Hong Kong: Banking Confidentiality

Hong Kong's Anti-Money Laundering Legislation

As in many countries, confidentiality between clients and their professional advisers and bankers is enshrined in the law or in codes of conduct issued by professional associations. To understand the practical reality of banking and financial confidentiality in Hong Kong it is necessary instead to look at the legislation that has been put in place to penetrate confidentiality in particular circumstances.

Hong Kong has signed or initialled mutual assistance treaties with some of its major trading partners; but the most important pieces of legislation are The Drug Trafficking (Recovery of Proceeds) Ordinance and The Organized and Serious Crimes Ordinance. In addition the Securities and Futures Commission issues guidance which requires professionals and many types of financial manager to report suspicious transactions and circumstances.

The system works effectively: Speaking at the commencement of the plenary meeting of the Financial Action Task Force in Hong Kong in 2002, SAR Chief Secretary, Donald Tsang, revealed that around $2.3 billion in laundered assets had been seized by the jurisdiction's government over the past few years. Mr Tsang promised delegates attending the international anti-money laundering conference that his country would continue the fight against terrorist financing, money laundering, and tax evasion.

'When our statutory framework is further strengthened, we expect to be able to cut off even more avenues for laundering money,' he explained. 'We realize that Hong Kong, as a major international financial centre and arguably the world's freest economy, must rely on the integrity of its financial system and its robust and comprehensive anti-money laundering regime,' he added.

The new Securities and Futures Ordinance increased the powers of the Securities and Futures Commission (SFC) to supervise the operations of banks as well as securities dealers and brokerages. These powers came into effect gradually during 2002 as subsidiary legislation under the Ordinance was passed.

The Hong Kong Monetary Authority (HKMA) also provides relevant guidance to the territory's banks (see below for fuller details), and in June, 2004 issued a supplement to the territory's anti-money laundering guidelines. This was further updated in 2007, and can be found here: http://www.info.gov.hk/hkma/eng/guide/index.htm

The supplement set out the latest "Know-Your-Customer" principles, taking account of the requirements of the paper on "Customer Due Diligence for Banks" issued by the Basel Committee on Banking Supervision in October 2001 and the revised Forty Recommendations issued by the Financial Action Task Force on Money Laundering in June 2003.

Under the new guidelines, banks and financial service providers were urged to subject the transactions of higher risk customers to enhanced due diligence.

Those deemed by the HKMA to fall into the high risk category included politically exposed persons, correspondent banks from "non-cooperative jurisdictions", and offshore companies established in order to disguise beneficial ownership.

Executive director of banking policy at the HKMA, Simon Topping observed that: "Hong Kong has been successful in establishing itself as an international financial centre by being known as a place which has strong control, good regulation, good supervision and being clean. If some businesses get turned away because things are slightly dodgy, then so be it. We only want good businesses here."

Key features of the two anti-money laundering Ordinances are as follows:

The Drug Trafficking (Recovery of Proceeds) Ordinance ("DTRPO")

The DTRPO contains provisions for the investigation of suspected drug derived assets, the freezing of assets on arrest and the making of confiscation orders following conviction.

Section 25(1) of the DTRPO creates an offence of dealing with property known or believed to represent the proceeds of drug trafficking. "Dealing" in relation to property referred to in the definition of "drug trafficking" includes :-

• receiving or acquiring the property;
• concealing or disguising the property (whether by concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it or otherwise);
  disposing of or converting the property;
• bringing the property into or removing it from Hong Kong;
• using the property to borrow money, or as security (whether by way of charge, mortgage or pledge or otherwise).

The offence is punishable by a maximum of 14 years' imprisonment and a maximum fine of $ 5 million.

Under section 25A of the DTRPO where a person knows or suspects that any property, directly or indirectly, represents a person’s proceeds of; was used in connection with; or is intended to be used in connection with, drug trafficking, he shall as soon as it is reasonable for him to do so, disclose that knowledge or suspicion to an authorized officer. "Authorized officer" includes: any police officer; any member of the Customs and Excise Department; and the Joint Financial Intelligence Unit ("JFIU") which was established and is operated by the Police and Customs and Excise Department. In addition, the DTRPO provides that a person who is in employment can make disclosure to the appropriate person in accordance with the procedures established by his employer for the making of such disclosures. Failure to make disclosure is an offence: maximum penalty, a fine at level 5 and imprisonment for 3 months.

A person has a defence if he intended to make proper disclosure and there is a reasonable excuse for his failure.

Section 25A(2) of the DTRPO provides a person with an immunity from prosecution for an offence under section 25. If a person who has made a disclosure under section 25A(1) does any act in contravention of section 25(1) whether before or after such disclosure and the disclosure relates to that act then the person does not commit an offence under section 25(1) if :-

• (a) the disclosure is made before he does that act and he does that act with the consent of the authorized officer; or
• (b) the disclosure is made after he does that act, is made on his own initiative and is made as soon as it is reasonable for him to make it.

Section 25A(5) of the DTRPO makes it an offence in certain circumstances for a person to disclose to another person that a disclosure has been made under section 25A(1) or (4). It is, however, a defence to prove that he did not know or suspect that the disclosure concerned was likely to be prejudicial to the investigation or that he had lawful authority or reasonable excuse for making that disclosure. The maximum penalty for this offence is a fine of $500,000 and imprisonment for 3 years.

Section 25A(3)(b) provides that a disclosure made under the DTRPO shall not be treated as a breach of any restriction upon the disclosure of information imposed by contract or by rules of professional conduct or other provision and the person making the disclosure shall not be liable for damages for any loss arising out of the disclosure or any act done or omitted to be done in relation to the funds or investments in consequence of the disclosure.

Section 26 of the DTRPO provides that no witness in any civil or criminal proceedings shall be obliged to reveal the making of a disclosure nor to reveal the identity of the person making the disclosure except when such disclosure may be revealed in proceedings instituted to prosecute an offence under section 25, 25A or 26; or where the court is of the opinion that justice cannot fully be done between the parties without revealing the making of the disclosure or the identity of the person making the disclosure.

The Organized and Serious Crimes Ordinance ("OSCO")

The OSCO:

• (a) gives Police and Customs and Excise officers powers to effectively investigate organized crime and triads;
• (b) gives the Courts jurisdiction to confiscate proceeds of serious crimes;
• (c) creates an offence of money laundering in relation to indictable offences; and
• (d) enables the Courts, under appropriate circumstances, to receive information about the offender and the offence in order to determine whether the imposition of greater sentences is appropriate where the offence amounted to an organized crime/triad related offence or other serious offence.

The term "organized crime" is defined to include offences connected with triad societies, criminal syndicates and serious offences that involve substantial planning and organization. Most indictable offences are covered, including murder, kidnapping, drug trafficking offences, assault, rape, theft, robbery, obtaining property by deception, false accounting, firearms offences, manslaughter, bribery offences and smuggling offences.

The OSCO provides that the police, for the purpose of investigating an organized crime may apply to the High Court to order a person to provide information or produce material. The OSCO also covers orders to make material available and gives authority to the police to search. Businesses in Hong Kong can now expect to receive court orders issued under the OSCO. Disclosure pursuant to such orders is considered to be made under compulsion of law, overriding any duty of secrecy or confidentiality owed to a client.

Sections 25, 25A and section 26 of the OSCO are modelled upon sections 25, 25A and 26 of the DTRPO. In summary, section 25(1) of the OSCO creates an offence of dealing with property known or believed to represent the proceeds of an indictable offence. "Dealing" in relation to any property in whole or in part directly or indirectly representing any person’s proceeds of an indictable offence, or dealing in any property that was used or is intended to be used in connection with an indictable offence includes:-

• receiving or acquiring the property;
• concealing or disguising the property (whether by concealing or disguising its nature, source,
• ocation, disposition, movement or ownership or any rights with respect to it or otherwise);
  disposing of or converting the property;
• bringing the property into or removing from Hong Kong;
• using the property to borrow money, or as a security (whether by way of charge, mortgage or pledge or otherwise).

The maximum penalty is 14 years’ imprisonment and a fine of $5 million.

Under section 25A of the OSCO where a person knows or suspects that any property represents a person’s proceeds of; was used in connection with; or is intended to be used in connection with, an indictable offence, he shall as soon as it is reasonable for him to do so, disclose that knowledge or suspicion to an authorized officer. Failure to make a required disclosure constitutes an offence. Where a person was employed at the relevant time, disclosure may be made to the appropriate person in accordance with the procedure established by his employer for the making of such disclosures. The maximum penalty for this offence is a fine at level 5 and imprisonment for 3 months.

A person has a defence if he intended to make proper disclosure and there is a reasonable excuse for his failure.

Section 25A(2) of the OSCO provides a person with an immunity from prosecution for an offence under section 25. If a person who has made a disclosure under section 25A(1) does any act in contravention of section 25(1) whether before or after such disclosure and the disclosure relates to that act then the person does not commit an offence under section 25(1) if :-

• (a) the disclosure is made before he does that act and he does that act with the consent of the authorized officer; or
• (b) the disclosure is made after he does that act, is made on his own initiative and is made as soon as it is reasonable for him to make it.

Section 25A(5) of the OSCO makes it an offence in certain circumstances for a person to disclose to another person that a disclosure has been made under section 25A(1) or (4). It is, however, a defence to prove that he did not know or suspect that the disclosure concerned was likely to be prejudicial to the investigation or that he had lawful authority or reasonable excuse for making that disclosure. The maximum penalty for this offence is a fine of $500,000 and imprisonment for 3 years.

Section 25A(3)(b) provides that a disclosure made under the OSCO shall not be treated as a breach of any restriction upon the disclosure of information imposed by contract or by any enactment rules of professional conduct or other provision and the person making the disclosure shall not be liable for damages for any loss arising out of the disclosure or any act done or omitted to be done in relation to the property in consequence of the disclosure.

Section 26 of the OSCO provides that no witness in any civil or criminal proceedings shall be obliged to reveal the making of a disclosure nor to reveal the identity of the person making the disclosure except when such disclosure may be revealed in proceedings instituted to prosecute an offence under section 25, 25A or 26; or where the court is of the opinion that justice cannot fully be done between the parties without revealing the making of the disclosure or the identity of the person making the disclosure.

