HKMA ISSUED GUIDANCE PAPER ON TRANSACTION SCREENING, TRANSACTION MONITORING AND SUSPICIOUS TRANSACTION REPORTING

On 13 December 2013, the Hong Kong Monetary Authority ("HKMA") issued a guidance paper for authorised institutions ("AIs") on sound industry practices for transaction screening, transaction monitoring and suspicious transaction reporting. This paper aims to assist AIs in not only meeting the legal and regulatory obligations under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, the Drug Trafficking (Recovery of Proceeds) Ordinance, the Organised and Serious Crime Ordinance and the United Nations (Anti-Terrorism Measures) Ordinance, but also enhancing the effectiveness of measures to mitigate their money laundering and terrorist financing ("ML"/"TF") risks.

The paper sets out detailed measures that an AI should take to mitigate its ML/TF risks, including:

  • establishing an effective transaction monitoring system (by using a level of automation that is appropriate to the scale of its operations) which can identify unusual or suspicious activity;
  • managing transaction monitoring alerts, the decision making process for suspicious transaction reports and the completion and timely submission of those reports to the Joint Financial Intelligence Unit; and
  • taking appropriate post-reporting actions enabling the AI to adequately mitigate further ML/TF risks.

Although this paper does not form part of the Guideline on Anti-Money Laundering and Counter-Terrorist Financing (for Authorised Institutions), the HKMA expects every AI to give full consideration to the adoption of the practices this paper describes, where necessary, to improve their anti-money laundering and counter-terrorist financing systems.

HKMA ISSUED A REVISED VERSION OF THE SUPERVISORY POLICY MANUAL ON "FINANCIAL INSTRUMENT FAIR VALUE PRACTICES"

Following the adoption of Hong Kong Accounting Standard 39 Financial Instruments: Recognition and Measurement and the Basel Committee on Banking Supervision's guidance designed to promote transparency regarding prudent fair valuation practices, the HKMA issued the revised module on 10 December 2013 to incorporate amendments relating to the full recognition, for regulatory purposes, of fair value arising from fairvalued financial instruments as a component of "Common Equity Tier 1 Capital" under Basel III.

The key amendments include:

  • the HKMAfs key supervisory expectations regarding an AIfs valuation practices, governance structure, senior management oversight, risk management and controls for the designation and valuation of financial instruments to be measured at fair value for financial reporting, risk management and regulatory capital purposes; and
  • guidance on elements of a sound valuation process (and valuation adjustments), including use of relevant and reliable inputs, marking-to-market or marking-to-model valuation methodologies, independent and rigorous model validation and integrated control processes.

All AIs are expected to ensure that all of their fair value estimates are reliable and determined in accordance with the applicable accounting standards and supervisory guidance set out in the module. The HKMA will evaluate the extent to which an AI's valuation process and practices are consistent with the standards in the course of its ongoing risk-based supervision and will take the result of its evaluation into account in its capital assessment of locally incorporated AIs.

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