Key points｜A quick reading of the revised version of Hong Kong's "Guidelines for Combating Money Laundering"

The Hong Kong Securities Regulatory Commission issued the "Guidelines on Combating Money Laundering" (applicable to licensed virtual asset service providers).

**Source: **Hong Kong Securities Regulatory Commission

Organization: Foresight News

The Hong Kong Securities Regulatory Commission’s latest "Guidelines for Combating Money Laundering and Terrorist Financing (Applicable to Licensed Corporations and Virtual Asset Service Providers Licensed by the Securities and Futures Commission)" adds a new chapter to the risk of money laundering and terrorist financing related to virtual assets. 12 chapters to provide guidance on the anti-money laundering and counter-terrorist financing regulations and standards to address these risks.

This section also explains how certain existing regulations apply to virtual asset transactions and activities, and provides examples of risk indicators and suspicious transaction and activity indicators related to virtual assets for assessing money laundering and terrorist financing risks. The key points of Foresight News are as follows.

Measuring virtual asset risk

Financial institutions (virtual asset service providers licensed by the China Securities Regulatory Commission) should fully consider a series of factors when measuring the overall risk level they face, such as: country risk, customer risk, product/service transaction risk and other risk.

Among them, the risks of product/service transactions include the market capital value, value and price volatility, trading volume or liquidity and (if applicable), market share, etc. of the virtual assets provided. Whether the product or service involves a virtual asset with enhanced anonymity virtual assets, etc.

When financial institutions identify and assess possible money laundering/terrorist financing risks in the development of new products and new businesses, should also identify and assess risks associated with the use of enhanced anonymity technologies or mechanisms (including but not limited to functions of virtual assets, currency mixers, currency transfer devices, privacy wallets, and other technologies that obscure the identity of the remitter, payee, holder, or beneficial owner of virtual assets) may arise from virtual asset transactions money laundering/terrorist financing risk. While taking appropriate measures to reduce and manage the identified risks, financial institutions should refrain from engaging in such virtual asset transactions if they are unable to reduce and manage such risks.

Customer Due Diligence Review: Execution of Measures

Financial institutions must implement customer due diligence measures for customers in the following situations:

• Before establishing a business relationship with that client;
• Before performing an extraordinary transaction for the client that involves (i) an amount equivalent to $120,000 or more (or the same amount converted in any other currency); or (ii) an amount equal to or more than $8,000 (or the equivalent amount in any other currency) and is a wire transfer.

Before performing non-recurring transactions (including virtual asset transfers and virtual asset exchanges) that are virtual asset transfers** and involve virtual assets equivalent to not less than 8,000 yuan, financial institutions must perform customer due diligence on the client Measures, **regardless of whether the related transaction is a single execution or multiple transaction executions that are linked.

Before conducting a virtual asset transfer involving not less than HK$8,000, the remittance institution must obtain and record the information of the remitter and the payee, and securely submit the relevant information to the collection institution.

Customer Due Diligence: Customer Identification and Verification

For natural person customers, financial institutions should at least obtain the following information to identify customers:

• full name;
• date of birth;
• Country of Citizenship;
• ID number or passport number and document type.

For customers who are legal persons, financial institutions should at least obtain the following identification information to verify the identity of customers:

• full name;
• date of incorporation, establishment or registration;
• place of incorporation, establishment or registration (including address of registered office);
• Unique identification number (such as registration number or business registration number) and type of document; *Principal place of business (if different from registered office address).

If the customer belongs to a trust or other similar legal arrangements, the financial institution should obtain at least the following identification information to identify the customer:

• the name of the trust or legal arrangement;
• Establishment or settlement date;
• Jurisdiction whose laws govern the trust or legal arrangement
• district;
• Unique identification number and document category granted by any official agency
• Address of registered office (if applicable).

In addition, (virtual asset) financial institutions should obtain IP addresses and time stamps, geolocation data, device identification numbers.

What are suspicious transactions?

Concerning the customer:

• Customers who have no apparent reason to use the services of a financial institution (for example, customers who open accounts for virtual asset trading services, but only deposit fiat currency or virtual assets and then withdraw the entire balance or substantially all of the deposit assets without other activities; or customers located outside Hong Kong open accounts with financial institutions to buy and sell virtual assets that are also provided by virtual asset service providers in their location);
• The source of the relevant funds is unknown or inconsistent with the client's status and superficial status;
• The customer enters the platform or sends a transaction instruction from an IP address that may have a higher risk, such as a jurisdiction with a higher risk, an IP address located in a jurisdiction that is not the customer's residence or principal place of business, or previously identified by a financial institution Be suspicious, be associated with "dark web" markets or software that enhances anonymity or allows anonymous communication, etc.

** Circumstances related to the transaction: **

• The buying and selling of virtual assets has no apparent purpose, or the nature, size or frequency of the transactions appear to be unusual;
• Involves the mirror buying or selling or trading of virtual assets used for currency exchange for illegal purposes or without apparent business purpose;
• converting virtual assets into fiat currency at possible loss without regard to, for example, price fluctuations or high commission fees, without apparent commercial justification;
• Converting a large amount of fiat currency or virtual assets into other or multiple virtual assets for no logical or obvious reason, obscuring the flow of funds.

Circumstances related to market irregularities:

• Place buy and sell orders in the same virtual asset in chronological order with the account of the same beneficial owner or associated person;
• Refer multiple new clients by the same person in a short period of time to buy and sell the same virtual asset;
• The client participates in pre-arranged or other non-competitive purchases and sales, in particular:

1. The buying and selling of specific virtual assets in equal quantities ("wash trading"), thereby creating the illusion of active trading, while the beneficial ownership of the virtual assets remains unchanged.
2. Accumulate virtual assets at a small incremental price, and gradually increase the price of virtual assets over time;
3. The customer buys a large amount of virtual assets in a short period of time, especially those with low trading volume, and the scale of the transaction is not commensurate with the customer's situation.