Hong Kong's anti-money laundering provisions were further strengthened by the enactment of the Drug Trafficking and Organized Crimes (Amendment) Ordinance in July 2002. The amendments made in the Ordinance enhance the provisions in DTRPO and OSCO relating to initiation of restraint/charging orders and confiscation orders against properties of persons who have committed money laundering offences.

In addition, the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575) was enacted on 12 July 2002 to implement the mandatory elements of the Resolution and certain of the Financial Action Task Force Special Recommendations on Terrorist Financing. The Ordinance criminalises the financing of terrorism, the supply of weapons to terrorists, and the recruitment to or membership of a terrorist or terrorist associates. It also provides for the freezing and forfeiture of terrorist property. A substantial part of the Ordinance came into effect on 23 August 2002.

The anti-money laundering laws are strictly enforced by the Police and Customs and Excise Department. A Joint Financial Intelligence Unit (JFIU) jointly operated by the two agencies was set up in 1989 to receive and disseminate reports on suspicious financial transactions. The JFIU maintains a central register of money changers and remittance agents. Both agencies work closely with financial regulators and the Department of Justice in investigation and prosecution.

As at the end of March 2004, assets amounting to $101 million had been ordered confiscated and were pending recovery and a further $1,273 million were restrained pending confiscation proceedings. A total of $383 million had been confiscated and paid to the Government under DTRPO and OSCO since the implementation of the two Ordinances.

The Independent Investigation Board

Although not directly aimed at money-laundering, the Independent Investigation Board (IIB), which began operations in 2005, and has a role comparable to the US' Public Companies Accounting Oversight Board, is another weapon in Hong Kong's armoury against financial crime.

The PCAOB, which was set up in the wake of a string of corporate scandals and following the high profile Sarbanes-Oxley legislation, has a budget of more than US$100m, but the IIB has to get by on hardly more than US1m.

There is wide support for the new body, which has taken over responsibility from the Hong Kong Society of Accountants for financial investigations. The HKSA, which relies upon part-time investigative work by unpaid members, is perceived to have been largely ineffective and extremely slow in dealing with accounting frauds and scandals.

Announcing the formation of the IIB in May, 2004, Frederick Ma, secretary for financial services and the treasury, said: "The intention is to improve the independence and transparency of investigation procedures, therefore enhancing public confidence. We issued a consultation paper in September 2003 and have received overwhelming support for the IIB to be established. Accountants need to take corporate governance seriously. Top accounting firms should take the lead in improving their governance, enhancing their transparency and providing channels to allow scrutiny by those who are not involved in the decision-making process."

The IIB will act on references from other regulators, but unlike its US and UK equivalents does not have powers to act on its own or to create regulatory standards. Many doubted whether it would be successful on such a low budget. "It is obvious that HK$8 million is not going to be enough to set up a good investigation team. With such a low budget, we have to question whether the proposed board is just a hollow gesture," said Chan Kam-lam, economic affairs spokesman for the Democratic Alliance for Betterment of Hong Kong, at the time. "It will not benefit the Hong Kong market if we set up an investigation board that does not have enough money to hire experts and fulfil its duties."

The government is thought to have wanted a larger budget for the IIB, but failed to secure sufficient financial backing from HKSA, the SFC and HKEx.

Speaking at an anti-money laundering conference in February, 2005, Hong Kong's Financial Secretary at the time, Henry Tang revealed that the territory's government is seeking to raise its game in combating money laundering and terrorist financing. He told those attending the conference that: "We have already started to put in place the latest recommendations of the Financial Action Task Force (FATF), which will become the new international standard on anti-money laundering."

The Financial Secretary also stressed the need for cross-border cooperation, explaining that: "While New York, London and Hong Kong must do our best individually to protect their markets against money launderers or terrorists, none of us can really succeed on our own. To be effective, all jurisdictions around the world must work together to create a security network so strong and so tight that criminals cannot breach our defence."

SFC Guidance For Financial Operations

Current guidance provided by the Securities and Futures Commission for securities dealers as set out below is matched by equivalent guidance for banks and other professional firms. Under the new Securities and Futures Ordinance the SFC has a much more direct role in applying such rules to all parts of Hong Kong's financial sector.

Says the FSC:

"International initiatives taken to combat drug trafficking and other serious crimes have concluded that financial institutions must establish procedures of internal control aimed at preventing and impeding money laundering. There is a common obligation in all the statutory requirements not to facilitate money laundering. There is therefore a need for awareness and vigilance and a system for reporting suspicious transactions to the law enforcement authorities.

Registered persons and licensed traders should:

• (a) issue a statement of policies and procedures for dealing with money laundering reflecting the current statutory requirements:
• (b) ensure that the content of this Guidance Note is understood by all members of their staff;
• (c) regularly review the policies and procedures on money laundering to ensure their effectiveness;
• (d) develop staff awareness and vigilance to guard against money laundering.

Policies and procedures should cover :

• (a) communication of group policies relating to money laundering;
• (b) account opening and; customer identification including requirements for proper identification;
• (c) maintenance of records;
• (d) compliance with relevant legislation;
• (e) co-operation with the relevant law enforcement authorities, including the timely disclosure of information;
• (f) internal audit to ensure compliance with policies, procedures, and controls relating to money laundering.

Where Hong Kong registered entities have branches or subsidiaries overseas, steps should be taken to alert local management to group policy in relation to money laundering. Where a local jurisdiction has a money laundering law, branches and subsidiaries of Hong Kong entities operating within that jurisdiction should act in accordance with the requirements of the local law.

The following critical subject areas provide some guidance to registered persons and licensed traders in developing appropriate policies and procedures.

Client identification

Registered persons and licensed traders should take all reasonable steps to enable them to establish, to their satisfaction, the true and full identity of each client, and of each client's financial situation and investment objectives.

Before opening the account, positive identification of a client should be made from documents issued by reliable sources and where practicable, file copies should be retained and reference numbers and other relevant details recorded.

Passports and Identity Cards are the type of documentation that should be produced as proof of identity.

Whenever possible the prospective customer should be interviewed personally.

At the time of opening a new trading account, the client should be asked whether any other person has a beneficial interest in the trading to be conducted under that account.

The primary duty to verify identity using the best cumulative documentary evidence that can be obtained rests with the account opening institution. However, it is recognized that in a small number of cases, it may not be able to obtain adequate verification by following the procedures outlined above. In such circumstances, with the consent of the client, it may be necessary to approach another registered person or licensed trader specifically for the purpose of verifying identity.

Corporate/Partnership Clients

In respect to corporate or partnership clients, it is important to identify the directors or partners, the account signatories and the nature of the business. Where applicable, the following should be obtained:

Certificate of Incorporation and Business Registration Certificate;
Bank Mandate; board resolution, where applicable;
memorandum and articles of association or partnership agreement, as the case may be together with information about the nature of the business;
specimen signatures;
copies of identification documents of directors or partners, as the case may be and of all account signatories; and
information as to major shareholders and beneficial owners.
If there is any doubt about the identity of the company or its beneficial owners, shareholders or directors, a company search or a credit reference agency search should be made.

No anonymous accounts

No anonymous or fictitious accounts should be allowed.

Account opened on behalf of a third person / trust account

A registered person or a licensed trader should ask a new client whether the account is opened on behalf of another person. If so, care should be taken to check the identity of all of the parties to the account along the lines of the account opening procedures for other accounts.

Avoidance of account opening by post

The account of a local client should not be opened by post.

Overseas Clients

For overseas clients in a country where the registered person or licensed trader does not have a presence, the application should be submitted through a reputable source such as a correspondent bank in that country, which can be relied upon to undertake effective identification procedures on behalf of the registered person or licensed trader. It is preferred to have documents certified by the company’s foreign lawyers.

Avoidance of third party cheques

"Third party" cheques (i.e. cheques or other payments from persons other than the client) should be supported by further verification of identity.

Record Keeping

Registered persons and licensed traders should ensure compliance with the record keeping requirements contained in the relevant legislation, rules or regulations of the Commission or of the relevant exchanges.

The investigating authorities need to ensure a satisfactory audit trail for suspected drug related or other laundered money and be able to establish a financial profile of the suspect account. For example, to satisfy these requirements, the following information may be sought:

• (i) the beneficial owner of the account;
• (ii) the volume of the funds flowing through the account; and
• (iii) for selected transactions:
  • the origin of the funds;
  • the form in which the funds were offered or withdrawn, i.e. cash cheques, etc.;
  • the identity of the person undertaking the transaction;
  • the destination of the funds;
  • the form of instruction and authority.

Where appropriate, registered persons and licensed traders should consider retaining in Hong Kong certain records e.g. customer identification, account files, and business correspondence., for periods which may exceed that required under other relevant legislation, rules and regulations of the Commission or of the relevant exchanges.

Retention of Records

A document retention policy must weigh the statutory requirements and the needs of the investigating authorities against normal commercial considerations. However, when practicable, the following document retention terms are suggested :

• (i) All necessary records on transactions, both domestic or international, should be maintained for at least five years. Such records must be sufficient to permit reconstruction of individual transactions (including the amounts and types of currency involved if any) so as to provide, if necessary, evidence for prosecution of criminal behaviour.
• (ii) Records on customer identification (e.g. copies or records of official identification documents like passports, identity cards, driving licenses or similar documents), account files and business correspondence should be kept for at least five years after the account is closed.

In situations where the records relate to on-going investigations or transactions which have been the subject of disclosure, they should be retained until it is confirmed that the case has been closed.

Recognition and Reporting of Suspicious Transactions

Registered persons and licensed traders, their directors, officers and employees should not, or, where appropriate, should not be allowed to, warn their customers when information relating to them is being reported to the JFIU.

The types of transactions which may be used by a money launderer are virtually unlimited, and it is difficult to definitively specify which transactions might constitute a suspicious transaction. Suspicion may arise where a transaction is for a purpose inconsistent with a customer's known business or personal activities or with the normal business for that type of account. Therefore, the first key to recognition is knowing enough about a customer's business and financial circumstances to recognize that a transaction, or series of transactions, is unusual.

