A Guide to Anti-Money Laundering for Crypto Firms

Hong Kong Announces VASP Licensing to Begin in March 2023

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Hong Kong’s government has set out amendments to its Anti-Money Laundering and Counter-Terrorist Financing Ordinance, including a virtual asset service provider (VASP) licensing regime. The government is also launching a registration program for dealers in precious metals and stones (DPMS).

A spokesperson argued the reforms would “safeguard the integrity of Hong Kong as an international financial center, protect investors and add to our credibility as a trusted and competitive place to do business.”

Once approved, Hong Kong’s VASP licensing scheme will be one of the most comprehensive in the world. It defines virtual assets broadly, covering Bitcoin, altcoins, stablecoins, and a host of governance tokens. Notably, the Secretary for Financial Services and the Treasury will gain the power to determine whether new/emerging assets are virtual assets. This could have implications for areas like non-fungible tokens (NFTs) in the future. 

All VASPs covered by the bill must apply for a license with the Securities and Future Commission (SFC). Firms operating in Hong Kong before March 1st, 2023, must submit a license application by December 1st, 2023. VASPs can then work under an assumed compliance framework until a final decision is reached on their application.

Central Bank Digital Currencies (CBDCs), financial assets already regulated by the Securities and Futures Ordinance, and other non-transferable, non-fungible assets are not covered. 

Operating without an appropriate license or marketing the services of an unlicensed firm to the people of Hong Kong will incur a fine of HK$5 million and a prison sentence of up to seven years. 

Requirements for licensed VASPs

Licensed firms must appoint two responsible officers, approved by the SFC. Officers are legally accountable for their firm’s compliance, with the draft legislation stating the applicants must have “sufficient authority within the licensed provider.”

The proposal also includes investor protection measures covering VASPs’ management structure, business model, and risk management policies. 

SFC supervisory powers

Lexology reports that the SFC will enjoy “broad supervisory powers” over VASPs in Hong Kong, including the ability to:

  • Enter the premises of licensed firms and their entities to conduct inspections, request documents, and investigate non-compliance
  • Appoint an auditor to review a licensee if it believes the firm is not meeting its anti-money laundering obligations

The move from Hong Kong’s government comes as other major regional financial centers are advancing their cryptoasset regulatory programs. In April, Singapore’s parliament approved the Financial Services and Markets Bill, which grants powers to the Monetary Authority of Singapore (MAS). The reforms include enhanced digital token regulation, harmonized technology risk management requirements, and expanded prohibition order powers. 

In Australia, the government closed its consultation on a proposed Digital Services Act in May 2022. If enacted, the plans would regulate digital assets around four key pillars, underlined by a “regulate and tolerate” approach. It’s unclear whether the proposals will advance under the Labor government, which took office in May. 

DPMS regulatory scope

The amendments include a registration regime for dealers in precious metals and stones. Anyone operating a DPMS business must register with the Commissioner of Customs and Excise. Registrants will be ordered into two groups based on whether they will be engaging in cash transactions at or above HK$120,000. Firms sitting above this limit will be subject to AML/CTF supervision.

This proposal addresses a concern raised by the Financial Action Task Force (FATF) in its 2018 evaluation of Hong Kong. In it, the FATF argued that the exemption of DPMS firms from AML/CFT rules “is not based on proven low risk.” It recommended the government introduce the “appropriate level of AML/CFT requirements for the DPMS sector regarding ML/TF risks.” 

The move also comes in light of research showing that DPMS firms are at high risk of being evolved in sanctions evasion, particularly in North Korea. Analysis by the Royal United Services Institute (RUSI) based on a review of 87 proliferation financing cases identified in UN Panel of Experts reports showed jewelry and diamonds appear in 25% and 5% of cases, respectively. Gold was the most frequently mentioned precious metal, occurring in 60% of cases. However, RUSI warned these examples were likely “only the top of a potentially much larger iceberg.”

Next steps 

The package of reforms will be introduced to Hong Kong’s Legislative Council on July 6th, 2022. Firms covered by the proposals should use the time before they come into effect in 2023 to review what license they will need to continue operating and any changes required to their AML/CFT programs to meet the new requirements. 

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Originally published July 1, 2022, updated July 1, 2022

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