U.S. and Hong Kong (2008)
U.S. Department of State
International Narcotics Control Strategy Report - 2008
Released by the Bureau of International Narcotics and Law Enforcement Affairs
March 2008
Volume II: Money Laundering and Financial Crimes
2008 International Narcotics Control Strategy Report
Released by the Bureau of International Narcotics and Law Enforcement Affairs
March 2008
Country Reports
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Hong Kong
Hong Kong is a major international financial center. Its low taxes and simplified tax system, sophisticated banking system, shell company formation agents, and the absence of currency and exchange controls facilitate financial activity but also make Hong Kong vulnerable to money laundering. The Hong Kong Special Administrative Region Government (HKSARG) considers the primary sources of laundered funds to be corruption (both foreign and domestic), tax evasion, fraud, illegal gambling and bookmaking, prostitution, loan sharking, commercial crimes, and intellectual property rights infringement. Laundering channels include Hong Kong's banking system, legitimate and underground remittance and money transfer networks, trade-based money laundering, and large-ticket consumer purchases--such as property, gold and jewelry. The proceeds from narcotics trafficking are believed to be only a small percentage of illicit proceeds laundered.
Money laundering is a criminal offense in Hong Kong under the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRoP) and the Organized and Serious Crimes Ordinance (OSCO). The money laundering offense extends to the proceeds of drug-related and other indictable crimes. Money laundering is punishable by up to 14 years' imprisonment and a fine of HK $5,000,000 (approximately U.S. $641,000).
Money laundering ordinances apply to covered institutions--including banks and nonbank financial institutions--as well as to intermediaries such as lawyers and accountants. All persons must report suspicious transactions of any amount to the Joint Financial Intelligence Unit (JFIU). The JFIU does not investigate suspicious transactions itself but receives, stores, and disseminates suspicious transactions reports (STRs) to the appropriate investigative unit. Typically, STRs are passed to the Narcotics Bureau, the Organized Crime and Triad Bureau of the Hong Kong Police Force, or to the Customs Drug Investigation Bureau of the Hong Kong Customs and Excise Department.
Financial regulatory authorities have issued anti-money laundering guidelines reflecting the revised FATF Forty Recommendations on Money Laundering to institutions under their purview and monitor compliance through on-site inspections and other means. The Hong Kong Monetary Authority (HKMA) is responsible for supervising and examining compliance of financial institutions that are authorized under Hong Kong's Banking Ordinance. The Hong Kong Securities and Futures Commission (SFC) is responsible for supervising and examining compliance of persons that are licensed by the SFC to conduct business in regulated activities, as defined in Schedule 5 of the Securities and Futures Ordinance. The Office of the Commissioner of Insurance (OCI) is responsible for supervising and examining compliance of insurance institutions. Hong Kong law enforcement agencies provide training and feedback on suspicious transaction reporting.
Financial institutions are required to know and record the identities of their customers and maintain records for five to seven years. The filing of a suspicious transaction report cannot be considered a breach of any restrictions on the disclosure of information imposed by contract or law. Remittance agents and moneychangers must register their businesses with the police and keep customer identification and transaction records for cash transactions above a legal threshold for at least six years. A directive from Hong Kong's Monetary Authority (HKMA) reduced this threshold amount from HK $20,000 (approximately U.S. $2,565) to HK $8,000 (approximately U.S. $1,000), effective January 1, 2007.
Hong Kong does not require reporting of the movement of any amount of currency across its borders, or of large currency transactions above any threshold level. Hong Kong is examining the effectiveness of its existing regime in interdicting illicit cross border cash couriering activities. Reportedly, Hong Kong is deliberating ways of complying with FATF Special Recommendation Nine but does not intend to put in place a "declaration system" and is instead considering a disclosure-based system. Law enforcement agents in Hong Kong are already empowered to seize criminal proceeds anywhere in the jurisdiction, including at the border.
Hong Kong does not make a distinction between onshore and offshore entities, including banks. Its financial regulatory regimes are applicable to residents and nonresidents alike. No differential treatment is provided for nonresidents, including with respect to taxation and exchange controls. The HKMA regulates banks. The Office of Commissioner of Insurance (OCI) and the Securities and Futures Commission (SFC) regulate insurance and securities firms, respectively. All three impose licensing requirements and screen business applicants. There are no legal casinos or Internet gambling sites in Hong Kong.
In Hong Kong, it is not uncommon to use solicitors and accountants, acting as company formation agents, to set up shell or nominee entities to conceal ownership of accounts and assets. Many of the more than 500,000 international business companies (IBCs) created in Hong Kong are established with nominee directors; and many are owned by other IBCs registered in the British Virgin Islands. The concealment of the ownership of accounts and assets is ideal for laundering funds. Additionally, some banks permit shell companies to open bank accounts, based only on vouching by the company formation agent. In such cases, the HKMA's anti-money laundering guidelines require banks to verify the identity of the owners of the company, including beneficial owners. The bank should also assess whether the intermediary is "fit and proper." However, solicitors and accountants have filed a low number of suspicious transaction reports in recent years; and Hong Kong officials seek to improve their reporting through regulatory requirements and oversight.
