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A Deep Dive into Hong Kong’s New AML Guidelines for VASPs: Part I

Catarina Veloso
Catarina Veloso
May 25, 2023
Catarina, a seasoned legal and regulatory expert, is the Regulatory & Compliance Senior Associate at Notabene. Previously heading legal at Fractal, co-chairing the Identify WG at INATBA, Catarina holds advanced law degrees from Technische Universität Berlin and Universidade Nova de Lisboa.
A Deep Dive into Hong Kong’s New AML Guidelines for VASPs: Part I
Summary

Today, Hong Kong’s Securities and Futures Commission (SFC) concluded its consultation on the regulation of virtual asset trading platforms and has gazetted the "Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers)" which sets forth  Travel Rule obligations. The SFC received 152 written submissions from the industry, including one from the Notabene Regulatory and Compliance team.

In a series of two blog posts, we will cover key Travel Rule compliance takeaways. Part I covers the entry into force, information transmission obligations, pre-transaction requirements, and self-hosted wallet obligations. Part II will cover obligations for Intermediaries, Travel Rule solution requirements, how to handle deposits, and more.

Key Travel Rule Takeaways:

Hong Kong VASPs are required to comply with Travel Rule obligations from June 1, 2023

On June 1, 2023, significant progress is expected to be achieved in the adoption of the Travel Rule in the APAC region. Both Hong Kong and Japan will require Virtual Asset Service Providers (VASPs) to begin complying with Travel Rule requirements. This milestone holds great importance as more than 80 crypto firms from mainland China and other countries have expressed interest in establishing a presence in Hong Kong, bolstering the city's ambition to become a leading hub for Web3 technologies.

In addition, European VASPs are gearing up for a busy summer, with the implementation of the Travel Rule in Portugal on July 15 and in the United Kingdom on September 1. These developments indicate a growing global trend toward enhancing regulatory oversight and anti-money laundering measures within the cryptocurrency industry. 

Get in touch with Notabene and start a fast and straightforward rollout of the Travel Rule through our SAFE Implementation Phases

Figure 1: Upcoming Travel Rule enforcement deadlines. 

VASPs are required to transmit information for all transactions, with a limited scope of information required for transactions below HKD 8,000

Hong Kong reinforces the APAC trend of requiring Travel Rule information transmission regardless of transaction amount while allowing a more limited scope of information to be transmitted for transactions below HKD 8,000. 

Figure 2: Travel Rule enforcement thresholds.  


According to sections 12.11.5, 12.11.6, and 12.11.9, [1] Originator VASPs are required to obtain, record and transmit to the Beneficiary VASP the required originator and beneficiary information, as follows:

Figure 3: Travel Rule information transmission obligations in Hong Kong 🇭🇰. (Source: HKSFC’s Anti-Money Laundering and Counter-Terrorist Financing Ordinance, § 12.11.5, 12.11.6, and 12.11.9)

Notabene helps VASPs comply with Travel Rule requirements globally by embedding information transmission requirements in our transaction validation system. By integrating with Notabene, Hong Kong VASPs can easily validate transactions against Notabene’s embedded jurisdictional rules and ensure that all the required information - considering the transaction amount - is included in the Travel Rule message.  

Travel Rule obligations must be fulfilled pre-transaction

According to sections 12.11.10 and 12.11.13, [2] the Originator VASP must submit the required Travel Rule information to the Beneficiary VASP before or when the virtual asset transfer is conducted

Figure 4: Key finding #7 from Notabene’s 2023 State of Crypto Travel Rule Compliance Report

According to Notabene’s 2023 State of Travel Rule Report, 37.5% of companies reporting to be Travel Rule-compliant fulfill requirements post-transaction, which does not align with the FATF’s pre-transaction requirements nor with the requirements in Hong Kong. In fact, 11.6% of respondents to our survey fulfill Travel Rule obligations only after the settlement of the corresponding blockchain transactions, up from 7% in the previous report, representing a 51% increase since last year. While this demonstrates progress, it highlights the need for jurisdictions to clarify that the Travel Rule is a pre-transaction obligation

Notabene welcomes the clarification by the SFC that Travel Rule compliance needs to be performed pre-transaction. This is particularly important given the specific characteristics of virtual asset transactions: settlement is immediate and irreversible; hence, only pre-transaction actions can effectively mitigate risk.