Disclosures of suspicious transactions under the DTRPO or the OSCO should be made to the JFIU. The JFIU functions as the domestic and international advisor on money laundering matters generally and can offer practical assistance to the financial sector on the subject of money laundering.

Procedures for Disclosure

The obligation to report under the DTRPO or the OSCO rests with the individual who becomes suspicious of a person or transaction. Under certain circumstances, a registered person or licensed trader may elect to bring the transaction to the urgent attention of supervisory management. The circumstances of each case can then be reviewed at that level to determine whether the suspicion is justified. If the suspicion remains it should be reported to the JFIU without delay. Consideration should be given to co-ordination through a central point, i.e. a compliance officer, for onward reporting to the JFIU.

The use of a standard format for reporting is encouraged. In the event that urgent disclosure is required, an initial notification should be made by telephone.

A register should be kept of all reports made to the JFIU and all reports made by employees to management.

The JFIU will acknowledge receipt of any disclosure made. If there is no immediate need for action e.g. the issue of a restraint order on an account, consent will usually be given for the registered person or licensed trader to operate the account under the provisions of section 25A(2) of the DTRPO or the OSCO, as the case may be.

Following the receipt and consideration of a disclosure by the JFIU, the information disclosed will be allocated to trained financial investigation officers in the Police and Customs and Excise Departments for further investigation.

Access to the disclosed information is restricted to the relevant financial investigating officers within the Police and Customs and Excise Departments. In the event of a prosecution, production orders will be obtained to produce the material at court. Section 26 of the DTRPO and the OSCO place strict restrictions on revealing the identity of the person making a disclosure under section 25A.

The Police and Customs and Excise Departments and the JFIU are not obliged, but may, on request, provide to a disclosing registered person or licensed trader a status report on an relevant investigation.

Enhancing and maintaining the integrity of the relationship which has been established between law enforcement agencies and registered persons/licensed traders is considered to be of paramount importance.

Education and Training

Registered persons and licensed traders must provide proper anti-money laundering training to their local and overseas staff.

Staff should be aware of their own personal obligations under the DTRPO and the OSCO and that they can be personally liable should they fail to report information as required. They are advised to read the relevant sections of the DTRPO and the OSCO. Staff must be encouraged to co-operate fully with the JFIU and to provide prompt notice of suspicious transactions. If in doubt, they should contact the JFIU..

Registered persons and licensed traders should have educational programmes in place for training new employees, staff dealing directly with the public, staff who open new accounts and those who supervise or manage such staff.

It will also be necessary to make arrangements for refresher training at regular intervals to ensure that staff do not forget their responsibilities."

Hong Kong In Good Odour With The FSF And The FATF

In mid-2000, the Financial Stability Forum, established by the G7 after the Asian crisis in 1998 to study methods of reducing global financial volatility, released its report, placing 25 of the world's leading offshore financial centres (OFCs) into three groups representing differing levels of threat to global financial stability, and Hong Kong was gratified, if not surprised, to find itself in the top (best) category.

Within the FSF's first group were Hong Kong, Luxembourg, Singapore and Switzerland, which the FSF generally perceived as having legal infrastructures and supervisory practices of the best quality amongst all the OFCs. Dublin, Guernsey, Isle of Man and Jersey were also included in the group and more or less regarded in the same way, but with the added emphasis that continuing efforts to improve the quality of supervision and co-operation should be encouraged.

Hong Kong also escaped inclusion on the FATF's 2000 listing of jurisdictions which it deemed 'uncooperative' in regard to the control of money laundering, even though in 1999 the FATF had carried out an assessment of the Hong Kong's Special Administrative Region which indicated that the jurisdiction's regulations were not quite up to par in the global fight against money-laundering. The multilateral had cited Hong Kong's low tax system, sophisticated banking facilities and the absence of currency and exchange controls as 'susceptible' to money-laundering activities.

The report stated that, since a first evaluation in 1994, Hong Kong had taken a number of important steps in its anti-money laundering regime. The expansion of its anti-money laundering legislation under both the Drug Trafficking (Recovery of Proceeds) Ordinance (DTRoP) and the Organised and Serious Crimes Ordinance (OSCO), which include the extension of the money laundering offence from only drug trafficking to the proceeds of serious crimes and statutory mandatory suspicious reporting, had provided a solid foundation for penal action.

Although the report described the legislative steps taken by Hong Kong to be 'fundamentally sound' it raised concerns that the reporting of suspicious transactions mandatory for both drug offences and other serious crime were inadequate. The report stated: 'the number of reports received are still small, relative to the size of the Hong Kong financial markets and reporting levels in other jurisdictions ... the low number of suspicious transactions reports and of convictions for money laundering, suggests that the effectiveness of the system can be further improved.'

Nonetheless, at the 12th plenary meeting of the FATF held in Madrid, Spain from 2nd to 6th of October, Hong Kong was selected as the President of the Financial Action Task Force on Money Laundering (FATF) for 2001-2002. Clarie Lo, commissioner for narcotics of the Hong Kong Special Administrative Region (HKSAR), who was Hong Kong's overall coordinator of anti-drug and anti-money laundering policies, would carry out the duties of the FATF President from July 2001 to June 2002, said a spokesman for the Hong Kong government.

Welcoming the selection result at the time, Secretary for Security of the SAR Regina Ip said "the Asian economic recovery inevitably heightened risks of increased money laundering through legal or illegal activities. Being one of the world's major financial centers with an effective anti-money laundering regime, Hong Kong is well placed to lead FATF in countering money laundering globally and assist other jurisdictions against such risks regionally.

Hong Kong's good standing with the international organisations was due to its robust regulatory structure, and the government continued work during 2000 to improve and extend its controls over financial activity.

The Drug Trafficking and Organized Crimes (Amendment) Bill 2000 aimed to further enhance the effectiveness of Hong Kong's anti-money laundering regime, said Clarie Lo.

Speaking at the Bills Committee meeting on the (Amendment) Bill, Mrs Lo said maintaining Hong Kong's status as a major financial centre depended, to a certain extent, on a robust anti-money laundering regime, as an effective regime rendered Hong Kong's financial services less accessible to criminal activities.

In respect of dealing with criminal proceeds, a key proposal was to add a new section to the existing Ordinances, i.e. Drug Trafficking (Recovery of Proceeds) Ordinance (DTOC) and Organized and Serious Crime Ordinance (OSCO), to provide that a person commits an offence if, having reasonable grounds to suspect that any property represents any person's proceeds of drug trafficking or indictable offences, he still deals with the property.

"The proposed amendment is targeted at professional money launderers. It also aims to address two deficiencies identified by the international Financial Action Task Force (FATF) on Money Laundering in its comprehensive evaluation reports on Hong Kong's money laundering regime in 1994 and 1998. They are the low prosecution and conviction rates of money laundering offences and the difficulty in proving the mental element of a money laundering offence," Mrs Lo said.

To tie in with the "dealing" provisions under Section 25, the Government also proposed to replace the wordings under the "disclosure" provisions in Section 25A of the two Ordinances from the present "suspect" to "having reasonable grounds to suspect."

"Both proposals to Section 25 and Section 25A will not change the onus of proof, which will still rest totally with the prosecution. Also, they will not alter the existing standard of proof, in that the prosecution will still need to prove beyond reasonable doubt all relevant elements of the crime in relation to the predicate drug trafficking or indictable offences as defined in the two Ordinances," Mrs Lo said.

"Safeguards are available in the existing Ordinances to protect a person from an honest mistake; and we are ready to provide more guidance to the financial sector in updating professional guidelines to protect those who consider themselves inadvertently affected by the proposals," she added.

According to the Police and the Customs, a total of 2,680 money laundering cases had been investigated in-depth since 1996 under Section 25. However, there had only been 61 prosecutions involving 79 persons, resulting in 36 convictions involving 43 offenders. Under 25A, there had been only one prosecution leading to one conviction.

"The current proposals in respect of Section 25 and Section 25A do not pinpoint any particular sector. In fact the banking sector has been cooperating very well with the Government in countering money laundering, as the bulk of reported suspicious transaction cases are from this sector," Mrs Lo said.

"We understand the concerns of some sectors on certain proposals of the (Amendment) Bill. We will continue our dialogues with them with a view to jointly casting the proposals in the Bill to a shape acceptable to all. After all, the success in the fight against money laundering depends on the concerted efforts of the Government, enforcement agencies, professional bodies and every citizen in Hong Kong," she added.

Other proposals in the Bill were largely technical. They included improvements to provisions relating to the application of a restraint order and the confiscation of proceeds derived from drug trafficking, organised crimes or specified offences.

'Know Your Customer' For On-Line Accounts

In October, 2000, Hong Kong's Securities and Futures Commission (SFC), the securities watchdog, released proposals which sought to impose tighter regulation of the trading activities of online brokers.

SFC executive director Andrew Procter said that the guidelines were needed in order to protect the interests of clients trading online. At the same time he warned that the proposals were likely to increase brokers' operating costs, which could make it difficult for smaller brokers to provide online trading. Mr Proctor said of the proposed measures: 'We do not plan to close the online operations of these brokers. We just want to help them improve their standards by issuing guidelines.'

The measures focused on account-opening requirements, investor protection, and operational standards. They also dealt with how brokers should ensure the real identity of clients. The options were a face-to-face meeting with clients, or a third party such as a bank manager being brought in to vouch for a client's identity; or a client might need to get a digital certificate from the Post Office.

Another proposal concerned restricting access to brokers' chat room services - used by investors to discuss market rumours or company news. The SFC also proposed that brokers have back-up computer tapes of transaction details - with copies stored outside the brokers' offices.

The Composite Securities And Futures Bill

In November, 2000, the government introduced its controversial Composite Securities and Futures Bill, intended to combine and replace all ten existing pieces of securities and futures legislation, as well as giving the Securities and Futures Commission (SFC) the power to regulate Internet trading, and allowing it to seize the working papers of market professionals during investigations. After many contentious hearings, the Bill became law in January 2002.

There were concerns that the new legislation would give too much power to the SFC, and in response the government set up an independent body to review the internal operations of the SFC. The non-statutory body, known as the Process Review Panel, ensures that the SFC's internal operations, including its investigative and disciplinary procedures, are fair and consistent.

