ANTI-MONEY LAUNDERING AND COUNTER-TERRORIST FINANCING (AMENDMENT) BILL 2022
Deputy President, in my capacity as Chairman of the Bills Committee on Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (“the Bills Committee”), I now report on the main deliberations of the Bills Committee.
The Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (“the Bill”) seeks to amend the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”) to establish a licensing regime for virtual asset service providers (“VASPs”) and a registration regime for precious metals and stones (“PMS”) dealers. Members in general support the Bill, and urge the authorities to strike a balance between the need for regulation, the development of the market and the need for minimizing compliance cost of the sectors.
Members have discussed the definition of virtual asset (“VA”) in the Bill, and requested the Administration to clarify whether the definition covers “non-fungible tokens” (commonly known as “NFTs”), as well as how the definition can cater for the rapid development of the VA market.
The Administration has explained that in most cases, where an NFT merely represents a genuine digital representation of a collectible, it will unlikely fall within the definition of “VA” as set out in the Bill. If the actual nature and functions of a specific NFT fall within the definition of “VA”, a person’s activity in relation to such NFT will require a licence only if such activity falls within the definition of “VA service” (i.e. automated trading services provided by centralized VA exchanges).
The Administration has pointed out that the Bill has empowered the Securities and Futures Commission (“SFC”) to prescribe characteristics that constitute the definition of a VA, and the Secretary for Financial Services and the Treasury (“SFST”) to determine, either generally or in a particular case, whether any digital representation of value is to be regarded as a VA under AMLO. In addition, SFST is also empowered to expand the scope of regulation by amending the definition of “VA service” when necessary to cover other forms of VA activities in the future. SFC and SFST may exercise the aforesaid powers by notice published in the Gazette, and such notices would be subsidiary legislation subject to the negative vetting procedure of the Legislative Council.
Regarding the licensing criteria for VASPs, the Bills Committee has examined the factors SFC would consider in determining whether a licence applicant as well as its responsible officers and licensed representatives are fit and proper persons when approving the relevant licence applications.
The Administration has indicated that the Bill has already set out in detail the factors that SFC should consider, which include the persons’ financial status or solvency; their educational or other qualifications, or experience, and reputation, character, reliability and financial integrity; whether they have been convicted of an offence under AMLO or other similar offences. SFC will publish guidelines in this regard, and the standards to be set out in these guidelines are expected to be generally aligned with those set out in the “Fit and Proper Guidelines” published by SFC under section 399 of the Securities and Futures Ordinance.
As regards promoting the development of the VA market in Hong Kong, members have noted that the primary objective of the Bill is to combat money laundering and terrorist financing (“ML/TF”) relating to VAs and protect investors, so as to provide a clear regulatory framework. The Administration believes that the establishment of a regulatory regime for VASPs will provide regulatory clarity to VASPs and further pave the way for the healthy and orderly development of the VA sector in Hong Kong.
Regarding the registration regime for PMS dealers, the Bills Committee and the industry have expressed concern about Category A registration, as well as the scope of the definition of “precious product” and the “50% value threshold” therein. Members are particularly concerned that Category A registration will increase the operating costs of the dealers, and about the inadvertent breach of the law by dealers who may not be aware of the PMS content of the products they sell and hence unaware of the need to register.
Having regard to the views expressed by the Bills Committee and the industry, the Administration has agreed to propose amendments to make the following adjustments: (1) providing that only PMS dealers carrying out non-cash transactions at HK$120,000 or above will need to be registered as Category A registrants; in other words, PMS dealers carrying out cash or non-cash transactions below HK$120,000 will not be required to register; and (2) amending the definition of “precious product”, so as to respond to the industry’s concern over the operational difficulties brought by the value threshold of PMS as specified in the definition. The Bills Committee welcomes the amendments proposed by the Administration, and considers that the aforesaid proposed amendments are in compliance with the requirements of the Financial Action Task Force and can also meet the needs of law enforcement and risk assessment, while at the same time facilitating industry compliance and alleviating the burden on the industry.
