causing to banks’ operations.

“Social distancing and a significant reduction in travel due to COVID-19 continue to significantly impact the ability of AIs to interact with existing and potential customers,” wrote Chu, adding that the situation affects the mass retail, corporate, and private banking segments alike.

Video conferencing, “delayed verification” for onboarding approved
In an Annex to the circular, the HKMA detailed key examples of measures taken by AIs during the pandemic, which it said could be referenced by industry participants, according to their specific needs.

The measures cover client onboarding, ongoing client due diligence (CDD), transaction monitoring, and the prevention of financial crime.

“We have, for example, observed that AIs are increasingly using video conferencing to interact with customers in the course of onboarding and ongoing customer due diligence reviews,” wrote Chu.

According to the regulator, some AIs have reserved video conferencing for those clients who have a relationship with another part of the bank in question. Others have implemented additional control measures, including ensuring that the initial source of funds comes from a same-name account when a face-to-face meeting is not possible and that third-party payment can only be made when a bank representative has met the client in person.

Chu also noted that some AIs were accepting scanned copies of identity documents from prospective overseas customers when establishing a business relationship and when the verification of physical identity documents was not possible at that time. Such an arrangement leverages the “delayed verification” option, as set out under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance.

Banks could also limit such measures to customers who had been met by bank staff prior to the pandemic, strengthen the monitoring of account activities, and limit account functionality to manage any additional risks stemming from this special approach, the HKMA said.

Praise for prioritising high-risk clients, transaction monitoring
Meanwhile, the HKMA praised banks for prioritising reviews of higher-risk customers and seeking relevant approvals to make exceptions for non-high-risk customers. Other banks were prioritising AML/CFT transaction monitoring given the “labour-intensive” nature of the work, which may be impacted by split team or staggered work arrangements to minimise infection risks.

The regulator said it was important for banks to maintain strict records of any adjustments made during this period and to plan for clearing backlogs once the situation improves. It also reminded AIs that its observations and examples were from firms that had taken into consideration both local regulations and their own specific policies and procedures.

This circular signed by Chu follows a letter sent to authorised institutions (AI) in April regarding support and guidance on money laundering and terrorist financing (ML/CTF) risk management during the pandemic.

At the time, banks were reminded that simplified due diligence processes could be applied to lower-risk retail account opening and that the HKMA would be flexible with its supervisory tools and wouldn’t “require or expect a ‘zero failure’ outcome”.

In March this year, both the HKMA and the Securities and Futures Commission issued circulars requiring financial institutions to notify them on significant changes made to their business plans and internal controls in response to the pandemic.

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