Hong Kong's open financial system has long made it the primary conduit for funds transferred out of China. Hong Kong's role has been evolving as China's financial system gradually opens. On February 25, 2004, Hong Kong banks began to offer Chinese currency-based (renminbi or RMB) deposit, exchange, and remittance services. Later that year, Hong Kong banks began to issue RMB-based credit cards, which could be used both in Mainland China and in Hong Kong shops that had enrolled in the Chinese payments system, China Union Pay. In November 2005, Hong Kong banks were permitted modest increases in the scope of RMB business they can offer clients. The new provisions raised daily limits and expanded services. This change brought many financial transactions related to China out of the money-transfer industry and into the more highly regulated banking industry, which is better equipped to guard against money laundering. Banks in Hong Kong are still not permitted to make loans in RMB.
Despite Hong Kong's efforts to encourage capital shifts to the banking industry, Chinese capital controls impel entities in both Hong Kong and Mainland China to use underground financial systems to avoid restrictions on currency exchange. A well-publicized June 2007 raid by Chinese police on an underground bank in Shenzhen resulted in the detention of six suspects, including a Hong Kong-based businesswoman, accused of facilitating the transfer of RMB 4.3 billion (over U.S. $570 million) out of China since the beginning of 2006--including transfers by Chinese state-owned enterprises. Authorities believe the majority of these funds were used to purchase properties and stocks in Hong Kong. Media reports indicate that such underground exchange houses are rampant in Guangdong province and have transferred more than RMB 200 billion (U.S. $26.7 billion) out of China since 2006.
Under the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRoP) and the Organized and Serious Crimes Ordinance (OSCO), a court may issue a restraining order against a defendant's property at or near the time criminal proceedings are instituted. 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 narcotics trafficking may be seized, and a court may order its forfeiture. Legitimate businesses can be seized if the business is the "realizable property" of a defendant. Realizable property is defined under the DTRoP and OSCO as any property held by the defendant, any property held by a person to whom the defendant has directly or indirectly made a gift, or any property that is subject to the effective control of the defendant. The Secretary of Justice is responsible for the legal procedures involved in restraining and confiscating assets. There is no time frame ascribed to freezing drug proceeds or the proceeds of other crimes. Regarding terrorist property, a formal application for forfeiture must be made within two years of freezing. Confiscated or forfeited assets and proceeds are paid into general government revenue. In July 2002, the legislature passed several amendments to the DTRoP and OSCO to strengthen restraint and confiscation provisions. These changes, effective January 1, 2003, lowered the evidentiary threshold for initiating confiscation and restraint orders against persons or properties suspected of drug trafficking, eliminated the requirement of actual notice to an absconded offender, eliminated the requirement that the court fix a period of time in which a defendant is required to pay a confiscation judgment, authorized courts to issue restraining orders against assets upon arrest rather than charging, required the holder of property to produce documents and otherwise assist the government in assessing the value of the property, and created an assumption under the DTRoP (to make it consistent with OSCO) that property held within six years of the violation by a person convicted of drug money laundering constitutes proceeds from that money laundering.
According to JFIU figures, as of September 30, 2007, the value of assets under restraint was $199 million, and the value of assets under a court confiscation order but not yet paid to the government was $9.85 million. JFIU also reported that, as of September 30, 2007, $56.5 million had been confiscated and paid to the government since the enactment of DTRoP and OSCO. Hong Kong has shared confiscated assets with the United States.
Hong Kong Customs and Hong Kong Police are responsible for conducting financial investigations. The Hong Kong Police has a number of dedicated units responsible for investigating financial crime, but the primary units responsible for investigating money laundering and terrorist financing are the Commercial Crimes and Narcotics Bureaus in Police Headquarters. There were 157 prosecutions for money laundering during the first 6 months of 2007. Hong Kong Customs had a significant money laundering case in 2006 in which the mastermind of a local pirated optical disc syndicate was convicted of money laundering involving HK $27.4 million (U.S. $3.5 million) accrued over a four-year period from piracy activities. This conviction was upheld on appeal in May 2007. The judge increased the sentence by 50 percent, in accordance with OSCO provisions. Hong Kong Customs arrested two individuals charged with copyright infringement and money laundering in 2007.