Deputy President, the above mentioned is my report on the deliberation of the Bills Committee, and the following are some of my views and observations when scrutinizing the Bill. As Chairman of the Bills Committee, I am glad to see that all members have actively and rationally made suggestions in respect of the deficiencies of the Bill in a careful, responsible and pragmatic manner. I would also like to commend the relevant government agencies responsible for the Bill, which of course include colleagues from the Financial Services and the Treasury Bureau, SFC, the Customs and Excise Department and the Department of Justice. They have listened very patiently, accepted Members’ views and improved the provisions of the Bill to meet the legislative requirements of international organizations without imposing an onerous compliance burden on the relevant sectors.
This time around, striking a balance between the development and regulation of the VA industry has been one of the focuses during our discussion on the Bill. That is, we should also provide appropriate support for this industry with enormous potential to develop steadily while strengthening the regulation on it.
The scope of regulation is another focus of concern. At present, it only covers the carrying on of a business of operating a VA trading platform, while other forms such as over-the-counter VA trading, peer-to-peer VA trading, stand-alone VA payment or custodian system are not subject to regulation. The Government has explained that a VA exchange is the most prevalent and developed VA business seen in Hong Kong nowadays. Other VA activities are scanty, and their fund movements are fully traceable by means of the measures implemented by financial institutions. Yet, I believe that the VA industry is developing by leaps and bounds, and market changes can emerge rather rapidly. Therefore, it is absolutely necessary for the Government to undertake to review the development of the VA market from time to time. The Government must conduct a review of the implementation of this regulatory regime to see whether it is necessary to further expand the scope of regulation in the future.
The requirement of “providing services to professional investors only” (“the PI requirement”) is another focus. There are views that it will hinder the business of VASPs and the future development of the VA sector. It is also hoped that the Government would not exclude non-PIs from the service across the board. The Government has indicated that given the tech-savvy and highly speculative nature of the VA industry compared to the traditional financial services industry, it is necessary to assess carefully the risks involved in investment, and therefore imposing the PI requirement at the initial stage is considered a more prudent approach.
I am very pleased to learn that the Government has indicated that, upon passage of the Bill by this Council, it would conduct a consultation on the detailed regulatory requirements of the new regime, and consider, taking into account the feedback from the industry and the public, whether it is possible to allow non-PIs to conduct transactions within licensed VA exchanges provided that additional investor protection measures are in place. Of course, I think the premise is to do a good job in investor education, so as to prevent small investors from participating in investment purely from the perspective of “following the trend”.
In addition, I believe the most important part is the amendment of the registration regime for PMS dealers. Dealers who are initially required to register as “Category A registrants” under the proposed Ordinance are mostly small- and medium-sized enterprises (“SMEs”) in Hong Kong. Requiring such dealers to register will create unnecessary compliance burden on them. After we have actively reflected such views at the meetings, the Government has immediately accepted our constructive views and made adjustments by proposing an amendment to provide that dealers carrying out transactions below HK$120,000 will not be required to register. This has significantly reduced the impact on SMEs.
The scope of the definition of “precious product” and the “50% value threshold” therein are of course another matter of concern. At the meetings, a number of members were concerned about the inadvertent breach of the law by dealers who may not be aware of the PMS content of the products they sell and hence unaware of the need to register with the Commissioner of Customs and Excise. After listening to such views, the Government has removed the requirement taking into account the operational difficulties and the relatively low level of ML/TF risks involved. It seems to be more stringent, but it is actually easier to enforce, thereby making it a perfect arrangement.
Deputy President, as the executive authorities and the legislature are playing different roles, sometimes it is inevitable for us to hold different views and have different considerations. Despite this, we can seek common ground while reserving differences as long as both parties can maintain active and positive communication in the overall interest of the Hong Kong society and the public. The Committee Stage amendments to the Bill in this exercise are excellent examples. I call upon Honourable colleagues to support the Bill and all the amendments.
Deputy President, I so submit.