Maybe you need a payment licence or maybe you do not? Recent developments in regulation of money services in Hong Kong.

By Michelle Chan, Hwee Yong Neo

01-2021

In Hong Kong, any person who intends to carry out "money services" must apply for a money services operator ("MSO") licence from the Customs and Excise Department ("CED") under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) ("AMLO").

This regime has been in place since 2012. However, whether a particular payment service constitutes money services under the AMLO is not necessarily straightforward as there has been few clear judicial and regulatory guidance on the precise ambit of money services under the AMLO. In this short newsletter, we discuss recent cases which provide some clarity and how these decisions might impact, in particular, innovative online payment businesses and services.

What is "money services"?

The definition of "money services" under the AMLO covers two types of services operated in Hong Kong: "money changing service" and "remittance service". "Money changing service" is, as the name suggests, the service of exchanging of currencies (but note that it does not include the typical service exchange of foreign currencies for local currencies by tourists at hotel counters, which is considered "incidental"). On the other hand, "remittance service" is defined to mean the transfer of funds from Hong Kong to a place outside of Hong Kong or receipt of funds in Hong Kong from a place outside of Hong Kong. It also includes any arrangements for such transfer or receipt. Money services under the AMLO is not limited to the traditional physical counters providing money changing or remittance services but also covers mobile operations with no fixed premises, including online operations, as will be discussed below.

How do the courts interpret money services?

While there currently are not many reported cases touching on the scope of money services in general, recent judicial developments appear to show that the courts are willing to take a more commercial and practical approach in determining whether a person is in reality carrying out a money service.

In the recent case of HKSAR v Fu Guangmiao [2020] HKCU 2676, the appellant was convicted of operating money services without a MSO licence and the subsequent appeal to the Court of First Instance ("CFI") was denied. The appellant in this case had offered his colleagues in a university a service operated on an online forum where he would accept payments in Hong Kong Dollar (HKD) into his bank account in Hong Kong and transfer the corresponding sum in Renminbi (RMB) from his bank account in Mainland China to a designated payee account in Mainland China. The appellant argued, among others, that (a) the remittance was for the appellant's personal needs to cover medical bills and did not involve any commercial purpose; (b) the appellant did not engage in a true remittance business as it was only a one-way remittance (i.e. only HKD to HKD) and not two-way (i.e. HKD to RMB); and (c) the appellant did not, and did not intend to, make any real profit from the remittances.

While the CFI did not discuss further in relation to (c) above, the CFI held, in relation to (a), that the appellant had made the service available to anyone who could access the online platform and the service provided by the appellant was not short and had a certain degree of continuity. This showed that the service of the appellant was not purely for his personal or private needs. In relation to (b), the CFI held that the purpose of the service was essentially to transfer his customers' funds denominated in HKD in Hong Kong to their RMB accounts in the Mainland i.e. the purpose was still to remit money (i.e. the judge did not appear to accept that a remittance service within the meaning of the AMLO must involve an actual "two-way" remittance between the operator and the customer). Accordingly, the CFI found that the appellant was operating a money services business without a licence under AMLO. While this was based on the principles set out in the CFI case of HKSAR v Ye Weichang [2016] 137 HKCU 137 (as discussed below), the court distinguished this case from HKSAR v Ye Weichang as the appellant in the latter case was not primarily engaged in money services.

In HKSAR v Ye Weichang, the appellant essentially ran a business of "topping up" his Hong Kong customers' e-wallet accounts, known as Alipay accounts, in Mainland China for the purposes of making payments on the Chinese e-commerce platform "Taobao". The appellant would first request his customers in Hong Kong to deposit a sum of money in HKD into the appellant's personal bank account in Hong Kong. The HKD amount represents the amount of RMB that the appellant's customers need to "top up", calculated at the exchange rate on the day plus 0.2% (the additional 0.2% is the service fee charged by the appellant in a transaction). Subsequently, the appellant would transfer the latter sum of money in RMB from his bank account in Mainland China to his customer's Alipay accounts in Mainland China which, either the appellant would then use to make payment on Taobao on behalf of the customers or the customers would do so themselves. The appellant was charged with the offence of operating a money services business without a MSO licence under the AMLO and was convicted.

However, the conviction was quashed on appeal and the appellant was held not to be engaged in providing money services under the AMLO as the nature of the appellant's business did not constitute "money services" but merely involves remittance of funds. In quashing the lower court's decision, the CFI held that the purpose of the MSO provisions under the AMLO was not to regulate remittances where the nature of the business is not to provide money services, but merely involves remittance of funds as an ancillary part of the service provided. The court further explained that services do not constitute money service under the AMLO simply because remittance of funds are involved. In other words, the nature of the business as a whole must constitute money service and not merely an ancillary part of it.

What does this mean for payment businesses?

1. The two cases above illustrates that a payment service would not necessarily fall within the ambit of money services under AMLO simply because it also involves the provision of a remittance service, as the courts appear to be concerned with the substance and nature of the business as a whole rather than the individual elements of the business viewed in isolation. Accordingly, for businesses which also provide money services as part of their service, it is important for such payment businesses to evaluate their service as a whole and assess whether they are in essence providing a money service in Hong Kong. The line drawn by the two cases above is notably fine.

2. As Hong Kong does not have a single ordinance which regulates payment services, in addition to considering whether the MSO may apply, there are other regulations in Hong Kong which a payment service provider should also consider, including, for example, the Payment Systems and Stored Value Facilities Ordinance (Cap. 584).