AML Compliance for Virtual Asset Service Providers in Hong Kong

Why AML Compliance Is Critical for VASPs

Virtual assets are high-risk from an anti-money laundering (AML) and counter-terrorist financing (CTF) perspective. The speed, pseudonymity, and borderless nature of blockchain transactions make virtual asset services an attractive vehicle for illicit financial flows. Regulators worldwide, including Hong Kong's Securities and Futures Commission (SFC) and Financial Intelligence Unit (JFIU), have responded with increasingly stringent AML/CTF requirements for virtual asset service providers (VASPs).

In Hong Kong, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and the SFC's Anti-Money Laundering Guidelines form the primary legal framework for VASP AML compliance. Failure to comply can result in licence revocation, substantial fines, and criminal prosecution of responsible officers.

The VATP Licensing Regime and AML Obligations

With effect from June 2023, virtual asset trading platforms (VATPs) operating in Hong Kong are required to apply for a licence from the SFC under the AMLO as amended. Licensed VATPs are subject to the same AML/CTF obligations as other regulated financial institutions under the AMLO, including banks, brokers, and money service operators.

The SFC's Guidelines for Virtual Asset Trading Platform Operators (the VATP Guidelines) set out detailed requirements for AML/CTF compliance that VATPs must implement as a condition of licensing. These requirements are broadly aligned with the Financial Action Task Force (FATF) Recommendations on virtual assets and virtual asset service providers.

Customer Due Diligence (CDD)

All licensed VATPs must conduct customer due diligence on new and existing clients. CDD requirements include:

Identity Verification: VATPs must verify the identity of all clients using reliable, independent source documents. For individual clients, this typically includes government-issued photo identification and proof of address. For corporate clients, due diligence extends to directors, beneficial owners, and controlling persons.

Beneficial Ownership: VATPs must identify and verify the ultimate beneficial owners of corporate clients, including those owning 25% or more of the client entity. Ownership structures involving trusts, foundations, or holding companies must be traced through to identify the natural persons in ultimate control.

Enhanced Due Diligence (EDD): Higher-risk clients — including politically exposed persons (PEPs), clients from high-risk jurisdictions, and those engaging in unusual transaction patterns — are subject to enhanced due diligence, including senior management approval for establishing the business relationship and more frequent monitoring.

Ongoing Monitoring: VATPs must continuously monitor client transactions to detect unusual or suspicious activity, update client information periodically, and assess whether existing CDD measures remain appropriate as the client relationship evolves.

The Travel Rule

Hong Kong has implemented FATF's Travel Rule for virtual asset transfers. Under the Travel Rule, VATPs must collect, verify, and transmit specified originator and beneficiary information for virtual asset transfers above the applicable threshold (currently USD 1,000 equivalent).

The practical implementation of the Travel Rule presents significant challenges for VATPs, as the information must be transmitted securely to the receiving VATP or financial institution before or simultaneously with the transfer. VATPs must implement technical solutions to comply with the Travel Rule, and must have procedures for handling transfers to or from non-compliant counterparts or unhosted (self-custodied) wallets.

Blockchain Analytics and Transaction Monitoring

Leading VATPs use blockchain analytics tools (such as Chainalysis, Elliptic, or TRM Labs) to screen virtual asset transactions and wallet addresses against sanctions lists and to identify wallets associated with illicit activity. The SFC expects VATPs to use appropriate technological tools to supplement their human-led AML/CTF monitoring.

Transaction monitoring systems should be calibrated to generate alerts for unusual patterns, including large or structuredtransactions, rapid movement of funds through multiple addresses, and transactions involving wallets associated with known illicit actors or sanctioned jurisdictions.

Suspicious Transaction Reporting

VATPs are required to file Suspicious Transaction Reports (STRs) with the Joint Financial Intelligence Unit (JFIU) when they know or suspect that a transaction or activity involves proceeds of crime or is connected with terrorist financing. The duty to report overrides any duty of confidentiality owed to the client. Tipping off the client about an STR filing is a criminal offence.

Record Keeping

VATPs must maintain records of client identification documents and transaction records for a minimum of five years from the end of the business relationship or the date of the transaction. Records must be maintained in a form that permits reconstruction of transactions and is accessible for regulatory inspection.

How Alan Wong LLP Can Help

Alan Wong LLP advises virtual asset businesses on AML/CTF compliance programme design and implementation, SFC licensing applications, regulatory gap analyses, staff training frameworks, and responses to regulatory enquiries. We assist VATPs with drafting and reviewing AML policies, procedures, and manuals, and work with technical specialists to support Travel Rule implementation. Contact us to discuss how we can help your virtual asset business meet its AML/CTF obligations.