Then Hong Kong Secretary for Financial Services Stephen Ip said in a statement: "We have established the Process Review Panel ahead of the enactment of the Securities and Futures Bill, in order to demonstrate our resolve to enhance the transparency and accountability of the Commission."

Chief Executive at the time, Tung Chee-hwa appointed Vincent Cheng Hoi-chuen, vice-chairman and chief executive of Hang Seng Bank, to chair the panel. Other members of the panel included Hysan Development chairman Lee Hon-chiu, legislator Bernard Chan, Worldsec International chairman Henry Cheong Ying-chew, Deloitte Touche Tohmatsu partner Fong Hup, senior counsel Robert Kotewall, Edward Kwan Pak-chung, executive director of HSBC Broking Services (Asia), SFC chairman Andrew Sheng, SFC non-executive director Henry Fan Hung-ling, Ian Wingfield, law officer (civil law), Department of Justice, Liu Pak-wai, of the Chinese University of Hong Kong, and Joseph Pang Yuk-wing, deputy chief executive of the Bank of East Asia.

The Composite Securities and Futures Act, as it became in 2002, extended and harmonised supervision over the various parts of the SAR's finance industry, partly through a direct increase in the powers of the Commission, and partly through the imposition of new duties on other market organisations.

The Act required the Hong Kong Monetary Authority (HKMA), for instance, to introduce guidelines which will impose the same kind of strict regulations on banks which deal in securities trading as those that were already in place for stockbrokers. The guidelines centre upon tightening up rules on employees, so that banks will need to do more reporting and put more resources into the training of securities staff.

Hong Kong stockbrokers had complained it was unfair for banks to be exempted from regulation by the Securities and Futures Commission (SFC). Staff are obliged to complete a securities course before banks are able to assign them to securities business, and two senior executives must be appointed to be in charge of a firm's securities business. In addition, banks will also need to bring in security controls to ensure clients' assets are not stolen or misused by bank staff.

The SFC rules require stockbrokers to execute trades immediately after they receive orders from clients. Previously, banks did not need to follow the SFC rule, so they might wait hours before executing trades for clients.

Hong Kong And Australia Agree To Harmonise Regulation

Hong Kong and Australia held a Roundtable meeting on financial services in Sydney in December 2000. Hong Kong's Secretary for Financial Services, Mr Stephen Ip, led a high-level delegation from the SAR which included Mr Andrew Sheng, Chairman of the Hong Kong Securities and Futures Commission, and Mr Kwong Ki-chi, Chief Executive of Hong Kong Exchanges and Clearing.

The two delegations exchanged views on a number of topical issues in the financial services sector. Mr Ip said: 'We had a fruitful discussion at the Roundtable meeting. We discussed the implications of global financial markets and the reforms and initiatives Hong Kong has embarked on to position ourselves as a major international financial centre. Such initiatives include modernising and consolidating our regulatory regime, restructuring our market operation to achieve greater efficiency and competitiveness, and enhancing our financial infrastructure to make the best use of technology.'

He continued: 'Given the openness of our respective markets, we see considerable scope for co-operation between Australia and Hong Kong. The Roundtable is a very important step forward in furthering such co-operation and strengthening the ties between the two jurisdictions. At the meeting today, we reviewed the current working relationships between Australia and Hong Kong, and our respective regulatory regimes in the areas of cross border financing, intermediary licensing, market regulation, clearing and settlement, and enforcement and surveillance. We also agreed to set up working groups to examine in detail the issues involved and develop the future work programme of the Roundtable.'

The Hong Kong and Australia delegations issued a joint statement at the end of the Roundtable meeting which stated: 'This has been a solid first step in strengthening ties between our jurisdictions. We acknowledge that there is a lot of work to be done to achieve our common objectives.'

House-Cleaning Before Clarie Lo's Term As FATF President

In February, 2001, a few months before beginning her stint as President of the FATF, Hong Kong's Commissioner for Narcotics, Clarie Lo, warned that Hong Kong needed to improve its money-laundering legislation if it wasn't to risk listing by the organisation.

Mrs Lo said that over the previous four years almost 3,000 investigations into money-laundering had resulted in a mere 49 convictions.

Mrs Lo argued: 'If we do not improve ourselves, there is a possibility we could be blacklisted some time in the future. Hong Kong is an international financial centre, the reason we can maintain our status must be based on the fact that we can combat money-laundering.'

In 1989 both the Hong Kong Police Force and the Customs and Excise Department had been empowered to investigate drug-related money laundering cases. A Joint Financial Intelligence Unit (JFIU) of both departments had also been established to facilitate the reporting of suspicious money laundering activities and to co-ordinate the investigation of these suspicious activities when warranted.

However, more was needed said Mrs Lo, who accused financial institutions and workers such as accountants and lawyers of being lax in reporting suspicious transactions and urged the law-makers to strengthen existing legislation by allowing money-laundering allegations to be based on 'reasonable grounds' of suspicion. Mrs Lo was referring to attempts by the financial and legal communities to avoid the key change, included in amendment legislation which had been circulated for consultation.

Hong Kong's legal community was in fact almost unanimous in its decision to reject the provision proposed in Hong Kong's Drug Trafficking and Organised Crimes (Amendment) Bill which called for money laundering to be an offence based on 'reasonable grounds' of suspicion.

Under existing legislation, anyone wishing to report a suspicious transaction must actually know that it took place or have proper reason to believe that it took place but this had done little in curbing the vast amount of money-laundering activity that was known to take place in the jurisdiction.

Legislator Eric Li Ka-Cheung said: "There is not a single legislator supporting the bill now ... the administration has been asked to rethink the bill.' This is for the simple reason says Mr Li that people were afraid they could be unaware that they were dealing with 'dirty' money and still be convicted of money laundering and face the maximum HK$1 million fine and five years in jail.

Mr Li explained people could be found guilty of making a bad judgment call or because they were 'not intelligent enough to be able to interpret it'. He said: 'As it stands we have come to a stalemate. I'm very pleased to see it. I was fighting a lonely battle.'

In a statement the Hong Kong Bar Association noted: 'It may well be difficult to prosecute these kind of [money-laundering] cases successfully but that is not necessarily a bad thing. The underlying objective behind the law at present is to ensure that the courts do not send careless or gullible people to prison who do not belong there.'

As the row over 'reasonableness' rumbled on, Mrs Lo continued to nail her colours firmly to the mast. At a seminar organised by the Hong Kong Narcotics Division of the Security Bureau at the end of February, Mrs Lo said Hong Kong was fully committed to the fight against money laundering: 'Hong Kong believes in continuously improving its legislative framework to make it more difficult for drug traffickers and other serious crime offenders to launder or retain their illicit profits,' she said.

She continued: 'In 2000, the Organized and Serious Crimes (Amendment) Ordinance was passed by the Legislative Council. It came into operation on 1 June 2000, requiring money changers and remittance agents to follow anti-money laundering measures such as customer identification and keeping of transaction records for transactions over HK$20,000. This Ordinance effectively helps prevent criminals from using these non-bank financial businesses as conduits for money laundering. We also introduced into the Legislative Council the Drug Trafficking and Organized Crimes (Amendment) Bill 2000, with a view to enhancing confiscation provisions and increasing penalties for money laundering offences.'

Mrs Lo said Hong Kong's efforts in anti-money laundering were recognised by the international community. She stated: 'The fact that Hong Kong has been selected to take over the FATF Presidency in July 2001 speaks highly of our achievements. Being one of the world's major financial centres with an effective anti-money laundering regime, Hong Kong is well placed to lead FATF in countering money laundering globally and assist other jurisdictions against such risks regionally.'

Clarie Lo Keeps Up The Pressure

Just days before taking up her role as President of the FATF, Clarie Lo addressed 200 representatives from the banking sector attending anti-money laundering seminars organised by the Narcotics Division of the Hong Kong Security Bureau on June 12 and 13, 2001. The aim of the seminars was to update the banking sector on international standards of anti-money laundering practices and to inform the sector of the Government's latest proposals to enhance the anti-money laundering legislative regime in Hong Kong.

Speaking at the two-day event, entitled 'Anti-Money Laundering Seminar for Authorized Institutions', the Commissioner for Narcotics said the banking sector had an important role to play in curbing money laundering and safeguarding Hong Kong's integrity and reputation as an international financial centre. The compliance officers, in particular, were the gatekeepers and whistle blowers in the fight against money laundering she claimed.

According to Mrs Lo, due to the concerted efforts of the Government, the regulators and the private sector, the number of suspicious transaction reports had increased more than ten times in the past six years, from 550 in 1994 to 6,104 in 2000. Of these reports, more than 95 per cent came from the banking sector.

Principal Assistant Secretary for Security (Narcotics), Ms Mimi Lee briefed the seminar on the FATF's on-going Non-Cooperative Countries and Territories (NCCT) exercise in which countries/territories which were determined to have detrimental rules and practices that impeded their cooperation in the international fight against money laundering would be put on a list and made to address their deficiencies. 'The impact of the NCCT exercise on Hong Kong is that we need to keep on improving our anti-money laundering regime and preventing our systems from being affected by loopholes identified in other countries' anti-money laundering regimes,' she said.

Ms Lee also urged authorized institutions in Hong Kong to give special attention to business relations and transactions with persons, including companies and financial institutions, from the non-cooperative ountries/territories.

September 11th, 2001

As in so many jurisdictions, the events of September 11th threw Hong Kong's defenders of confidentiality onto the back foot, and gave an impetus to the government's efforts to tighten up on money laundering defences.

Revelations that up to HK$50 billion had been laundered through the territory's banking system by a syndicate in order to evade Chinese taxes led the authorities to caution the SAR's banking sector to check that terrorist funds had not also been laundered or hidden there by associates of Osama Bin Laden.

The Deputy Chief Executive of the Hong Kong Monetary Authority, David Carse, (HKMA) stressed that there was no indication or evidence that this was the case, but that the region should follow the lead of other jurisdictions by conducting investigations into banking secrecy and reporting of suspicious transactions.