Through our partnership with Fireblocks, Notabene offers the first fully integrated solution between custody and the Travel Rule, allowing VASPs to smoothly tie Travel Rule compliance and transaction settlement. 

Account ownership verification is required when transacting with self-hosted wallets and higher-risk VASPs

Hong Kong joins Singapore 🇸🇬, Switzerland 🇨🇭, Germany 🇩🇪 and the European Transfer of Funds regulation in requiring VASPs to verify the customers’ wallet ownership when transacting with self-hosted wallets. Notabene helps VASPs comply with these requirements by providing a self-hosted wallet identification tool, allowing customers verify the ownership of the self-hosted wallet before transacting.

Figure 5: A comparison of the approach to self-hosted wallets

The novelty of Hong Kong’s approach is requiring that same verification when transacting with VASPs that present higher ML/TF risks. In these cases, the VASP must verify that the customer owns or controls the account maintained with the higher-risk VASPs by obtaining, for instance, a statement of account. [3]

The move by Hong Kong’s SFC to tighten regulations on VASPs demonstrates a rising trend toward greater clarity in global Travel Rule guidelines. As part of these regulatory changes, Hong Kong VASPs must comply with Travel Rule requirements from June 1, 2023, affecting VASPs across the region. Given the growing interest from numerous crypto firms to establish their presence in Hong Kong, this has significant implications.

Notabene’s role in this landscape is paramount, offering the industry’s only pre-transaction decision-making solution that ensures seamless compliance with these regulatory measures. Our service, which includes an integrated solution between custody and the Travel Rule and a self-hosted wallet identification tool, has the potential to significantly streamline the process of regulatory compliance for all VASPs, particularly in Hong Kong.

Stay tuned for part two.

References

[1] 12.11.5 Before carrying out a virtual asset transfer involving virtual assets that amount to not less than $8,000, an ordering institution must obtain and record the following originator and recipient information144:

(a) the originator’s name;

(b) the number of the originator’s account maintained with the ordering institution and from which the virtual assets are transferred (i.e. the account used to process the transaction) or, in the absence of such an account, a unique reference number assigned to the virtual asset transfer by the ordering institution;

(c) the originator’s address 145 , the originator’s customer identification number 146 or identification document number or, if the originator is an individual, the originator’s date and place of birth;

(d) the recipient’s name; and

(e) the number of the recipient’s account maintained with the beneficiary institution and to which the virtual assets are transferred (i.e. the account used to process the transaction) or, in the absence of such an account, a unique reference number assigned to the virtual asset transfer by the beneficiary Institution.

12.11.6  Before carrying out a virtual asset transfer involving virtual assets that amount to less than $8,000, an ordering institution must obtain and record the following originator and recipient information:

(a) the originator’s name;

(b) the number of the originator’s account maintained with the ordering institution and from which the virtual assets are transferred or, in the absence of such an account, a unique reference number assigned to the virtual asset transfer by the ordering institution;

(c) the recipient’s name; and

(d) the number of the recipient’s account maintained with the beneficiary institution and to which the virtual assets are transferred or, in

the absence of such an account, a unique reference number assigned to the virtual asset transfer by the beneficiary institution.

12.11.9 An ordering institution must submit the required originator and recipient information obtained and held under paragraphs 12.11.5 and 12.11.6 (hereafter referred to as "required information") to the beneficiary institution securely (see paragraph 12.11.12).

[2] 12.11.10 In addition, the ordering institution must submit the required information to the beneficiary institution immediately (see paragraph 12.11.13).

12.11.13 “Immediately” referred to in paragraph 12.11.10 means that the ordering institution should submit the required information prior to, or simultaneously or concurrently with, the virtual asset transfer (i.e. the submission must occur before or when the virtual asset transfer is conducted)149.

[3] 12.10.6: Conversely, where a virtual asset deposit or payment is made via an ordering or beneficiary institution that presents higher ML/TF risk or an unhosted wallet, the FI should ascertain the customer’s ownership or control of the account (or wallet address as appropriate) maintained with the ordering or beneficiary institution, or the unhosted wallet, by taking appropriate measures, for example:

(a) using appropriate confirmation methods141; and

(b) obtaining evidence from the customer such as statement of account issued by the VA transfer counterparty.

141 Examples of confirmation methods may include requesting the customer to perform the micropayment test (i.e. by effecting a virtual asset transfer with an (typically small) amount specified by the FI) or message signing test (i.e. by signing a message specified by the FI which is then verified by the FI).

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