Featured Article: 21st Century KYC/AML for Hong Kong
By CryptoBLK
In the past decade, regulators, both locally and internationally, have passed strict anti-money laundering/know your customer (AML/KYC) regulations that have forced banks to invest heavily in this function just to be in compliance. This pressure on banks has translated into high fees and difficult requirements for SMEs & startups to meet when they are registering with the Companies Registry (CR) in Hong Kong and opening bank accounts. This has given rise to a growing Trust & Company Service Provider (TCSP) industry that is 7203 strong here in Hong Kong, according to the (CR).
TCSPs exist to help SMEs with all of their company secretary tasks including registration & bank account opening. TCSPs are required to follow the stipulations of the 2018 Anti- Money Laundering Ordinance (AMLO) and to take all reasonable measures to mitigate Money Laundering & Terrorist Financing. In order to do this the TCSPs are strictly regulated and must execute their own ‘AML/CTF systems’ which comprise of risk assessments, customer due diligence, ongoing monitoring of clients, suspicious transactions reporting, record keeping, and staff training.
Despite the recent update in the AMLO, the tasks performed by TCSPs are still full of redundancies and inefficiencies and if Hong Kong is to remain competitive as a major startup hub in Asia, we need to modernize and simplify the requirements TCSPs perform on behalf of their clients, the SMEs. One such inefficiency that SMEs face is having to go through very similar KYC processes multiple times, when they register with the CR and then again when they open a bank account or two or three. Each time the SME (or TCSP on their behalf) must provide many of the same KYC documents to the bank who then needs to take time to verify the documents. This redundancy and timely verification process can now be almost entirely eliminated using advances in cryptography and blockchain.
The AMLO in a way that opens the KYC process up to collaboration & innovation. Financial Institutions (FIs) are now allowed to work with intermediaries like the Licensing Regime Trust or Company Service Providers (TCSPs) to share the AML/KYC burden. The problem is, with over a decade of building regulatory walls around the financial industry, FIs and TCSPs are having difficulty reestablishing a productive working relationship outside of their silo’s. Getting this working relationship right is key for both promoting entrepreneurship in Hong Kong and increasing the ‘ease of doing business’ while also improving the KYC/AML process and regulatory regime.
Blockchain offers the perfect medium to break down these silos and allow TCSPs & banks to share sensitive information for a few reasons:
Instant verification: every document has a hash code associated with it and users will always check the hash code associated with the document to the hash code kept on the blockchain by all participants to verify authenticity.
Immutability: Users can be confident in the documents stored and shared on a blockchain due to the immutability. It is impossible to change any document without changing the hash code, which is automatically checked when a document is accessed.
Resiliency: the distributed nature of blockchain ensures that if portions of the network go down the rest of the network will continue to perform.
Innovation: blockchain is an extensible technology that facilitates future innovation and added usability.
It’s time for Hong Kong to update the corporate registration and bank account opening processes to leverage 21st century technology and enhance Hong Kong’s reputation as an entrepreneurial hub in Asia.
(The eKYC Alliance is RegTech platform using blockchain & cryptography to tackle KYC/AML challenges that regulators, businesses, TCSPs, and financial institutions are facing.)