How to Get the Right KYC AML Platform in Hong Kong

On June 8, 2021, the Hong Kong Monetary Authority (HKMA) unveiled its “Fintech 2025” strategy that aims to drive fintech development in Hong Kong. The Fintech 2025 strategy is the Hong Kong government’s way of encouraging institutions to adopt newer technologies, and to future-proof Hong Kong’s digital currencies to expand further and develop the country’s booming economic market.

With the country being one of the world’s biggest financial hubs in trade and finance, the Fintech 2050 strategy is a welcomed encouragement for digitization and modernization in fintech companies and financial institutions, but this modernization can be a double-edged sword that can harm many businesses when not handled properly. The most common issues financial institutions would have to look out for is money-laundering and fraud.

To avoid these two things, Hong Kong has AML and KYC regulations to ensure that individuals and companies are kept safe from becoming victims of money laundering.

What is KYC?

KYC or Know Your Customer/Client is part of the Customer Due Diligence (CDD) process that helps identify and verify your client’s identity. This process involves many different things, like checking personal and business information to determine if the client has any negative hits like fraud, bad credit standings, being a Politically Exposed Person (PEP), and other sanctioned lists. For companies dealing in money matters, KYC is a mandatory process as it is the first line of defence when countering money laundering, fraud, and other crimes that may leave the company and their stakeholders vulnerable.

According to HKMA’s Executive Director Carmen Chu, the financial sector should play its “gatekeeper” role in the Anti-Money Laundering (AML) ecosystem “in helping to identify and stop fraudsters and cyber criminals who prey on the vulnerable.”

Failure to maintain a good KYC process has heavy consequences. Affected companies can be fined by the Hong Kong government and often be subject to reputational damage. In worst cases, their business permits may be withdrawn and blacklisted from doing business with others in the future. In August 2022, the Hong Kong Monetary Authority penalised Commerzbank AG with HK$6,000,000 for not conducting proper CDD measures during client onboarding.

Although it may seem that KYC and CDD only applies to financial institutions, Hong Kong enacted the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”), CAP. 615 on March 1, 2018. This law makes KYC and CDD a statutory requirement for Designated Non-Financial Businesses and Professionals (DNFBP) and registered Trust or Company Service Providers (TCSP).

How does KYC Work in Hong Kong?

The KYC process is relatively simple. You ask your clients to show you their documents and perform the relevant checks on each of them. IDs, home addresses, current jobs, and even financial statements are scrutinised to ensure everything is in order and that the client they are dealing with is who they say they are.

But the KYC process is not foolproof. Fraudsters can always use techniques and new technology to circumvent this process and deceive the system. Thankfully, the KYC process has also evolved to ensure security. There are things like face verification, liveliness checks, and automated document scanning AIs to ensure that nothing is forged and cheated.

Contact Lanturn to learn about our digital KYC systems.

How to Comply with the KYC Guidelines?

Institutions are tasked to apply KYC measures depending on what the situation calls for. The measures include a risk assessment, ongoing monitoring, and record keeping.

1. Risk Assessment
Before doing business with any entity, companies should evaluate the client’s background to see the degree, frequency, and extent of the CCD measures they should be doing moving forward.

2. Ongoing Monitoring
Businesses should review existing KYC documents of customers whenever necessary. Depending on the risk assessment, these checks can be regular or only when certain events happen, like a huge transaction or a drastic change in your client’s business operations. These are done to ensure that your current documents are up-to-date and relevant to the client’s profile.

3. Record Keeping
All transactions and agreements should be recorded and kept by the company. These records are essential as they can help you detect any foul play or illegal transactions.

Hong Kong’s KYC AML New Compliance Requirements

In September 2021, the Securities and Futures Commission (SFC) updated its guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations) to widen its scope.

The update now includes the following:

• Institutional risk assessment to help financial institutions assess Money Laundering (ML) /Terrorist Financing (TF) vulnerability levels

• Adopting a risk-based approach to simplified and enhanced CDD requirements

• Identifying indicators for suspicious transactions involving third-party deposits and payments

• Updated CDD requirements and measures for cross-border correspondent banking relationships.
  
  

For a more detailed breakdown of the new compliance requirements, you can check the full guidelines provided by the SFC on their website here.

How Much Does KYC Cost?

Some factors can make KYC expensive. After all, KYC expenses are more than just staff salaries, and overtime pays. To see the actual cost, businesses need to look at the following factors:

1. Data Management. All companies are required to store customer data correctly to avoid it from being leaked or used by other parties for malicious reasons. Hong Kong has the Personal Data (Privacy) Ordinance (CAP 486), which ensures that all companies and data processors do whatever they can to safeguard the personal data they will be using.

Because sensitive data has to be managed correctly, it must be kept and stored in secure locations that only the business would have access to. In our modern age, these data are usually held in secure servers either on or off-site. These servers must also be big enough to handle all your customers' data.

You may opt to avail of third-party server services that can host your customer's data. Many foreign and local companies offer these services, but it would depend on how much data you would be storing and for how long. Businesses that would choose to do this do have to be careful since they do not own the servers. Troubleshooting and security are two main concerns if they choose to do this.


2. Personnel Training. For your company to properly comply with the KYC procedures, you must train your client-facing employees. Failure on their part may result in hefty fines, which would hurt your finances and the company's reputation. In 2022, the Hong Kong Securities and Futures Commission (SFC) fined Rifa Futures $1.14 million (HKD 9 million) for breaches in their KYC regulatory violations between 2016 to 2018.


3. Customer Satisfaction. If customers are experiencing too many delays or go through too many hoops before opening an account, you may lose them even before you can do business with them. This is an invisible cost, but companies can feel this if it happens too often because of how your KYC system works.

Upgrading your KYC systems may help you cut the process in half, but this can cost more money which you would have to pass on to your clients by raising your service prices. An article by Harvard Business Review shares that price changes can often make buying decisions more complex as customers would no longer have a clear reference price, so they wouldn't know when to buy.

KYC with Lanturn

Lanturn is a boutique fintech company that offers a quality KYC and AML platform which can help simplify your CCD procedures. Our KYC & AML checks can be divided into two tiers:

• Basic – Information obtained to verify the identity of potential/existing clients, shareholders, and investors.

• Enhanced – For higher-risk customers. A deeper analysis of the client’s individual/business activities are done to mitigate associated risks.
  
  

By dividing our KYC process, we speed up the process and save our clients money, as the heavier KYC procedures that require more verification are reserved for high-risk customers.

All our services include:

• Collection and verification methods that comply with Data Protection regulations

• A four-eyes quality check for all documents/information collected

• Secure digital record-keeping
  
  

If you would like to learn more about our services, feel free to reach out to us today. Our team would be happy to be of assistance.