In a response to President Bush's Executive Order requiring banks to close accounts linked to Osama bin Laden, David Carse said that banks should review accounts to check any suspicious connection with terrorist activities, and the Securities and Futures Commission (SFC) issued an advisory circular to all registered intermediaries advising them to give special attention to business relations and transactions with persons from 19 jurisdictions identified by the Financial Action Task Force (FATF) as non-cooperative countries and territories (NCCTs) in the fight against money laundering.

Speaking to the Regional Conference of Attorneys-General of Countries in Asia and Europe in November, Hong Kong's Director of Public Prosecutions, Mr Grenville Cross, announced that Hong Kong was acting to strengthen its asset seizure laws in order to 'strike directly at the financing of terrorism.'

During his speech entitled 'Recovering the Proceeds of Crime - Time For Action not Words,' Mr Cross confirmed that it had been made clear to banks in Hong Kong that it was incumbent upon responsible financial institutions to review their customers' accounts to see whether any of them might be connected to terrorism, and suspicions must be reported.

'The time has surely passed when financial institutions can rely upon confidentiality as an excuse for not helping law enforcers,' he said. 'Bank secrecy laws have been deployed down the years by those who wish to conceal their ill-gotten gains. The information kept by financial institutions in relation to the holding and transfers of money is critical to money laundering investigations.'

Mr Cross highlighted the direct threat that money laundering posed to national and international financial systems and called for the issue of bank secrecy to be examined in light of the need to balance the interests of the individual, the financial services provider and the state.

He pointed out that some jurisdictions in recent times had cut back on bank secrecy by prohibiting certain operations that were designed to stop the flow of money being traced, such as anonymous bank accounts or procedures to eliminate the paper trail.

Prosecutors had to prosecute organised criminals, seize their assets and disrupt their operations, declared Mr Cross. The confiscation of the proceeds of crime was an integral part of the functions of today's prosecutors and investigators, and they had to be determined and resolute and prepared to play a long game. He added that it was 'easier for a criminal organisation to replace apprehended offenders than it is to replace millions of dollars of seized assets.'

Mr Cross concluded: 'Let us not be afraid to do what is necessary to combat money laundering. If we act resolutely at this stage, future generations will thank us. If we shy away from action, the future may indeed be bleak. To leave illegal assets in the hands of criminals is profoundly damaging to society. Let us act now before it is too late.'

Hong Kong Takes Up FATF Presidency

In her opening speech at the Plenary Meeting of the 13th round of the FATF in Paris on 5-7 September, 2001, Hong Kong's Secretary for Security, Mrs Regina Ip, spoke of the jurisdiction's firm commitment to international co-operation in tackling international crimes, money laundering activities and drug trafficking.

'Hong Kong is a key international financial centre and one of the world's freest economies. We in Hong Kong realize that our strengths lie in the integrity of our financial systems. Therefore, we are fully committed to and always vigilant in countering money laundering,' explained Mrs Ip.

The FATF meeting was being held to assess developments in its on-going review of non-cooperative countries and territories and to discuss the work of the coming year. Presiding at the meeting in her capacity as President of the FATF was Mrs Clarie Lo, Hong Kong's Commissioner for Narcotics, who assumed her role in July, 2001. Hong Kong had been a member of the FATF for eleven years and this marked the first occasion a non-OECD member had taken over the role of the President of the FATF.

Mrs Ip was speaking to an audience of over 280, comprising policy makers, experts in the fields of finance, legal and legal enforcement from member jurisdictions, as well as representatives from international organizations including the IMF, the World Bank and the United Nations.

She explained: 'In an effort to continuously improve our anti-money laundering regime, new legislation requiring money changers and remittance agents to identify customers and keep transaction records was introduced and came into effect in June 2000 and we have also recently introduced a bill to enhance the confiscation provisions and penalties on money laundering offences. It is now being scrutinized by the Legislative Council, the law making body of Hong Kong.'

The Secretary for Security continued to stress that Hong Kong was determined to maintain and work in close partnership with foreign jurisdictions to combat money laundering. The government had at that time entered into mutual legal assistance agreements with 12 other jurisdictions, and had 'initialed' agreements with five more countries. In addition, Hong Kong had signed surrender of fugitive offenders treaties with 13 jurisdictions.

If for no other reason, Hong Kong's presidency of the FATF from June 2001 to May 2002 would have ensured that the SAR did everything in its power to control money-laundering, and in February 2002 the authorities had a perfect opportunity to show off their achievements to the FATF's plenary meeting in Hong Kong.

Speaking at the commencement of the meeting, Chief Secretary, Donald Tsang, revealed that around $2.3 billion in laundered assets had been seized by the jurisdiction's government over the previous few years. Mr Tsang promised delegates attending the international anti-money laundering conference that his country would continue the fight against terrorist financing, money laundering, and tax evasion.

'When our statutory framework is further strengthened, we expect to be able to cut off even more avenues for laundering money,' he explained. 'We realize that Hong Kong, as a major international financial centre and arguably the world's freest economy, must rely on the integrity of its financial system and its robust and comprehensive anti-money laundering regime,' he added.

He said that the government of Hong Kong would propose new laws in 2002 to block funding to all terrorist groups, and to organisations and individuals suspected of having links to them.

Hong Kong's Surveillance Efforts Bear Fruit

Hong Kong's Police and Customs authorities reported an increase of more than 50 per cent in the number of suspicious money-laundering activities in the first eight months of 2001 compared with the whole of 2000. Between the two authorities a total of 66 reports of suspected laundering were received between January and August, compared with 43 in 2000, 14 in 1999, and 24 in 1998.

The figure excluded dubious transactions reported by banking institutions but a police spokewoman explained to the local media that this did 'not necessarily mean money-laundering is getting worse at non-bank financial institutions in the SAR, it may simply mean people and institutions are more aware of their legal obligations and willing to come forward.'

Within Hong Kong's banking sector 3,975 cases were reported up until August 2001. In 2000 the total figure was 5,995 and 5,757 in 1999.

In September 2002, Deloitte Touche Tohmatsu accused Hong Kong of under-reporting money laundering linked to terrorism and other crimes, and suggested that the SAR was lagging the global trend of using technology to combat the fraud.

The global business consultancy firm made the remarks on the heels of the fatal bombing in Bali: ''The war on terrorism cannot be won along the military front alone. Terrorism must be fought on the financial front as well,'' Michael Zeldin, head of the company's global anti-money laundering taskforce, told a news conference. But the consulting firm also said Hong Kong had good regulations against the crime. Zeldin said no country is immune from money laundering in terrorism: ''I think the whole world is vulnerable to money laundering in terrorism and there is no country that is immune.''

2003, however, saw a further rise in reports of suspicious circumstances to 11,000, up 10% on the previous year.

The gradual breaking down of barriers between SAR and Mainland banking systems which began in 2003 alongside the CEPA initiative, and continued with increasing speed in 2004, did, of course, create new possibilities for money-laundering.

In January, 2004, The Hong Kong Monetary Authority (HKMA) urged banks in the jurisdiction to be alert to the possibility of money laundering as they geared up to offer yuan-denominated banking services. "Participating banks are requested to heighten the awareness of their staff involved in such business to possible money laundering transactions," the regulator announced.

In order to reduce the possibility of money laundering activity taking place, the HKMA ordered banks to record whether yuan deposits are made in cash, or via the conversion of other currencies.

It also urged the financial institutions to keep track of multiple accounts opened by the same customer, and to ensure that the 20,000 yuan per day exchange limit (at that time) was not breached by spreading the transactions across several accounts.

In June, 2004, HKMA issued a supplement to the territory's anti-money laundering guidelines setting out the latest "Know-Your-Customer" principles, taking account of the requirements of the paper on "Customer Due Diligence for Banks" issued by the Basel Committee on Banking Supervision in October 2001 and the revised Forty Recommendations issued by the Financial Action Task Force on Money Laundering in June 2003.

Under the new guidelines, banks and financial service providers were urged to subject the transactions of higher risk customers to enhanced due diligence.

Those deemed by the HKMA to fall into the high risk category included politically exposed persons, correspondent banks from "non-cooperative jurisdictions", and offshore companies established in order to disguise beneficial ownership.

Executive director of banking policy at the HKMA, Simon Topping observed that: "Hong Kong has been successful in establishing itself as an international financial centre by being known as a place which has strong control, good regulation, good supervision and being clean. If some businesses get turned away because things are slightly dodgy, then so be it. We only want good businesses here."

According to a comprehensive global money laundering report by the US State Department issued in March, 2006: the primary sources of laundered funds in Hong Kong are narcotics trafficking (particularly heroin, methamphetamine, and ecstasy), tax evasion, fraud, illegal gambling and bookmaking, and commercial crimes. Laundering channels include Hong Kong’s banking system, and its legitimate and underground remittance and money transfer networks.

The report said : 'Hong Kong is substantially in compliance with the Financial Action Task Force’s (FATF) Forty Recommendations on Money Laundering, and has pledged to adhere to the revised FATF Forty Recommendations. Overall, Hong Kong has developed a strong anti-money laundering regime, though improvements should be made.'

Hong Kong Tackles Its Securities Sector

A key development for Hong Kong in 2002 was the introduction of the Securities and Futures Ordinance, which extended the remit of the Securities and Futures Commission (SFC) to a wide variety of financial institutions, although banks themselves remained under Hong Kong's Monetary Authority (HKMA).

The banks are known as 'exempt dealers', because their securities departments are not regulated by the Securities and Futures Commission. However, under the Banking (Amendment) Ordinance 2002 and the Securities and Futures Ordinance a raft of new rules governing banks' securities business was introduced.

However, the main points of the new regulations, as outlined in a HKMA circular, are as follows:

• Banks and any of their staff involved in securities business must register with the HKMA, and personnel must meet the SFC's fit and proper person requirements;
• Banks will need to appoint two senior executives to supervise the way in which securities activities are conducted

Under the new regulatory regime, the Monetary Authority is in charge of the day-to-day supervision of banks' securities divisions, but cases of suspected malpractice are handed to the Securities and Futures Commission for investigation.

'This is in line with the concept that the SFC remains the ultimate authority to regulate the securities and futures industry,' the circular explained.