The JFIU receives and analyzes STRs to develop information that could aid in prosecuting money laundering cases and, in suitable cases, distributes reports to law enforcement investigating units. The JFIU can refer cases to all Hong Kong law enforcement agencies and, in certain circumstances, to regulatory bodies in Hong Kong as well as to overseas law enforcement bodies. The JFIU also conducts research on money laundering trends and methods and provides case examples (typologies) to financial and nonfinancial institutions to assist them in identifying suspicious transactions. The JFIU has no regulatory responsibilities. Since 1994, when OSCO first mandated the filing of suspicious transaction reports (STRs), the number of STRs received by JFIU has generally increased. In the first nine months of 2007, 12,308 STRs were filed, of which 1798 were referred to law enforcement agencies. This compares with 10,782 STRs filed for the same period in 2006, 13,505 STRs filed during all of 2005, 14,029 filed during 2004, and 11,671 during 2003. The JFIU launched an electronic system for reporting STRs by registered users in late 2006
On July 3, 2004, the Legislative Council passed the United Nations (Anti-Terrorism Measures) (Amendment) Ordinance. This law is intended to implement UNSCR 1373 and the FATF Special Eight Recommendations on Terrorist Financing in place in July 2004. It extends the HKSARG's freezing power beyond funds to the property of terrorists and terrorist organizations. It also criminalizes the provision or collection of funds by a person intending or knowing that the funds will be used in whole or in part to commit terrorist acts. Hong Kong's financial regulatory authorities have directed the institutions they supervise to conduct record searches for assets of suspected terrorists and terrorist organizations listed on the UN 1267 Sanctions Committee's consolidated list and the list of Specially Designated Global Terrorists designated by the United States pursuant to E.O. 13224.
The People's Republic of China (PRC) represents Hong Kong on defense and foreign policy matters, including UN affairs. Through the PRC, the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, the UN Convention against Corruption, and the UN International Convention for the Suppression of the Financing of Terrorism are all applicable to Hong Kong
To help deal with anti-money laundering (AML) issues from a practical perspective and reflect business needs, the Hong Kong Monetary Authority (HKMA) has recently coordinated the establishment of an Industry Working Group on AML. The Group, which includes representatives of some 20 authorized institutions, has met twice. Three subgroups have been established to share experiences and consider the way forward on issues such as PEPs (politically exposed persons), terrorist financing, transaction monitoring systems and private banking issues. The subgroup on Customer Due Diligence (CDD) issued guidelines on issues related to PEPs in November 2007. The HKMA has also implemented a number of initiatives on AML issues, including issuing circulars and guidance to authorized institutions on combating the financing of weapons of mass destruction conducting in-depth examinations of institutions' AML controls and setting out best practices for AML in high-risk areas--such as correspondent banking, private banking, and remittance.
The HKMA circulated guidelines that require banks to maintain a database of terrorist names and management information systems to detect unusual patterns of activity in customer accounts. The Securities and Futures Commission (SFC) and the Office of the Commissioner of Insurance (OCI) circulated guidance notes in 2005 that provided additional guidance on CDD and other issues, reflecting the new requirements in the Revised FATF Forty Recommendations on Money Laundering and Special Recommendations on Terrorist Financing. In 2006, the OCI and the SFC revised their guidance notes to take into account the latest recommendations by the FATF.
Other bodies governing segments of the financial sector are also engaged in advancing anti-money laundering efforts. The Hong Kong Estates Agents Authority, for instance, has drawn up specific guidelines for real estate agents on filing suspicious transaction reports; and the Law Society of Hong Kong and the Hong Kong Institute of Certified Public Accountants are in the process of drafting such guidance for their members.
Hong Kong is an active member of the Financial Action Task Force's FATF and Offshore Group of Banking Supervisors and was a founding member of the Asia Pacific Group on Money Laundering (APG).
In November 2007, the APG and FATF conducted a site visit as part of their joint mutual evaluation of Hong Kong. The mutual evaluation report will be discussed at FATF's June 2008 Plenary
Hong Kong's banking supervisory framework is in line with the requirements of the Basel Committee on Banking Supervision's "Core Principles for Effective Banking Supervision." Hong Kong's JFIU is a member of the Egmont Group and is able to share information with its international counterparts. Hong Kong is known to cooperate with foreign jurisdictions in combating money laundering.
Hong Kong's mutual legal assistance agreements generally provide for asset tracing, seizure, and sharing. Hong Kong signed and ratified a mutual legal assistance agreement (MLAA) with the United States that came into force in January 2000. Hong Kong has MLAAs with 22 other jurisdictions. Hong Kong has also signed surrender-of-fugitive-offenders (extradition) agreements with 17 countries, including the United States, and has signed agreements for the transfer of sentenced persons with ten countries, also including the United States. Hong Kong authorities exchange information on an informal basis with overseas counterparts and with Interpol.
The Government of Hong Kong should further strengthen its anti-money laundering regime by establishing threshold reporting requirements for currency transactions and putting into place "structuring" provisions to counter evasion efforts. Per FATF Special Recommendation IX, Hong Kong should also establish mandatory cross-border currency reporting requirements. Hong Kong should continue to encourage more suspicious transaction reporting by lawyers and accountants, as well as by business establishments, such as auto dealerships, real estate companies, and jewelry stores. Hong Kong should also take steps to stop the use of "shell" companies, IBCs, and other mechanisms that conceal the beneficial ownership of accounts by more closely regulating corporate formation agents. Particularly, since Hong Kong is a major trading center, Hong Kong law enforcement and customs authorities should seek to address trade-based money laundering.
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U.S. and Hong Kong
