Greg Kilminster
Head of Product - Content
HKMA letter on risk-based approach to customer due diligence
The Hong Kong Monetary Authority has written to update all of its regulated firms to provide an update on the execution of a risk-based approach (RBA) for customer due diligence (CDD).
The letter identifies room for improvement in both the design and execution of CDD, for example: “information requests to customers should be risk sensitive, not excessive and should not duplicate information already held by or known to the [firms] concerned, or are publicly available.” Also: “It is not consistent with the RBA to ask customers to provide details or proof of salary, employment or investments dating back years.”
The letter goes on to remind firms of the guiding principles of RBA in relation to CDD (risk differentiation, proportionality, and not a “zero failure” regime) and also points out previous guidance in this space including previous letters on de-risking and tips for private banking. Firms are advised to review this guidance to ensure their CDD policies are aligned to the legal and regulatory requirements. The letter concludes with a note to inform firms that HKMA is also preparing new practical guidance on PEP-related AML/CFT controls, focusing on how to apply RBA on former PEPs.
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ASIC cracks down on predatory lending
The Australian Securities and Investments Commission (ASIC) is intensifying its scrutiny of corporate governance and consumer protection in 2024 according to an article on its website from Sarah Court, ASIC deputy chair.
ASIC plans to ramp up its efforts against high-cost credit and predatory lending practices targeting consumers and small businesses. The article points out that with economic uncertainties and increased financial pressures, vulnerable individuals are at higher risk of falling victim to predatory lending.
The article reminds readers its enforcement actions against unlicensed credit activity, exemplified by ongoing litigation against Cigno Pty Ltd and BHF Solutions Pty Ltd and it adds too that ASIC will hold directors personally accountable for significant corporate misconduct, as demonstrated by recent legal actions.
The article also stresses that ASIC will focus heavily on lenders’ compliance with financial hardship obligations during 2024. Court ends the article with a clear warning: “Our purpose in communicating these enforcement priorities is to provide company directors with an opportunity to review their practices before they become the recipient of regulatory attention."
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US Treasury publishes updated National Risk Assessments
The United States Department of the Treasury has published three National risk Assessment reports on money laundering, terrorist financing and proliferation financing. The publications mark the fourth iterations of the money laundering and terrorist financing risk assessment, and the third update of the proliferation financing risk assessment.
The accompanying press release urges public and private sectors to use the reports to better understand the current illicit finance environment and inform their own risk mitigation strategies.
Key findings include:
- Hiding money in legal businesses: criminals use shell companies or misuse legitimate businesses to disguise illegal funds.
- Shady real estate deals: lack of transparency in real estate transactions allows criminals to launder money through property purchases.
- Unregulated sectors: investment advisors, for example, lack strong anti-money laundering (AML) rules, creating vulnerabilities.
- Complicit professionals: businesses and professionals like merchants can be misused to launder money.
- Weak compliance in some financial institutions: gaps in oversight and compliance at some US financial institutions create vulnerabilities.
Key findings include:
- The US faces ongoing threats from both foreign and domestic terrorist groups seeking funding.
- The main methods of funding involve direct cash donations, money service businesses, and (more recently) virtual assets.
- Some terrorist organisations are adept at exploiting the international financial system through various fundraising methods.
- The rise of domestic violent extremist movements adds another layer of complexity and challenge for law enforcement.
Key findings include:
- Russia: Since 2022, Russia’s illegal war in Ukraine has driven them to use increasingly sophisticated methods to obtain US-made military goods illegally. This includes using front companies and complex trade routes to mask their activities.
- DPRK: North Korean networks involved in proliferation financing are actively exploiting the digital economy. This includes hacking virtual asset service providers to steal funds and sending out skilled IT workers overseas to engage in fraudulent activities.
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FinCEN looks to reduce money laundering in real estate
The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has published a new rule proposal aimed at reducing the opportunity for money laundering by increasing transparency requirements in the real estate sector.
The proposed new rule would require certain entities involved in property transactions to collect and report the following information to FinCEN:
- Beneficial ownership information for the legal entity (transferee entity) or trust (transferee trust) receiving the property.
- Information about individuals representing the transferee entity or transferee trust.
- Information about the business filing the report (the reporting person).
- Information about the residential real property being sold or transferred.
- Information about the transferor (the seller).
- Information about any payments made.
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SEC chair supports FINRA new rules for post-trade transparency in treasury markets
The chair of the Securities and Exchange Commission (SEC), Gary Gensler, has expressed his support for the recent approval of proposed rules by the Financial Industry Regulatory Authority (FINRA) to establish post-trade transparency in the Treasury Markets.