Brokerages, which are more directly supervised by the SFC, complained that the 'know your customer' requirement for a face-to-face meeting before opening an account was hindering the development of on-line trading, and the SFC responded by amending its code of conduct to allow investors to open online trading accounts without a face-to-face meeting.

The new procedure was provided for in an amendment to the Code of Conduct for Persons Registered with the Securities and Futures Commission. The Code already provides various options of client identification procedures for account opening in non-face-to-face situations. The new procedure did not replace the existing procedures, but provided a further alternative to these existing procedures.

Registered persons could then choose to use this new procedure to verify the identity of new clients by:

• obtaining from a new client a copy of his identity document, a copy of the signed client agreement, and a cheque (with an amount not less than $10,000 and bearing the client's name as shown in his identity document) issued by the client and drawn on the client's account with a licensed bank in Hong Kong; and
• ensuring that the signature on the cheque issued by the client and the signature on the client agreement are the same; and
• encashing the cheque.

The registered person is also required to inform the client that the account will not be activated until the cheque is cleared and to keep proper records to demonstrate that the client identification procedure above has been followed satisfactorily.

The new procedure can be applied to client accounts opened online or by post for dealing in securities, futures and options, or unit trusts and mutual funds.

Alexa Lam, the SFC's Executive Director of Intermediaries and Investment Products, said: "The amendment shows the SFC's continuous commitment towards facilitating market development and deregulation. The new procedure is designed to be practical while providing comprehensive verification steps that will greatly facilitate online trading business."

Despite the creation of the SFC, the regulatory regime in Hong Kong remained muddled, and many people thought that the SFC should become an over-arching regulator on the model of the UK's FSA. The authorities had proposed that the SFC should assume HKEx's regulatory duties, a suggestion which was swiftly rebuffed by the exchange.

The Hong Kong government had, for some time, been keen to address the perceived conflict of interest created by the fact that the current stock market regulator, Hong Kong Exchanges and Clearing (HKEx) is also itself a profit-making listed firm.

In October, 2003, the government made another attempt at forcing a resolution of the conflict of interest, putting forward four proposed models in a public consultation paper.

These were: to allow the SFC to assume the regulatory role, to establish a new regulator, to allow HKEx to set up a subsidiary to handle its listing functions, or to expand the dual-filing system currently shared by the SFC and HKEx for approving new listings.

Executive director of the Asia-Pacific Association of Chartered Certified Accountants, Allen Blewitt explained at the time that: "It would be better if the government let the Securities and Futures Commission take over the regulation work of Hong Kong Exchanges and Clearing as a first step to prepare for the setting up of a single regulator. This would be the most effective way of solving the conflict of interest at HKEx." Needless to say, both HKEx and the Hong Kong Stockbrokers Association have expressed a preference for the establishment of a subsidiary listings body.

The Hong Kong Monetary Authority

Although Hong Kong's Securities and Futures Authority took on overall supervision of all financial markets in Hong Kong, with the passing of the Securities and Futures Ordinance in early 2002, front-line supervision of banks remained with the Hong Kong Monetary Authority (the de facto central bank) and the HKMA was indeed very active after September 11th in stepping up its supervision of anti-money laundering rules.

In a circular released in November, 2001, the Deputy Chief Executive of the Hong Kong Monetary Authority, David Carse, warned banks to be especially vigilant when dealing with non-banking financial institutions such as money changers.

The circular talked about 'know your customer' rules in the light of the stepped-up international fight against money laundering, and advised careful and constant monitoring as opposed to ad-hoc reporting. Money changers were especially singled out for mention, according to Mr Carse, because: 'as part of their day-to-day business, [they] normally handle a large amount of bank notes in different currencies.'

Mr Carse warned that even if the nature of their customer's business typically involved handling large amounts of cash, banks should not automatically regard the transaction as above board. 'Nor should it be assumed that, because the customer is registered with the police as a money changer, the [authorised institution] does not need to conduct its own due diligence or ongoing monitoring,' he warned.

The Deputy Chief of the HKMA closed by advising Hong Kong based banks that if suspicions arose concerning any customer, they should file a report immediately with the jurisdiction's Joint Financial Intelligence Unit.

Mr Carse's urging had however to be seen in the light of Hong Kong's Privacy Code, looked after by a Privacy Commissioner. In 2001, the banks (in dramatic contrast to their Swiss compeers) had been demanding changes to the privacy code which would allow them to share more information about their customers (with each other, that is, not with the Government!).

But in March, 2002, with changes to the Code bogged down in negotiation, and after the Privacy Commissioner had expressed reservations about the banks' demands to share more credit data, the Hong Kong Association of Banks (HKAB) removed from its proposed changes to the code a requirement that would have allowed them to share information about customers' mortgages.

Liu Jinbao, chairman of HKAB and chief executive of Bank of China (Hong Kong), said the association had reached a consensus that it would not share customers' home-loan data. Mr Liu said the association's main priority was to make legislative changes that would allow them to share credit-card information on customers rather than mortgage information. Previously, the banks could only share "negative information" about clients, such as details on customers who have failed to repay a bank loan.

In 2003, HKMA was faced with another source of risk for banks and their customers, when the growth of 'phishing' (attempts to gain access to the bank account details of unwary internet users) began to affect the SAR.

In January, 2004, the Authority issued a warning over a fraudulent website advertising the "Bank of Swisscredit", the fifth such site reported in Hong Kong in less than a month. The soi-disant 'bank' claims to have its head office in Zurich, with branches in Hong Kong and Canada offering a variety of banking and investment services. In addition to urging members of the public to report any dealings that they have had with the fraudulent website, the HKMA announced in a statement that:

"Given the global nature of the Internet, members of the public are reminded to verify the status of any organisation making use of the Internet to solicit deposits from the public. They can check the status of any entity in Hong Kong which solicits deposits from the public with the HKMA by calling its public enquiry hotline 2878 8222."

In June, 2006, a newly formed industry working group on the prevention of money laundering and terrorist financing said it would help Hong Kong's banking sector meet new challenges in stopping such activities.

The group included representatives from the Monetary Authority and the banking industry, and the Authority's Deputy Chief Executive, William Ryback was appointed as chairman. The two finance industry associations involved nominated 19 authorised institutions as group members.

Mr Ryback explained that although the anti-money laundering and counter-terrorist financing regime in Hong Kong is strong, there is a need to guard against money launderers', criminals' and terrorists' use of the banking system.

The group aimed to perform the following functions:

• To encourage the sharing of anti-money laundering and counter-terrorist financing experiences and techniques among authorised institutions;
• To provide industry feedback to the authority on the implementation of supervisory standards;
• To promote industry standards and best practices on specific areas in which the industry may need more guidance; and
• To raise the industry's and general public's anti-money laundering and counter-terrorist financing awareness.
  
  The group will also serve as a forum for discussing international developments and exchanging views on issues affecting the implementation of international standards and other related matters.

The Hong Kong Monetary Authority's Guideline

This section contains significant extracts only from the Guideline, which was issued in 2000; the complete Guideline is available from the HKMA.

The Guideline applies directly to all banking and deposit taking activities in Hong Kong carried out by authorized institutions. However, institutions are expected to ensure that their subsidiaries in Hong Kong also have effective controls in place to combat money laundering. Where Hong Kong incorporated institutions have branches or subsidiaries overseas, steps should be taken to alert management of such overseas offices to Group policy in relation to money laundering. Where a local jurisdiction has a money laundering law, branches and subsidiaries of Hong Kong incorporated institutions operating within that jurisdiction should, as a minimum, act in accordance with the requirements of the local law. Where the local law and the Guideline are in conflict, the foreign branch or subsidiary should comply with the local law and inform the Head Office immediately of any departure from Group policy.

The phrase "money laundering" covers all procedures to change the identity of illegally obtained money so that it appears to have originated from a legitimate source. Cash lends anonymity to many forms of criminal activity and is the normal medium of exchange in the world of drug trafficking. This gives rise to three common factors:

• criminals need to conceal the true ownership and origin of the money;
• they need to control the money; and
• they need to change the form of the money.
  
  One of the most common means of money laundering that institutions will encounter on a day-to-day basis takes the form of accumulated cash transactions which will be deposited in the banking system or exchanged for value items. These simple transactions may be just one part of the sophisticated web of complex transactions which are set out and illustrated below. Nevertheless, the basic fact remains that the key stage for the detection of money laundering operations is where the cash first enters the financial system.

There are three stages of money laundering during which there may be numerous transactions made by launderers that could alert an institution to criminal activity:

• Placement - the physical disposal of cash proceeds derived from illegal activity;
• Layering - separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity;
• Integration - the provision of apparent legitimacy to criminally derived wealth. If the layering process has succeeded, integration schemes place the laundered proceeds back into the economy in such a way that they re-enter the financial system appearing to be normal business funds.
  
  Legislation has been developed in Hong Kong to address the problems associated with the laundering of proceeds from drug trafficking and serious crimes. The Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) came into force in September 1989. It provides for the tracing, freezing and confiscation of the proceeds of drug trafficking and creates a criminal offence of money laundering in relation to such proceeds.

The Organized and Serious Crimes Ordinance (OSCO), which was modelled on the DTROP, was brought into operation in December 1994. It extends the money laundering offence to cover the proceeds of indictable offences in addition to drug trafficking.

Amendments to both Ordinances were made and came into effect on 1 September 1995. These amendments have tightened the money laundering provisions in both Ordinances and have a significant bearing on the duty to report suspicious transactions. In particular, there is now a clear statutory obligation to disclose knowledge or suspicion of money laundering transactions.

The Monetary Authority fully subscribes to the basic policies and principles to combat money laundering as embodied in the Statement of Principles issued by the Basle Committee in December 1988. The Statement seeks to deny use of the banking system to those involved in money laundering by application of the following principles:

• Know your customer: banks should make reasonable efforts to determine the customer's true identity, and have effective procedures for verifying the bona fides of new customers.
• Compliance with laws: bank management should ensure that business is conducted in conformity with high ethical standards, that laws and regulations are adhered to and that a service is not provided where there is good reason to suppose that transactions are associated with laundering activities
  Co-operation with law enforcement agencies: within any constraints imposed by rules relating to customer confidentiality, banks should co-operate fully with national law enforcement agencies including, where there are reasonable grounds for suspecting money laundering, taking appropriate measures which are consistent with the law.
• Policies, procedures and training: all banks should formally adopt policies consistent with the principles set out in the Statement, and should ensure that all members of their staff concerned, wherever located, are informed of the bank's policy. Attention should be given to staff training in matters covered by the statement. To promote adherence to these principles, banks should implement specific procedures for customer identification and for retaining internal records of transactions. Arrangements for internal audit may need to be extended in order to establish an effective means for general compliance with the Statement.
  
