Case study report

Team2 members: Cao Qiong, Li Jiyang, Li Changqi, Zhang Jiabo 1450words

Introduction

AML is an important part of the mechanisms that protect the healthy and normal

function of social economy and finance. It is more special in Hong Kong—the

monitor institutions in financial center should pay more efforts to do their work. In

Hong Kong from the date when AMLO was established, it has been playing a leading

role in anti-money laundering actions. One impressive result is the violation of four

banks. But in the process the AMLO has also encountered problems that bring

difficulties and risks.

Based on a case study about AML and bank industry in Hongkong, this report

provides an analysis on the current situation of AMLO in Hongkong and problems it

encounters. These problems and corresponding answers will be presented in the

following part.

For the global standards for Anti-Money Laundering (AML), the most important
part of AML is the Financial Action Task Force (FATF). Its primary function is to set a

global standard for AML compliance and monitor their effective implementation.

THE FATF 40 Recommendations was first published by FATF in 1990. According to

the latest version in 2012, the Recommendations were modified from legal systems,

measures to prevent money laundering, measures to combat money laundering,

international co-operation respectively. The case mentioned several standards in the

Recommendations like customer due diligence (CDD), political exposed person

(PEP), monitoring.

Banks are now facing the dilemma beefing up its AML practices or risking

following the fate of the four disciplined banks. Our group think the bank should beef

up its AML practice. Although beefing up AML practice will make banks lose large

number of potential customers, AML is significant in society and financial industry.

AML is an objective need to maintain social stability. Doing a good job in anti-money

laundering work can cut off the financing channels for criminal activities, destroy the

economic foundation of criminal groups, and curb the desire of criminals to commit

economic crimes to a certain extent. AML is conducive to the healthy operation of the

market economy. Many illegal and criminal activities in the economic field of our

country are directly related to money laundering. Such as: drug crimes, smuggling

crimes, corruption, financial fraud crimes, etc. AML is conducive to maintaining the

integrity of the bank. The involvement of the bank in money laundering activities

severely damages the reputation of the bank. Moreover, the bank will face the huge

amount of fine and other penalty in operation, which is not worth doing like this.
 It is well-known that Anti-Money Laundering (AML) seeks to deter criminals by

making it harder for them to hide ill-gotten money. And Anti-Money Laundering

(AML) compliance is one of the top issues faced by financial institutions; AML takes

up a lot of time, money and resources, is complex and has effects across the

organization, and is a significant risk factor, as mistakes can lead to huge fines and

reputational loss. Therefore, it’s never too much to spend on AML, organizations

should try to create proper workflow that take into account the situation and properly

funnel the process along. For large organization, they have budget and human

resources to be allocated in AML while for small ones, they are up against the wall

both in terms of budget and human resources, so it is hard for them to allocate

adequate resources, such as money and manpower.

As for the GCBC, there are many advantages for setting up non-bank money

lending subsidiaries. For example, there is no similar regulatory oversight existed for

non-bank money lenders and therefore it can attract more customers with high-profit

margin. But there is extra cost in setting up subsidiaries and it could be a distraction

of GCBC’s main business.

Some banks think they can move their operations to other countries with less

stringent AML regulations. It is not an advisable choice. In short-term, it seems that

moving to other countries with loose AML regulators will reduce the cost on

company's compliance and AML system, and increase potential business

opportunities, but we can all foresee that strengthening anti-money laundering work

has become the norm in international financial supervision. In long-term, with the
standardization and globalization of the AML regulations, it will not be able to

continue its profit in this way. In addition, financial institutions are at the front line to

battle against money laundering, they play a critical role in preventing criminal

money from getting into the financial system, so they cannot simply proceed from

their own interests, but must consider the risks and benefits of the entire financial

system.

Looking at the practice of “de-risking” among its peers, the Chief Executive in

this case wondered whether the AMLO was well designed to combat money

laundering activities. As regulatory agencies increase their anti-money laundering

supervision, banks have to invest more resources and costs in compliance system, and

once there are compliance problems, banks will face huge fines. In this case, more

and more banks are adopting de-risking measures. However, De-risking approach by

not serving certain segments of market can lead to further risk into the global financial

system, as the unsatisfied client needs have potential to force companies and

individuals enter unregulated channel, which makes regulators unable to safely

manage the money laundering risk. Regulators should improve the efficiency of

information collection and information monitoring in terms of compliance, and

provide a secure information sharing system so that banks can safely share big data,

so as to promote the development of a more inclusive financial system. At the same

time, At the same time, banks also need to use higher technology and more

professional talents to find relatively cost-effective ways to meet the requirements of

regulatory agencies, thereby reducing compliance costs.

 There is also a question if ordinance’s social benefits outweigh its social costs.

The answer is definitely yes. AML is beneficial to the normal and healthy function of

economy and the ordinance is now indispensable in Hong Kong AML system. In

macroscopic level. Money laundering can aggravate the fluctuation on financial

market and contort the interest and exchange rate. In microscopical level, ordinance

will help maintain reputation of banks and maintain customer’s confidence on banks.

Another vital significance of AML is to fight crimes. Money laundering is the result

of crimes and also can be the root of crimes.

But the wide-spread usage of enhanced CDD procedures do offer a convenient

approach to bank opportunists to find wealthy people as target customers, thus

triggering the worriers of people about the possibility that the low marginal profit

customers will be denied by bank by the reason of AML.

So, it is more like a moral problem of bank: finding wealthy customer is nature

of bank. As a mechanism of fighting money laundering, which function the ordinance

will serve is decided by users. Strict monitoring will help to solve this problem.

While the AMLO has made it more costly for criminals to use the banking

system as a conduit for money laundering, no similar regulatory oversight exists for

non-bank money lenders. Thus, it is conceivable that money launderers would shift

their activities from banks to non-bank money lenders. This WOULD render the

AMLO ineffective in combating money laundering.

Considering current situation, the Ordinance plays an important role and money

launders are shifting more and more from banks to non-bank institutions which will
aggravate the difficulty of AMLO’s action.

These sorts of institutions include bureau de exchange, cheque casher, money

transmission services, securities and commodities brokers, life insurance companies

and underground and parallel banking system. Though monitoring over these

institutions is improving, it is not easy for AMLO to be effective. The money

laundering actions through these institutions have a common point that they make

money laundering with more sophisticated and professional operations which make it

difficult to monitor.

Conclusion
 The establish of AMLO do improves the efficiency of AML, but the potential

problems of this mechanism can not be ignored. In the interaction with AML

monitors, banks gradually get used to it by their spontaneously reactions. The tools

used for distinguishing money laundering actions may be used to search for high

marginal-profit customer and the Ordinance is supposed to expand action range to

foreign countries for better monitoring. The fact that nonbank institutions are used

more and more by money launders will render AMLO ineffective.

About recommendations, a more detailed ordinance is urgently needed to ensure the

compliant usage of monitor tools like CDD procedures. The monitor institutions

should care more about potential social costs and find method to solve it. Updating

ordinance’s form with time and pay more attention on nonbank money lenders will be

future direction for AMLO.

Reference

https://www.trulioo.com/blog/ux-compliance

http://econ.cssn.cn/zx/bwyc/201707/t20170731_3596107_1.shtml

https://wenku.baidu.com/view/c368851982d049649b6648d7c1c708a1294a0a44.html

http://people.exeter.ac.uk/watupman/undergrad/rtb/techniques3.htm