U.S. and Hong Kong (2002)

International Narcotics Control Strategy Report - 2001

Released by the Bureau for International Narcotics and Law Enforcement Affairs
March 2002

Section XII: Money Laundering and Financial Crimes

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Country Reports

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Hong Kong. Hong Kong is a major international financial center. Its low taxes, sophisticated banking system, and absence of currency and exchange controls facilitate financial activity, but also make it vulnerable to money laundering. The primary sources of laundered funds are narcotics-trafficking, tax evasion, fraud, illegal gambling and bookmaking. Laundering channels include Hong Kong's banking, remittance, money transfer networks, and its underground banking system. Hong Kong is substantially in compliance with the Financial Action Task Force's (FATF) 40 recommendations and has developed a strong anti-money laundering regime, though improvements should be made. It is a regional leader in its anti-money laundering efforts and is serving as the 2001-2002 FATF President.

Money laundering is a criminal offense in Hong Kong under the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRoP) and Organized and Serious Crimes Ordinance (OSCO). The money laundering offense now extends to the proceeds of drug-related and other indictable crimes. Money laundering ordinances apply to all persons, including banks and non-bank financial institutions, as well as to intermediaries such as lawyers and accountants. All persons must report suspicious transactions to the Joint Financial Intelligence Unit (JFIU). Financial institutions are required to record the identities of their customers and maintain records for five to seven years. Hong Kong law provides that the filing of a suspicious transaction report shall not be regarded as a breach of any restrictions on the disclosure of information imposed by contract or law. Statutes that came into effect in June 2000 require remittance agents and moneychangers to register and to keep transaction and customer identification records for cash transactions equal to or over U.S. $2,564 (HKD 20,000).

There is no distinction made in Hong Kong between onshore and offshore banks or insurers, and no differential treatment for non-residents, including on tax, exchange controls, or disclosure of information regarding the beneficial owner of accounts or other legal entities. Hong Kong classifies banks according to their scope of business, there are three tiers of deposit-taking institutions: fully licensed banks, restricted license banks, and deposit-taking institutions. The Hong Kong Monetary Authority (HKMA) regulates banks. The Insurance Commission and the Securities and Futures Commission regulate insurance and securities firms, respectively. All three impose licensing requirements and conduct background checks on business applicants. Legally established casinos or Internet gambling sites do not exist in Hong Kong.

In Hong Kong it is not uncommon to use solicitors and accountants to set up shell or nominee entities to conceal ownership of accounts and assets. The concealment of the ownership of accounts and assets is ideal for the laundering of funds. Solicitors and accountants have filed only a handful of suspicious transaction reports in recent years.

Under the DTRoP and OSCO, a court may issue a restraint order against a defendant's property at or near the time criminal proceedings are instituted. The property includes money, goods, real property, and instruments of crime. A court may issue confiscation orders at the value of a defendant's proceeds from illicit activities. Cash imported into or exported from Hong Kong that is connected to drug trafficking may be seized, and a court may order its forfeiture. Hong Kong law provides for an application to be made by the overseas jurisdiction to share in assets realized. Hong Kong's mutual legal assistance agreements provide for asset sharing. Hong Kong has shared confiscated assets with the United States.

The government reintroduced to the legislature, in November 2000, an amendment to strengthen the DTRoP and OSCO. The amendment was designed to improve the chances of obtaining successful prosecutions by reducing the evidentiary threshold for money laundering offenses and suspicious transactions reporting. It would have increased penalties for money laundering offenses and strengthened confiscation provisions. The amendment did not pass due to opposition from the banking, accountancy, and legal sectors, and also legislator concerns that the lower evidentiary threshold might lead to conviction of innocent persons. The government intends to continue to pursue strengthened legislation in this area in 2002.

In 2001, the banking, securities, and insurance industries filed 6296, 65, and 29 suspicious transaction reports, respectively. From January to November 2001, there were 34 prosecutions for money laundering offenses and 5 convictions. The Hong Kong government reported no particular increase in financial crimes over the past year and has not found evidence to indicate narcotics proceeds are being used to fund smuggling activities.

Through the People's Republic of China, Hong Kong is subject to the 1988 UN Drug Convention, an active member of the FATF and the Offshore Group of Banking Supervisors, and also a founding member of the Asia/Pacific Group on Money Laundering. Hong Kong authorities cooperate with law enforcement agencies of other governments investigating narcotics-related financial crimes. Hong Kong has signed and ratified a mutual legal assistance agreement with the U.S., which came into force in January 2000. It has also signed mutual legal assistance agreements with Australia, France, the United Kingdom, New Zealand, Italy, the Republic of Korea, Switzerland, Portugal, the Philippines, Ireland, and Canada. Hong Kong has initialed such agreements with Israel, India, Argentina, Brazil, the Czech Republic, Germany, Poland, Singapore, and South Africa. These agreements provide for the exchange of information for all serious crimes, including money laundering. Hong Kong's banking supervisory framework has, in general, addressed all the areas covered by the 1997 Basel Committee Core Principles for Effective Banking Supervision. An amendment to the Banking Ordinance in 1999 allows the HKMA to disclose information to an overseas supervisory authority about individual customers subject to conditions regarding data protection. The JFIU is a member of the Egmont Group and is able to share information with its international counterparts.

Hong Kong should strengthen its anti-money laundering regime by establishing threshold reporting requirements for transactions exceeding specified amounts and put into place "structuring" provisions to counter evasion efforts. It should establish cross-border currency reporting requirements and encourage more suspicious transactions reporting by lawyers and accountants as well as business establishments, such as auto dealerships, real estate companies, and jewelry stores. Steps should also be taken to discourage the use of "shell" companies and other mechanisms that conceal the beneficial ownership of accounts. Hong Kong should consider more aggressive enforcement and strengthening of its laws on remittance agents and moneychangers.

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• Full report of "International Narcotics Control Strategy Report, 2001"