Regulation Focus Series | Article 6: Hong Kong

As one of Asia’s major financial centers, the Special Administrative Region of Hong Kong hosts numerous financial institutions and is a hotbed of digital and blockchain innovation. In this installment of our Regulatory Focus Series, we take a look at the Fragrant Harbour’s financial regulations and AML/KYC requirements for regulated businesses.

Hong Kong is a bustling metropolis on the South China Sea and one of the world’s leading financial centers. The ‘Fragrant Harbor’ — as it is known among locals — has served as an important port city since its founding by British traders in 1841. 

Despite its small size, Hong Kong boasts one of the largest economies in Asia with a Gross Domestic Product (GDP) per capita that is among the highest in the world. It also ranks highly for competitiveness, economic freedom, and ease of doing business. Its strategic location and dynamic economy have enabled it to become one of Asia’s most vibrant cities and a major hub for international trade and finance.

Classified as a Special Administrative Region (SAR) of China since the British handed over sovereignty to Beijiing in 1997, Hong Kong has retained a degree of autonomy from the mainland that includes its own legal system, currency, immigration policy, and free market economy. This ‘one country, two systems’ approach gives Hong Kong certain freedoms that are not permitted on mainland China while keeping it under Beijing’s ultimate sovereignty. 

While tensions have risen in recent years due to increased interference and oversight from Beijing, both jurisdictions continue to negotiate terms that uphold their respective interests while largely maintaining Hong Kong’s status as a global financial center. 

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Hong Kong Regulatory Authorities

The Hong Kong Monetary Authority (HKMA) is an independent government department responsible for maintaining monetary and financial stability in Hong Kong. It also regulates banks, deposit-taking companies, money services operators, insurers and other financial institutions including Virtual Asset Service Providers (VASPs). 

Its main objectives are to promote the soundness and efficiency of the banking system in Hong Kong, ensure that it meets international standards for anti-money laundering (AML) and counter terrorist financing (CTF) regulations, as well as foster a competitive environment for businesses. 

The Hong Kong Securities and Futures Commission (SFC) is a statutory body established by law to regulate activities related to securities and futures markets in Hong Kong. It carries out functions that include: 

  • Supervising market intermediaries such as brokers, dealers, fund managers and advisers
  • Monitoring trading activities on exchanges
  • Investigating insider dealing or market manipulation
  • Reviewing prospectuses before they are issued
  • Licensing persons who wish to carry out regulated activities
  • Providing investor education programs
  • Promoting best practices among industry participants
  • Collecting statistics on capital markets activity
  • Advising policy makers on regulatory issues affecting capital markets development in Hong Kong
  • Enforcing compliance with its rules

Rules for Regulated Businesses

Businesses operating in regulated industries must comply with all rules and regulations of the HKMA and SFC. These include:

  • Disclosure requirements 
  • AML and KYC measures
  • Capital adequacy ratios
  • Corporate governance principles
  • Margin requirements for leveraged products 
  • Client asset protection provisions

Regulatory bodies such as the SFC also enforce a range of compliance rules that firms must adhere to in order to remain compliant. Firms must ensure they are up-to-date with these regulations or face penalties ranging from fines to suspension or revocation of their operating license. 

Rules for VASPs and Crypto Companies

Hong Kong has implemented a comprehensive set of regulations for crypto companies and Virtual Asset Service Providers (VASPs). These regulations are intended to ensure the safety and security of customers, protect against financial crime, and foster a compliant and legitimized digital asset industry. 

Crypto companies must register with the SFC as an intermediated service provider. This requires all companies to obtain a Type 7 or 9 license. A Type 7 license allows crypto companies to provide automated trading services while a Type 9 license allows them to advise their customers on investing in digital assets. Companies must also pass the SFC’s fit and proper test before they can be licensed, which includes background checks on their personnel.

The SFC has  also issued new rule proposals designed to protect investors from financial risks associated with crypto trading. The proposed rules would require crypto exchanges to: 

  • Adhere to AML standards
  • Obtain a license from the SFC 
  • Implement measures such as customer due diligence and record keeping. 
  • Maintain an adequate amount of financial resources and cyber security systems in order to protect customers’ funds from theft or fraud

In addition, platforms will be required to report any suspicious activity and keep track of market manipulation. Finally, any platform offering margin financing services must also meet certain criteria in order to ensure the safety of its clients’ investments. These proposed regulations are seen as a step forward towards legitimizing cryptocurrency trading in Hong Kong and will help ensure greater consumer protection in the industry.

In addition to registering with the SFC, VASPs must also be registered with the Customs and Excise Department as Money Service Operators (MSOs). This requires VASPs to have adequate systems in place for customer identification, record-keeping, transaction monitoring, staff training, compliance procedures etc. All MSOs must also apply for authorisation before they can be regulated by customs law. 

VASPs and other financial and regulated businesses need to collect information on their customers that include:

  • Full name
  • Date of birth
  • Nationality
  • A government-issued ID or passport number 

In order to comply with Hong Kong’s AML regulations, crypto companies must also report suspicious transactions to the Joint Financial Intelligence Unit (JFIU) within seven days from when the transaction was reported. 

VASPs are also required by law to conduct customer due diligence before engaging in any transactions that involve virtual assets that could be used as a means of payment or money laundering activities. They are further obliged to monitor ongoing transactions and report any suspicious activity immediately. 

Finally, businesses must adhere to taxation principles applicable in Hong Kong when dealing with virtual assets. Tax payable depends on whether profits or gains arising from cryptocurrency activities constitute income or capital gains under Hong Kong tax law. 

How KYC-Chain Can Help

Is your business regulated by the HKMA or looking to do business in Hong Kong? KYC-Chain’s end-to-end onboarding solution allows our clients to securely and efficiently carry out the necessary KYC checks to comply with Hong Kong AML and KYC laws — whether they are using the financial center as a global base of operations or interacting with customers in its market. 

Get in touch and we’ll be happy to show you how KYC-Chain can be your KYC onboarding solution.