  The principles laid down by the Basle Committee have subsequently been developed by the Financial Action Task Force (FATF). In February 1990, FATF put forward forty recommendations aimed at improving national legal systems, enhancing the role of financial systems, and strengthening international co-operation against money laundering. Hong Kong, China is a member of the FATF and fully complies with the forty recommendations.

The Monetary Authority considers that institutions should follow the basic policies and principles as embodied in the Statement of Principles of the Basle Committee and the FATF recommendations. Specifically the Monetary Authority expects that institutions should have in place the following policies, procedures and controls:

• Institutions should issue a clear statement of policies in relation to money laundering, adopting current regulatory requirements. This statement should be communicated in writing to all management and relevant staff whether in branches, departments or subsidiaries and be reviewed on a regular basis.
• Instruction manuals should set out institutions' procedures for: account opening; identification of applicants for business; record-keeping; reporting of suspicious transactions.
• Institutions should seek actively to promote close co-operation with law enforcement authorities, and should identify a single reference point within their organization (usually a compliance officer) to which staff are instructed to report suspected money laundering transactions promptly. This reference point should have a means of liaison with the Joint Financial Intelligence Unit which will ensure prompt referral of suspected money-laundering transactions associated with drug trafficking or other indictable offences. The role and responsibilities of this reference point in the reporting procedures should be clearly defined.
• Measures should be undertaken to ensure that staff are educated and trained on matters contained in this Guideline both as part of their induction procedures and at regular future intervals. The aim is to generate and maintain a level of awareness and vigilance among staff to enable a report to be made if suspicions are aroused.
• Institutions should instruct their internal audit/inspection departments to verify, on a regular basis, compliance with policies, procedures, and controls against money laundering activities.
  
  Institutions should not keep anonymous accounts or accounts in obviously fictitious names. They should obtain satisfactory evidence of the identity and legal existence of persons applying to do business with the institution (such as opening a deposit account) on the basis of reliable documents or other resources, and record that identity and other relevant information regarding the applicant in their files. They should establish that any applicant claiming to act on behalf of another person is authorized to do so.

For the purposes of this guideline, evidence of identity can be regarded as satisfactory if:

• it is reasonably capable of establishing that the applicant for business is whom he claims to be; and
• the institution which obtains the evidence is satisfied, in accordance with the procedures established by the institution, that it does establish that fact.

Institutions should institute effective procedures for obtaining satisfactory evidence of the identity of applicants for business including obtaining information about name, permanent address, date of birth and occupation.

Positive identification should be obtained from documents issued by official or other reputable sources e.g. passports or identity cards. For Hong Kong residents, the prime source of identification will be the identity cards which they are required by law to carry with them. File copies of identity documents should be kept.

Institutions are advised to check the address of the applicant by appropriate means, e.g. by requesting sight of a recent utility or rates bill or checking the Voters Roll maintained by the Registration & Electoral Office.

Where institutions require applicants for personal banking services to provide in the application forms for such services the names and particulars of persons who have agreed to act as referees for the applicants, they should follow the practices and procedures as set out in the section on personal referees of the Code of Banking Practice jointly issued by the Hong Kong Association of Banks and the Deposit-taking Companies Association.

Corporate applicants

Company accounts are one of the more likely vehicles for money laundering, even where the company is also being used for legitimate trading purposes. It is therefore important to obtain satisfactory evidence of the identity of the principal shareholders , directors and authorized signatories and of the nature of the business. The guiding principle should be to establish that it is safe to enter into a business relationship with the company concerned.

Before a business relationship is established, measures should be taken by way of a company search and/or other commercial enquiries to ensure that the applicant company has not been, or is not in the process of being, dissolved, struck off, wound-up or terminated. In addition, if institutions become aware of subsequent changes to the company structure or ownership, or suspicions are aroused by a change in the profile of payments through a company account, further checks should be made.

The following documents or information should be obtained in respect of corporate applicants for business which are registered in Hong Kong (comparable documents, preferably certified by qualified persons such as lawyers or accountants in the country of registration, should be obtained for those applicants which are not registered in Hong Kong):

• Certificate of Incorporation and Business Registration Certificate;
• Memorandum and articles of association;
• resolution of the board of directors to open an account and confer authority on those who will operate it; and
• a search of the file at Company Registry.

For companies other (listed) companies, institutions should obtain satisfactory evidence of the identity of the principal shareholders, at least two directors (including the managing director) and all authorized signatories in line with the requirements for individual applicants, and of the nature of the business.

Trust, nominee and fiduciary accounts are a popular vehicle for criminals wishing to avoid identification procedures and mask the origin of the criminal money they wish to launder. Accordingly, institutions should always establish, by confirmation from an applicant for business, whether the applicant is acting on behalf of another person as trustee, nominee or agent.

Any application to open an account or undertake a transaction on behalf of another person without applicants identifying their trust or nominee capacity should be regarded as suspicious and should lead to further enquiries as to the underlying principals and the nature of the business to be transacted.

Institutions should obtain satisfactory evidence of the identity of trustees, nominees and authorized signatories and of the nature of their trustee or nominee capacity and duties by, for example, obtaining a copy of the trust deed. Enquiries should also be made of the extent to which the applicant for business is subject to official regulation (e.g. by a body equivalent to the Monetary Authority).

Particular care should be taken in relation to trusts created in jurisdictions without equivalent money laundering legislation to Hong Kong.

Client accounts

Where the intermediary is a firm of solicitors or accountants, their professional codes of conduct may preclude the firms from divulging information to institutions concerning their underlying clients. It may therefore not be possible for an institution to establish the identity of the person(s) for whom a solicitor or accountant is acting. In such cases, the institution should obtain a written statement about the underlying principals and source of funds. In addition, the institution should not be precluded from making reasonable enquiries about transactions passing through client accounts that give cause for concern or from reporting those transactions if any suspicions are aroused.

Transactions undertaken for non-account holders (occasional customers)

Where transactions are undertaken by an institution for non-account holders of that institution e.g. requests for telegraphic transfers, or where funds are deposited into an existing account by persons whose names do not appear on the mandate of that account, care and vigilance are required. Where the transaction involves large sums of cash, or is unusual, the applicant should be asked to produce positive evidence of identity from the sources set out above and in the case of a foreign national, the nationality recorded. Copies of the identification documents should be kept on file.

An institution should not undertake for a non-account holder any remittance or money changing transaction that is HK$20,000 or more or of an equivalent amount in any other currency unless the particulars of the transaction are recorded. In this context, the non-account holder in respect of an inward remittance transaction refers to the recipient of the funds. As regards an outward remittance transaction, the non-account holder is the remitter of the funds.

Record keeping

The DTROP and the OSCO entitle the Court to examine all relevant past transactions to assess whether the defendant has benefitted from drug trafficking or other indictable offences.

The investigating authorities need to ensure a satisfactory audit trail for suspected money laundering transactions and to be able to establish a financial profile of the suspect account. For example, to satisfy these requirements the following information may be sought:

• the beneficial owner of the account;
• the volume of funds flowing through the account;
• for selected transactions:
• the origin of the funds (if known);
• the form in which the funds were offered or withdrawn i.e. cash, cheques etc.;
• the identity of the person undertaking the transaction;
• the destination of the funds;
• the form of instruction and authority.
  
  An important objective is for institutions at all stages in a transaction to be able to retrieve relevant information, to the extent that it is available, without undue delay.

When setting document retention policy, institutions must weigh the statutory requirements and the needs of the investigating authorities against normal commercial considerations.

Recognition of suspicious transactions

As the types of transactions which may be used by a money launderer are almost unlimited, it is difficult to define a suspicious transaction. However, a suspicious transaction will often be one which is inconsistent with a customer's known, legitimate business or personal activities or with the normal business for that type of account. Therefore, the first key to recognition is knowing enough about the customer's business to recognize that a transaction, or series of transactions, is unusual.

Reporting of suspicious transactions

The reception point for disclosures under the DTROP and the OSCO is the Joint Financial Intelligence Unit, which is operated by the Police and Customs and Excise Department.

In addition to acting as the point for receipt of disclosures made by any organization or individual, the unit also acts as domestic and international advisors on money laundering generally and offers practical guidance and assistance to the financial sector on the subject of money laundering.

The obligation to report is on the individual who becomes suspicious of a money laundering transaction. Each institution should appoint a designated officer or officers (Compliance Officer(s)) who should be responsible for reporting to the Joint Financial Intelligence Unit where necessary in accordance with section 25A of both the DTROP and the OSCO and to whom all internal reports should be made.

Compliance Officers should keep a register of all reports made to the Joint Financial Intelligence Unit and all reports made to them by employees. Compliance Officers should provide employees with a written acknowledgement of reports made to them, which will form part of the evidence that the reports were made in compliance with the internal procedures.

All cases where an employee of an institution knows that a customer has engaged in drug-trafficking or other indictable offences and where the customer deposits, transfers or seeks to invest funds or obtains credit against the security of such funds, or where the institution holds funds on behalf of such customer, must promptly be reported to the Compliance Officer who, in turn, must immediately report the details to the Joint Financial Intelligence Unit.

All cases, where an employee of an institution suspects or has reasonable grounds to believe that a customer might have carried on drug trafficking or might have been engaged in indictable offences and where the customer deposits, transfers or seeks to invest funds or obtains credit against the security of such funds, or where the institution holds funds on behalf of such customer, must promptly be reported to the Compliance Officer. The Compliance Officer must promptly evaluate whether there are reasonable grounds for such belief and must then immediately report the case to the Joint Financial Intelligence Unit unless he considers, and records his opinion, that such reasonable grounds do not exist.

