The hidden AML risks in jurisdictions with high corporate entity turnover

The latest statistics from the Hong Kong Company Registry (HKCR) show a remarkable surge in business activity. In 2023 alone, an impressive 132,000 new companies were incorporated in Hong Kong, catapulting the total to 1.4 million registered entities. This is no small feat for a jurisdiction with a population of just 7.4 million, but it mirrors other highly dynamic jurisdictions.

So, what does this mean for AML teams and compliance leaders within the walls of banks and innovative payment companies? The influx of these new entities is something of a double-edged sword. On one hand, it represents an abundance of potential new customers and business opportunities. On the other, it significantly increases the risk of inadvertently facilitating money laundering activities. This is because high volumes of new onboarding requests combined with a fast pace of change in existing clients’ corporations pose qualitative challenges beyond just larger workloads.

However, increasing workloads for compliance teams is, of course, a significant problem in all financial institutions, and more so in markets with a fast pace of change. Anti-money laundering compliance is a complex field of work requiring extensive training, so teams are not easily scalable to adapt to increased business demands. Since throwing more bodies at the problem is not an option, clashes between compliance team capacity and management plans to enter new markets and decreasing the time to revenue for new clients are almost inevitable.

Looking at Hong Kong figures, an astounding 9.2% of currently registered companies are new entities set up within the last 12 months. This isn’t merely a testament to business vibrancy but also a stark reminder of the highly dynamic nature of the corporate landscape, especially considering the 94,000 dissolutions of corporate entities in the same period. KYC-ops departments and compliance teams face two simultaneous challenges: The high pace of change increases the risk of missing crucial details. At the same time, traditional digital support tools such as entity databases are now significantly behind the quickly changing reality, reducing their usefulness sharply.

The evident pace of creation and destruction of corporate entities is not the only dynamic element impacting AML compliance, though. A more hidden layer comes to light when we look at the number of corporate filing documents submitted to the registry. In Hong Kong, almost 3m documents were filed in 2023, more than double the number of documents necessary for a straightforward continuation of the registered 1.4m entities. The excess 1.6m documents represent changes: new director appointments and resignations, new share issuances, charges added or removed, and changes to the shareholders or corporate structure. The real danger lies in the subtleties of risks associated with these changes. For example, a resigned director or a new share issuance filing can indicate a complete change of control. Traditional CDD processes that continue to screen the names on the original director’s lists or the original shareholders from the time of onboarding fall short of the regulatory requirements.

Another critical trend adding to the risks is the increasing prevalence of cross-border corporate structures. Companies structured with parent companies outside the local jurisdictions are no longer just the realm of large multinational corporations or trading hubs like Hong Kong and Singapore. In today’s globalised world, with trade flows and supply chains often transcending countries or continents, medium-sized and even smaller companies can have corporate structures extending across country boundaries. In this situation, beneficial ownership structures of companies can be complex and opaque, designed to obscure the flow of funds and the true nature of ownership using layering as a money laundering technique. Or they might accurately reflect a legitimate company’s needs for operating in multiple geographic locations. This trend makes it ever more challenging for compliance teams to distinguish between legitimately complex and artificially layered structures.

Thankfully, the regulatory landscape in Hong Kong is stringent, with a clear emphasis on AML compliance. The Hong Kong Monetary Authority (HKMA) and other local regulatory bodies have put detailed AML guidelines in place that financial institutions must follow. But this further increases the impact of the above risks on compliance teams in the jurisdiction. Non-compliance is not an option, given the severe penalties and reputational damage that can result from regulatory infractions. As we have seen, traditional digital approaches and processes based on manual teams are falling short and cannot scale

Integrating real-time business entity data into AML processes is one crucial area to turn to for solutions. New RegTech offerings like Know Your Customer’s global company registry platform can shift compliance processes from one-off compliance with point-checks to achieving continuous compliance covering the entire lifetime of a corporate entity. Company structure updates and changes in control are assessed in real-time and power a holistic and always-updated view of the corporate reality. At the same time, the automation offered by these tools radically reduces workloads on compliance teams. It frees up their time to deal with the real work of compliance: Evaluating the reasons behind a complex structure or understanding the actual flow of funds and the parallel flow of control in a cross-border structure, for example. But it isn’t technology alone that mitigates these risks. In this fast-paced environment, continuous learning and adaptation are essential. Compliance professionals must keep their fingers on the pulse of both the business and regulatory landscapes.

Integrating real-time business entity data into AML processes is one crucial area to turn to for solutions. New RegTech offerings like Know Your Customer’s global company registry platform can shift compliance processes from one-off compliance with point-checks to achieving continuous compliance covering the entire lifetime of a corporate entity. Company structure updates and changes in control are assessed in real-time and power a holistic and always-updated view of the corporate reality. At the same time, the automation offered by these tools radically reduces workloads on compliance teams. It frees up their time to deal with the real work of compliance: Evaluating the reasons behind a complex structure or understanding the actual flow of funds and the parallel flow of control in a cross-border structure, for example. But it isn’t technology alone that mitigates these risks. In this fast-paced environment, continuous learning and adaptation are essential. Compliance professionals must keep their fingers on the pulse of both the business and regulatory landscapes.