The newly approved rules include:
- Revisions to FINRA Rules 6710 and 6750 to enable end-of-day dissemination of individual transaction data for On-the-Run Nominal Coupons in U.S. Treasury Securities, reported to TRACE, with specified dissemination caps for large trades.
- Amendment of FINRA Rule 7730 to include U.S. Treasury Securities in the present fee structure for end-of-day and historic TRACE data.
In his statement, Gensler emphasises that this new development is “an important step towards bringing the Treasury market’s post-trade transparency closer to that which has benefited investors in the corporate, municipal, and mortgage bond markets.”
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SEC imposes fine of $1.5 million on Crypto firm for registration violations
The Securities and Exchange Commission (SEC) has announced that TradeStation Crypto, Inc. (TradeStation) has been charged for failing to register the offer and sale of a crypto lending product.
According to the SEC’s order, TradeStation began selling this product with an interest feature in August 2020. However, since it did not meet the exemption requirements for registration, TradeStation was legally obligated to register the offer and sale, but it failed to do so.
As part of the settlement, TradeStation has agreed to pay $1.5 million in fines and to a cease-and-desist order that prohibits it from violating the registration provisions of the Securities Act of 1933.
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SEC adopts new rules to further define “dealer” and “government securities dealer”
The Securities and Exchange Commission (SEC) has adopted new rules to provide further clarity on the definition of “dealer” and “government securities dealer” under sections 3(a)(5) and 3(a)(44), respectively, of the Securities Exchange Act of 1934 (Exchange Act).
As per the current definition, the term “dealer” refers to any person engaged in the business of buying and selling securities for their own account through a broker or otherwise, but excludes a person who buys or sells securities for their own account, either individually or in a fiduciary capacity, but not as a part of a regular business.
The new rules 3a5-4 and 3a44-2 define the types of activities that would identify a person as a de facto market maker by further defining the phrase “as a part of a regular business” in that context.
Specifically, the rules further define “as a part of a regular business” to include “engag[ing] in a regular pattern of buying and selling securities,” or “government securities,” “that has the effect of providing liquidity to other market participants by”:
- “Regularly expressing trading interest that is at or near the best available prices on both sides of the market for the same security and that is communicated and represented in a way that makes it accessible to other market participants;” or
- “Earning revenue primarily from capturing bid-ask spreads, by buying at the bid and selling at the offer, or from capturing any incentives offered by
- trading venues to liquidity-supplying trading interest.”
Persons engaging in such activities are now deemed to be “dealers” or “government securities dealers” and are required to register with the Commission under Section 15(a) or Section 15C, as applicable. They must also become a member of an SRO and comply with federal securities laws and regulatory obligations, as well as applicable SRO and Treasury rules and requirements.
The rules were adopted after a three-against-two vote with Commissioner Mark T Uyeda and Commissioner Hester M Peirce, highlighting the major impact it will have on principal trading firms, proprietary trading funds, private funds, and other market participants who will now have to register with the Commission and become members of an SRO.
The SEC urges individuals engaging in activities requiring dealer registration to register as soon as possible. The compliance date is one year from the effective date of the final rules, which is 60 days after the date of publication in the Federal Register.
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HKMA releases consultation paper on crypto-assets prudential treatment
The Hong Kong Monetary Authority (HKMA) has released a preliminary consultation paper (CP) on new regulations for the prudential treatment of crypto-asset exposures. The proposed rules align with two consultative documents issued by the Basel Committee on Banking Supervision in October 2023 and December 2023, on the disclosure of crypto-asset exposures and amendments to the crypto-asset standard.
The proposed regulations categorise crypto-assets into two groups:
- Group 1 includes qualifying tokenised assets and stablecoins, which will be subject to the risk-based capital requirements of the existing Basel capital framework.
- Group 2 includes crypto-assets that do not meet all of the Group 1 classification conditions and will be subject to a more conservative capital treatment.
Crypto-assets, in that context, cover private digital assets that rely on cryptography and distributed ledger technologies (DLT) or similar technologies.
Dematerialised securities that are issued through DLT or similar technologies are also included in this definition.
However, dematerialised securities that use electronic versions of traditional registers and databases that are centrally administered are not covered. This new standard also does not cover the prudential treatment of central bank digital currencies (CBDCs).
The CP also covers other requirements, including liquidity risk, risk management systems supervisory review, and disclosure requirements.
The HKMA plans to issue another consultation on the draft amendments to the rules in Q1 2025 and implement these new standards no earlier than 1 July 2025. The HKMA invites comments on the proposal of this CP by 6 May 2024.
Click here to read the full RegInsight on CUBE’s RegPlatform