Today Compliance Matters interviewed Hannah Cassidy, a partner at the international law firm of Herbert Smith Freehills and an expert on financial regulation in Hong Kong, about the latest developments there.

Q: What have the regulators in Hong Kong been doing on the anti-money-laundering front?

A: The Securities and Futures Authority has published a list of its expectations. Hong Kong is about to receive a Financial Action Task Force evaluation team - in fact they might have landed in Hong Kong already. Singapore went through the procedure recently. These evaluations are more rigorous than they were before and we expect the FATF report on Hong Kong to be hard-hitting. Hong Kong has passed several amendments to regulations and opened several enforcement cases in the run-up to the evaluation but there is definitely room for improvement, so one of the things that the SFC has done in the last 18 months is issue a circular setting out good and bad practices.

Q: This is a common occurrence among modern regulators, isn't it? They issue their opinions about whether a practice is good or bad without linking those opinions to any rules. Do you think they are guilty of 'regulation-creep,' i.e. trying to influence firms to meet new standards without actually bothering pass any rules?

A: Yes, that does happen, but I think the regulators also do it - and this might be particular to Hong Kong - to potentially fill in the gaps when the rules or laws are not crystal clear. The regulator wants everybody to know what it thinks the rules mean. I think Hong Kong is a bit unique here because we are somewhat stymied in getting legislation through LegCo (the legislative council, pronounced 'lejco,' which serves as Hong Kong's alternative to a parliament) because our process is very cumbersome. It's different in Singapore.

Sometimes, then, the regulators are forced to use this method. The manager-in-charge regime is a good example. They created a new category of regulated persons. The statute just refers to regulated persons and doesn't go into too much detail about who is to be included. The SFC has used a circular to clarify who is in that category, so there are now managers-in-charge. The phrase never existed before the circular was issued. It applies to heads of compliance, heads of AML, heads of equity research and others.

Q: What has been happening on the enforcement front?

A: The director of enforcement at the Hong Kong Monetary Authority, which is a mixture of a conduct regulator and a prudential regulator, said that he was not expecting zero failure. He wants to know if each financial firm has done its best to deter and detect money laundering. If you report it to the SFC, that puts you on the front foot.

There is now a much sharper focus on the role of senior management. They have to approve policies and high-risk customers. They are now involved in the approval of ongoing monitoring and I'm 90% sure that they are also obliged by the rules to be involved when there is a red flag.

Q: Do the regulators send 'attestation letters' to CEOs and order them to certify that their firms are compliant?

A: No, that's something unique to the UK. Recently they've compelled firms in the UK to issue a new one to attest that they've got plans to transition away from the London Interbank Offered Rate/LIBOR to alternative interest rate benchmarks.

Q: The  Asia Securities Industry and Financial Markets Association, based in Hong Kong, wants to standardise AML rules and guidelines throughout Asia for some reason. Does your law firm have anything to do with that?

A: We work with ASIFMA and co-author papers with them. We co-authored their guide to best AML/KYC practice in the summer. The object of our paper was to convince the regulators that inconsistencies between the rules of different countries and the fragmentation that brings are not a good thing. Rules often conflict with each other and this makes things difficult and expensive for banks.

Q: I don't suppose that the regulators are too worried about what makes things easy for the banks, but they are always worried about regulatory arbitrage (firms taking advantage of differences in rules and doing business in countries whose regulations are lax). Did you do any research on that?

A: No, not so much. We looked at how to flag inconsistencies to do with identification and the verification of documents. I think that regulators do care about what makes things easy for banks, though, because they are concerned about what's good for the marketplace and they are worried about de-risking, where banks shed customers and counterparties because they have to expend too much effort to deal with them compliantly. De-risking takes people out of the financial system, and this troubles regulators greatly.

Q: Have the Paradise Papers (issued last November) had any effect on compliance in Hong Kong?

A: No. Their effect was more at a high level, reinforcing the global trends in AML. It reminded firms that when things go wrong, tax issues are bound to attract massive media attention. If you haven't obeyed the right client money rules, not so much, but if you've helped some terrorists with their finances, or breached sanctions, or helped tax evasion, that is more serious.

* Hannah Cassidy can be reached on +852 2101 4133 at hannah.cassidy@hsf.com