Banks and Export Controls: Hong Kong's New Dual-Use Goods Guidance Raises the Bar
The Hong Kong Monetary Authority (HKMA) has recently updated its Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) FAQs, introducing comprehensive guidance on dual-use goods. This development marks a significant shift in how financial institutions must approach export control compliance, reflecting a growing trend of regulatory convergence between banking and trade control obligations.
What Are Dual-Use Goods and Why Do They Matter?
Dual-use goods are products and materials that can serve both civilian and military applications. Common examples include certain chemicals, biotechnology, computing technology, and telecommunications equipment. While these items have legitimate commercial uses, they can also potentially be used in weapons development or military applications.
For banks, this presents a unique challenge. The new guidance recognizes that financial institutions face elevated risks through their involvement in trade-related financial services and exposure to international supply chains. As intermediaries in global trade, banks must now take a more active role in preventing the proliferation of weapons of mass destruction (WMDs) and understanding their customers' potential involvement in military-related activities.
Key Features of Hong Kong's New Guidance
The Hong Kong Association of Banks (HKAB) has produced what appears to be the most detailed guidance specifically for banks on dual-use goods internationally. The guidance adopts a comprehensive "whole-of-lifecycle" approach, requiring banks to consider dual-use goods at multiple stages:
Institutional Risk Assessment: Banks must evaluate their exposure to dual-use goods risks at an organizational level
Customer Due Diligence: Enhanced requirements for understanding customers' involvement with dual-use goods
Ongoing Monitoring: Continuous assessment of transactions and relationships
Staff Training: Specific focus on dual-use goods awareness and risk identification
Practical Implications for Banks
The guidance sets a new standard for banks' controls around dual-use goods, requiring them to:
Implement specific screening procedures for dual-use goods
Develop clear escalation pathways for risk scenarios
Train staff to identify and assess dual-use goods risks
Document their approach to dual-use goods compliance
Maintain detailed records of their assessments and decisions
Perhaps most significantly, banks must ensure they have "enough information to assess the potential extent of involvement of dual-use goods and whether any potential dual-use goods are used for money laundering, terrorist financing, sanctioned activities or proliferation financing purposes."
Broader Industry Implications
This development in Hong Kong reflects a broader international trend where banks are increasingly expected to act as gatekeepers not just for financial crime, but also for trade compliance. Several factors are driving this convergence:
Growing Complexity: The dual-use goods landscape is becoming more complex with technological advancement
International Pressure: Increased focus on preventing proliferation financing
Regulatory Evolution: More sophisticated approaches to trade-based financial crime
Looking Ahead
The Hong Kong guidance could serve as a model for other jurisdictions. Banks globally should take note of this development, as it likely signals a broader trend toward more rigorous expectations for financial institutions' role in trade control compliance.
For banks, this means:
Investment in technology and tools to identify and assess dual-use goods risks
Enhanced staff training programs
More sophisticated customer due diligence processes
Greater scrutiny of trade finance transactions
Conclusion
The HKMA's new guidance on dual-use goods represents a significant evolution in how banks must approach trade control compliance. While this creates additional compliance obligations, it also provides a clear framework for banks to manage these risks effectively. As similar requirements emerge in other jurisdictions, banks would do well to study and learn from Hong Kong's approach.
Financial institutions should view this not just as a compliance exercise, but as an opportunity to strengthen their risk management frameworks and contribute to international security objectives. The convergence of banking and trade control compliance is likely to continue, making early adaptation to these requirements a strategic advantage.
Patrick Goergen, The Export Control Expert & Explainer - 22 January 2025
