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A new licensing regime for virtual asset service providers (VASPs) will come into effect on 1 March 2023 under proposed amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (the AMLO) which were introduced to Hong Kong’s Legislative Council on 6 July 2022. The proposed amendments are set out in the Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Bill 2022 (Amendment Bill) which also introduce a new registration regime for dealers in special metals and stones (DPMS) an objective to impose statutory anti-money laundering and counter-terrorist financing (AML/CTF) obligations on these two sectors.
1. Any person seeking to carry on the business of VASP in Hong Kong will have to apply for a licence from the Securities and Futures Commission (SFC). The relevant person is subject to the meeting of a fit and proper test as well as the AML/CTF and other regulatory requirements.
2. Any person seeking to carry on the business of regulated activities as a DPMS for a customer in Hong Kong will have to be registered under register with the Commissioner of Customs and Excise (C&E) under a Two-Tiers DPMS registration regime, based on whether or not the DPMS intends to or may engage in cash transactions at or above HK$120,000 in the course of its business (specified cash transactions). Applicants who intend to or may engage in any specified cash transaction in the course of their DPMS business will be subject to an additional fit and proper test and only this tier of registrants will be subject to the AML/CTF obligations under the AMLO.
Highlight below the key issues of VASPs:
Licensing Requirements For Licensed VASPs In order to be eligible for a VASP license, the VASP license applicant must be a locally incorporated company with a permanent place of business in Hong Kong or a company incorporated elsewhere but registered in Hong Kong under the Companies Ordinance (Cap. 622). An applicant wishing to be licensed as a VASP must demonstrate to the SFC that:
1. it is a fit and proper person to be licensed to provide the VA service. 2. it has at least 2 persons fit and proper to be responsible officers (“ROs”), each of whom are of sufficient authority within the applicant and at least one of whom must be an executive director. 3. each director of the applicant is fit and proper. 4. the ultimate beneficial owner of the applicant is fit and proper to be the ultimate beneficial owner of a VASP licensee.
Licensing Conditions and AML/CTF Requirements The Amendment Bill provides that the SFC may impose a range of licensing conditions on a VASP licensee, including, but not limited to:
1. Financial conditions (e.g. capital requirements). 2. Risk management policies and procedures. 3. Anti-money laundering and counter-terrorism financing policies and procedures & in compliant with AMLO's requirements such as customer due diligence, record keeping requirements, suspicious transactions reporting, training, etc. 4. Management of client assets. 5. Financial reporting and disclosure. 6. Virtual asset listing and trading policies. 7. Market abuse policies. 8. Cybersecurity. 9. Avoidance of conflicts of interest.
Key Offences Under The VASP Regime The Amendment Bill creates an enforcement regime VA service providers in Hong Kong or to the Hong Kong public as follows:
1. A person carrying on a business of providing a VA service without a license would be an offence punishable on conviction on indictment to a fine of HK$5 million and 7 years imprisonment, and in the case of a continuing offence, a further fine of HK$100,000 for every day during which the offence continues.
2. The offence of active marketing of a VA service by unlicensed persons, whether in Hong Kong or elsewhere, to the public of Hong Kong. This offence in particular is likely to have a significant impact on crypto exchanges based outside of Hong Kong and without a Hong Kong presence “on the ground” but which market their services to the Hong Kong public, including through, for example, Chinese language advertising.
3. The offence of making false or misleading statements in connection with an application for the grant of a license.
4. The offence of making fraudulent or reckless misrepresentations with the intention to induce others to invest in VAs.
5. The offence of employing any deceptive or fraudulent device, scheme or act, directly or indirectly, in a transaction involving VA.
Importantly, the offences of making fraudulent or reckless misrepresentations or employing deceptive or fraudulent devices, schemes or acts per point 4 and 5 above are not limited to transactions on licensed VASPs and as such will capture all individuals and/or firms engaging in this type of conduct with a substantial nexus to Hong Kong.
6. In non-compliance with the statutory AML/CFT requirements, the licensed VASP and its ROs commit offences and upon conviction, each is liable to a fine of HK$1 million and 2 years imprisonment. Further, licensed VASPs and ROs in contravention may face disciplinary actions, including suspension or revocation of licenses.
For details of the Bills, please refer to https://www.gld.gov.hk/egazette/pdf/20222625/es32022262516.pdf
Disclaimer: Whilst reasonable care has been taken in provision of information above, it does not constitute legal or other professional advice. INTERSHORES does not accept any responsibility, legal or otherwise, for any error omission and accepts no responsibility for any financial or other loss or damage that may result from its use. In particular, readers are advised to take appropriate professional advice before committing themselves to any involvement in jurisdictions, vehicles or practice.
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