On 3 November 2020, the Financial Services and the Treasury Bureau (“FSTB“) of the Government of the Hong Kong Special Administrative Region launched a consultation1 (“Consultation“) on proposals to enhance anti-money laundering and counter-terrorist financing (“AML/CTF“) regulation in Hong Kong under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO“). The key enhancements include: (a) a new licensing regime for virtual asset services providers (“VASPs“), which will be regulated by the Securities and Futures Commission (“SFC“); and (b) a two-tier registration regime for dealers in precious metals, precious stones, precious products or precious asset-backed instruments (“DPMS“), which will be regulated by the Commissioner for Customs and Excise (“C&CE“). The changes are intended to align Hong Kong’s regime with the latest requirements and recommendations of the Financial Action Task Force. The Consultation will close on 31 January 2021.
The new VASPs licensing regime and DPMS registration regime in the Consultation will impact: (a) virtual asset trading platform providers; and (b) persons dealing in precious metals, precious stones, precious products or precious asset-backed instruments, as summarised below.
|Which regulator is responsible for licensing and oversight?||The SFC.|
|What products and services will be regulated and require a licence?||The new regulated activity (“Regulated VA Activity“) will cover the operation of a trading platform (“VA Exchange“) that:
Subject to various exemptions, VA is proposed to be defined as a digital representation of value that:
|Do the licensing requirements only apply when the regulated activity is undertaken in Hong Kong?||Licensing requirements apply in the following circumstances:
|Are there any carve outs or exemptions?||The following will fall outside the scope of VA:
Operating the following platforms will not require a separate VASPs licence under the new regime:
|Any incorporation or personnel requirements to be eligible for a licence?||Local entity: The licensee must be a Hong Kong incorporated company with a permanent place of business in Hong Kong.
Personnel requirements: At least two responsible officers (“ROs”), and all executive directors must be approved by the SFC as ROs.
|Will there be licensing conditions imposed?||Licensing conditions and regulatory requirements may be imposed, which will cover areas including:
|What AML/CTF requirements will apply once licensed?||A licensee will be subject to AML/CTF obligations under the AMLO.
|When to get a licence?||A licence must be obtained within 180 days from the commencement date of the new regime.|
|Which regulator is responsible for registration and oversight?||The C&CE.|
|What products and services will be regulated and require registration?||DPMS registration will cover the conduct of the following activities (“DPMS Regulated Activities“):
a) trading in (i.e., selling, offering for sale, purchasing or possessing for sale/resale), importing or exporting precious metals, precious stones or precious products;
b) manufacturing, refining or carrying out any value-adding work (e.g., cutting, polishing, etc.) on precious metals, precious stones or precious products;
c) issuing, redeeming or trading in precious asset-backed-instruments; and
d) acting as an intermediary for a), b) or c) above.
The in-scope products include the following:
|What is the proposed two-tier registration structure?||There are two categories of registration for any person seeking to carry on a business of DPMS Regulated Activities in Hong Kong. The category required will depend on whether the person engages in any “specified cash transaction” i.e., making or receiving, in respect of any transaction involving DPMS Regulated Activities, a payment or payments in cash of at least HKD 120,000 in total, whether the transaction is executed in a single operation or in multiple operations which appear to be linked.
The proposed two-tier registration divides activities as follows:
|Do the registration requirements only apply when the regulated business is undertaken in Hong Kong?||Non-domestic DPMS are exempt from registration if all of the following conditions are met:
|Are there any carve outs or exemptions?||Banks, licensed corporations, insurance institutions, money service operators and stored value facilities regulated under the AMLO are exempt from the registration requirement where they conduct DPMS Regulated Activities which are ancillary to their principal business.|
|What are the criteria to be registered?||Category A: Filing an application accompanied by a valid business registration certificate, addresses of all premises pertaining to the place of business and a declaration that the registration is being obtained for a lawful purpose. Registration is valid as long as the DPMS continues to stay in business subject only to the payment of annual fees.
Category B: Applicants are subject to a fit and proper assessment, in addition to those procedural requirements mentioned above regarding Category A applicants. Registration is valid for three years and renewal is also subject to a further fit and proper assessment.
|What AML/CTF requirements will apply once registered or to non-domestic dealers?||A Category A registrant will not be subject to any AML/CTF obligations under the AMLO.
A Category B registrant will be subject to AML/CTF obligations under the AMLO.
A non-domestic dealer will need to file a cash transaction report with the C&CE within one day of completion of any specified cash transactions and in any event before departure from Hong Kong.
|When to get registered?||DPMS who have been in operation immediately before the commencement of the proposed regime will be allowed 180 days to apply for registration. During the transitional period, DPMS carrying on DPMS Regulated Activities will be deemed to have been registered until such time as an application is approved.|
The proposed changes outlined in the Consultation will have wide implications for businesses that engage in virtual assets, precious metals and precious stones which are not currently regulated. Businesses in these sectors should consider the following:
- Will they require a licence or registration under the new regime?
- If a licence or registration is required, is it possible to redefine the scope of their business to fall within a carve-out or exemption?
- If a licence or registration is required and will be applied for:
-What is the scope of permissible activities under the licence or registration?
-What resources and systems are required in order to meet the application criteria?
-What are the ongoing compliance requirements and commitments for resources and systems?
-What is the overall timetable?
Submissions in response to the Consultation are due by 31 January 2021. If you would like to collaborate on a submission, or if you have any questions on how the proposed changes may impact your business and activities, please liaise with your usual contact at Baker McKenzie or the lawyers listed in this client alert.