Can I receive payment from a third party who is not my customer for my goods and services? Would there be any money laundering issues from receiving third-party payments?

Requests from clients for third-party payment arrangements should normally be refused. Requiring a third-party to receive a client’s funds should be rare. Such arrangements are acceptable in exceptional and legitimate circumstances due to the financial crime and compliance risks associated with such transactions. For instance, third-party payments may be used to disguise the true beneficial owner or source of funds. Therefore, extra care must be taken to address the associated risks such as money laundering and misappropriation of funds.

The SFC has laid down key control measures that should be adopted by parties accepting third-party payment arrangements. This article will help you understand (i) the SFC regulations with respect to accepting third-party payments; and (ii) how licensed corporations should protect themselves from risks; and (iii) the exceptional circumstances for accepting third-party payments;. Additionally, the issues surrounding money laundering would be examined.  

What should licensed corporations be aware of when accepting third-party payment arrangements?

SFC has explained effective practices that corporations should take with respect to third-party payment arrangements. Corporations should adopt a policy that discourages third-party deposits and payments. Should such arrangements be accepted, detailed policies, procedures and controls should be in place to mitigate the risks. The acceptance should be subject to stringent management control.

Corporations accepting third-party payment arrangements should clearly explain, in approved policies and procedures, the exceptional circumstances and the control measures to be carried out by designated managers and staff.

Before accepting third-party payment arrangements, due diligence should be conducted on a risk-sensitive basis to determine (i) the identity of the third-party payor; (ii) the relationship between the client and the third-party payor; and (iii) the reason for receiving the deposit from the third-party. Appropriate measures should be taken to ensure the payment is reasonably in line with the client’s profile and normal commercial practices. Low risk third-party payors include immediate family members, beneficial owners and affiliated companies of corporate clients and regulated custodians and lending institutions. High risk third party payors should be subjected to enhanced security measures.

The acceptance of a third-party deposit or payment should be approved by the Manager-in-charge (MIC) of Anti-money Laundering and Counter-Terrorist Financing or Money Laundering Reporting Officer. If the third-party poses a higher risk, dual approval would be required by the MIC and a member of the senior management.

Furthermore, the SFC encourages corporations to require clients to designate bank accounts held in their own names or that of acceptable third parties for transactions. This is to make it easier for determination of the third-party payor or payee before transacting, as well as for ascertainment the origin of payments.

Corporations should also continuously monitor these accounts and pay attention to red flags relating to third-party transactions, which include, but not limited to, the following:

1. Transactions that have no legitimate purpose and/or appear not to have a commercial rationale;
2. Where the size or pattern of transactions is out of line with any pattern that has previously emerged;
3. A customer located in a place outside Hong Kong who uses local accounts to trade on stock or futures exchanges located in that place;
4. A number of transactions by the same customer in small amounts relating to the same investment, each purchased for cash and then sold in one transaction, the proceeds being paid to a person other than that customer
5. Wash trading (i.e. the entry of matching buys and sells in particular securities or futures or leveraged foreign exchange contracts) through multiple accounts does not result in a bona fide market position and might be used to transfer funds between accounts by generating offsetting losses and profits in different accounts.

Further investigation should be prompted if suspicious activities are identified. A suspicious transaction report should be made to the Joint Financial Intelligence Unit.

Exceptional circumstances where third-party transaction arrangements can be accepted

Third-party deposits and payments should be accepted under exceptional and legitimate circumstances having regard to the client’s profile and normal commercial practices. Examples of these rare circumstances include the following:

1. A client enters into a service agreement under which the proceeds of the sale of securities are transferred to a third-party custodian or margin financier;
2. A client requests the firm to effect payments for fees and charges under service agreements with a third-party asset manager which manages the client’s investment portfolio in a securities account maintained with the firm;
3. A client requests the firm to draw from his account to pay the seller or deposit funds into an escrow agent’s account for the purchase of listed shares or bonds off-exchange.

The “SAFE” approach promoted by the Joint Financial Intelligence Unit may be adopted:

S: screening the account for suspicious indicators

A: asking the customers appropriate questions

F: finding out the customer’s records

E: evaluating all the above information

Money laundering issues when receiving third-party payments

Money laundering is an offence for a person who transfers illegally obtained money (i.e. crime proceeds) so it appears to have originated from a legitimate source. One of the ways is to pay the crime proceeds for legitimate goods or services. Under the Organised and Serious Crimes Ordinance, it is an offence to deal with any property that one knows or has reasonable grounds to believe that any part of that property represents criminal proceeds. Thus, one can be liable whether he pays or receives money from an illegal source.

A Customer Due Diligence (CDD) needs to be conducted in accordance with the Guideline on Anti-Money Laundering and Counter Financing of Terrorism. It is advisable that you should always conduct CDD to identify the customer, verify the customer’s identity and obtain information on the purpose and intended nature of the business relationship. When a third-party acts on behalf of the customer, you should identify that person and verify his identity and authority to act on behalf of that customer.

What to do if I suspect money laundering from received payments?

In case of suspicion, you should make a Suspicious Transaction Report as soon as practicable to the Joint Financial Security Unit. Your report should include the following:

• Personal particulars of the person(s) or company involved in the suspicious transaction;
• Details of the suspicious financial activity;
• The reason why the transaction is suspicious, i.e. what the suspicious activity indicators are;
• The explanation, if any, given by the person about the transaction.

Key Takeaways

• Corporations are not prohibited to arrange third-party payments but should not accept such arrangements unless they can put in place adequate control measures to mitigate financial risks.
• Third-party payment arrangements are allowed in exceptional circumstances
• If you suspect money laundering from received payments then make a Suspicious Transaction Report as soon as practicable

References:

1. Key control measures and examples of effective practices: https://apps.sfc.hk/edistributionWeb/api/circular/openAppendix?lang=EN&refNo=19EC39&appendix=0
2. Circular to licensed corporations and associated entities – Third-party deposits and payments: https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/aml/doc?refNo=19EC39
3. Guideline on Anti-Money Laundering and Counter- Financing of Terrorism (For Licensed Corporations): https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/guidelines/guideline-on-anti-money-laundering-and-counter-financing-of-terrorism-for-licensed-corporations/guidelineonantimoneylaunderingandcounterfinancingofterrorismforlicensedcorporations.pdf
4. “SAFE” Approach: https://www.jfiu.gov.hk/en/str.html
5. Money Laundering: https://www.police.gov.hk/ppp_en/04_crime_matters/ccb/fst.php?msg_id=cct_06
6. https://www.nd.gov.hk/pdf/moneylaundering/AML_eng_part3.pdf

Suspicious Transaction Report: https://www.jfiu.gov.hk/en/str.html

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