Institutions must take steps to ensure that all employees concerned with the holding, receipt, transmission or investment of funds (whether in cash or otherwise) or the making of loans against the security of such funds are aware of these procedures and that it is a criminal offence to fail to report either knowledge or circumstances which give rise to a reasonable belief in the existence of an offending act.

Institutions should make reports of suspicious transactions to the Joint Financial Intelligence Unit as soon as it is reasonable for them to do so. The use of a standard format for reporting is encouraged (see Annex 6 which sets out a reporting format acceptable to the Joint Financial Intelligence Unit). In the event that urgent disclosure is required, particularly when the account concerned is part of an on-going investigation, an initial notification should be made by telephone.

Institutions should refrain from carrying out transactions which they know or suspect to be related to money laundering until they have informed the Joint Financial Intelligence Unit which consents to the institution carrying out the transactions. Where it is impossible to refrain or if this is likely to frustrate efforts to pursue the beneficiaries of a suspected money laundering operation, institutions may carry out the transactions and notify the Joint Financial Intelligence Unit on their own initiative and as soon as it is reasonable for them to do so.

Cases do occur when an institution declines to open an account for an applicant for business, or refuses to deal with a request made by a non-account holder because of serious doubts about the good faith of the individual and concern about potential criminal activity. Institutions must base their decisions on normal commercial criteria and internal policy. However, to guard against money laundering, it is important to establish an audit trail for suspicious funds. Thus, where practicable, institutions are requested to seek and retain copies of relevant identification documents which they may obtain and to report the offer of suspicious funds to the Joint Financial Intelligence Unit.

Where it is known or suspected that a report has already been disclosed to the Joint Financial Intelligence Unit and it becomes necessary to make further enquiries of the customer, great care should be taken to ensure that the customer does not become aware that his name has been brought to the attention of the law enforcement agencies.

Following receipt of a disclosure and research by the Joint Financial Intelligence Unit, the information disclosed is allocated to trained financial investigation officers in the Police and Customs and Excise Department for further investigation including seeking supplementary information from the institution making the disclosure, and from other sources. Discreet enquiries are then made to confirm the basis for suspicion.

Access to the disclosed information is restricted to financial investigating officers within the Police and Customs and Excise Department. In the event of a prosecution, production orders are obtained to produce the material for court. Section 26 of both the DTROP and the OSCO places strict restrictions on revealing the identity of the person making disclosure under section 25A. Maintaining the integrity of the relationship which has been established between law enforcement agencies and institutions is considered to be of paramount importance.

EXAMPLES OF SUSPICIOUS TRANSACTIONS

Unusually large cash deposits made by an individual or company whose ostensible business activities would normally be generated by cheques and other instruments.

Substantial increases in cash deposits of any individual or business without apparent cause, especially if such deposits are subsequently transferred within a short period out of the account and/or to a destination not normally associated with the customer.

Customers who deposit cash by means of numerous credit slips so that the total of each deposit is unremarkable, but the total of all the credits is significant.

Company accounts whose transaction, both deposits and withdrawals, are denominated in cash rather than the forms of debit and credit normally associated with commercial operations (e.g. cheques, Letters of Credit, Bills of Exchange, etc.).

Customers who constantly pay-in or deposit cash to cover requests for bankers drafts, money transfers or other negotiable and readily marketable money instruments.

Customers who seek to exchange large quantities of low denomination notes for those of higher denomination.

Frequent exchange of cash into other currencies.

Branches that have a great deal more cash transactions than usual. (Head Office statistics should detect aberrations in cash transactions.)

Customers whose deposits contain counterfeit notes or forged instruments.

Customers transferring large sums of money to or from overseas locations with instructions for payment in cash.

Large cash deposits using night safe facilities, thereby avoiding direct contact with the institution.

Purchasing or selling of foreign currencies in substantial amounts by cash settlement despite the customer having an account with the institution.

Customers making large and frequent cash deposits but cheques drawn on the accounts are mostly to individuals and firms not normally associated with their retail business.

Customers who wish to maintain a number of trustee or clients' accounts which do not appear consistent with their type of business, including transactions which involve nominee names.

Customers who have numerous accounts and pay in amounts of cash to each of them in circumstances in which the total of credits would be a large amount.

Any individual or company whose account shows virtually no normal personal banking or business related activities, but is used to receive or disburse large sums which have no obvious purpose or relationship to the account holder and/or his business (e.g. a substantial increase in turnover on an account).

Reluctance to provide normal information when opening an account, providing minimal or fictitious information or, when applying to open an account, providing information that is difficult or expensive for the institution to verify.

Customers who appear to have accounts with several institutions within the same locality, especially when the institution is aware of a regular consolidation process from such accounts prior to a request for onward transmission of the funds.

Matching of payments out with credits paid in by cash on the same or previous day.

Paying in large third party cheques endorsed in favour of the customer.

Large cash withdrawals from a previously dormant/inactive account, or from an account which has just received an unexpected large credit from abroad.

Customers who together, and simultaneously, use separate tellers to conduct large cash transactions or foreign exchange transactions.

Greater use of safe deposit facilities by individuals. The use of sealed packets deposited and withdrawn.

Companies' representatives avoiding contact with the branch.

Substantial increases in deposits of cash or negotiable instruments by a professional firm or company, using client accounts or in-house company or trust accounts, especially if the deposits are promptly transferred between other client company and trust accounts.

Customers who decline to provide information that in normal circumstances would make the customer eligible for credit or for other banking services that would be regarded as valuable.

Large number of individuals making payments into the same account without an adequate explanation.

Customers who maintain an unusually large number of accounts for the type of business they are purportedly conducting and/or use inordinately large number of fund transfers among these accounts.

High velocity of funds through an account, i.e., low beginning and ending daily balances, which do not reflect the large volume of dollars flowing through an account.

Multiple depositors using a single bank account.

An account opened in the name of a money changer that receives structured deposits.

An account operated in the name of an off-shore company with structured movement of funds.

Purchasing of securities to be held by the institution in safe custody, where this does not appear appropriate given the customer's apparent standing.

Back to back deposit/loan transactions with subsidiaries of, or affiliates of, overseas financial institutions in known drug trafficking areas.

Requests by customers for investment management services (either foreign currency or securities) where the source of the funds is unclear or not consistent with the customer's apparent standing.

Larger or unusual settlements of securities transactions in cash form.

Buying and selling of a security with no discernible purpose or in circumstances which appear unusual.

Customers introduced by an overseas branch, affiliate or other bank based in countries where production of drugs or drug trafficking may be prevalent.

Use of Letters of Credit and other methods of trade finance to move money between countries where such trade is not consistent with the customer's usual business.

Customers who make regular and large payments, including wire transactions, that cannot be clearly identified as bona fide transactions to, or receive regular and large payments from, countries which are commonly associated with the production, processing or marketing of drugs.

Building up of large balances, not consistent with the known turnover of the customer's business, and subsequent transfer to account(s) held overseas.

Unexplained electronic fund transfers by customers on an in and out basis or without passing through an account.

Frequent requests for travellers cheques, foreign currency drafts or other negotiable instruments to be issued.

Frequent paying in of travellers cheques, foreign currency drafts particularly if originating from overseas.

Numerous wire transfers received in an account but each transfer is below the reporting requirement in the remitting country.

Customers sending and receiving wire transfer to/from financial haven countries, particularly if there are no apparent business reasons for such transfers or such transfers are not consistent with the customers' business or history.

Changes in employee characteristics, e.g. lavish life styles.

Any dealing with an agent where the identity of the ultimate beneficiary or counterparty is undisclosed, contrary to normal procedure for the type of business concerned.

Customers who repay problem loans unexpectedly.

Request to borrow against assets held by the institution or a third party, where the origin of the assets is not known or the assets are inconsistent with the customer's standing.

Request by a customer for an institution to provide or arrange finance where the source of the customer's financial contribution to a deal is unclear, particularly where property is involved.

A customer who is reluctant or refuses to state a purpose of a loan or the source of repayment, or provides a questionable purpose and/or source.

Developments In 2006-07

In June, 2006, a newly formed industry working group on the prevention of money laundering and terrorist financing said it would help Hong Kong's banking sector meet new challenges in stopping such activities.

The group included representatives from the Monetary Authority and the banking industry, and the Authority's Deputy Chief Executive, William Ryback was appointed as chairman. The two finance industry associations involved nominated 19 authorised institutions as group members.

Mr Ryback explained that although the anti-money laundering and counter-terrorist financing regime in Hong Kong is strong, there is a need to guard against money launderers', criminals' and terrorists' use of the banking system.

The group aimed to perform the following functions:

• To encourage the sharing of anti-money laundering and counter-terrorist financing experiences and techniques among authorised institutions;
• To provide industry feedback to the authority on the implementation of supervisory standards;
• To promote industry standards and best practices on specific areas in which the industry may need more guidance; and
• To raise the industry's and general public's anti-money laundering and counter-terrorist financing awareness.

The group will also serve as a forum for discussing international developments and exchanging views on issues affecting the implementation of international standards and other related matters.

In January, 2007, the Hong Kong Security Bureau said that from January 26, remittance agents and money changers must verify customers' identities, and record transactions of HK$8,000 (US$1,024) or more.

They must also verify the identity of anyone who receives a remittance of HK$8,000 or more.

The requirements aim to meet the new international standards with regard to combating money laundering and terrorist financing.

Customers must produce their Hong Kong identity cards - or certificate of identity, document of identity or travel document - for verification, and provide their addresses and telephone numbers.

Agents and money changers must also record and retain the particulars of the sender and the instructor of any transaction if the two are not the same person.

Commissioner for Narcotics, Sally Wong urged the agents in question to include the sender's information in the transactions, in order to facilitate remittance to countries which demand such information.

She said that those who came across suspicious transactions should report them to the joint financial intelligence unit, a team set up jointly by the Police and Customs departments.

In April, 2007, meanwhile, the Hong Kong Securities and Futures Commission (SFC) entered into a Memorandum of Understanding (MOU) with the China Banking Regulatory Commission (CBRC) for co-operation and information sharing with respect to Hong Kong licensed intermediaries who provide services to Mainland commercial banks conducting overseas wealth management business on behalf of their clients.

The MoU was signed on April 10 in Hong Kong by Eddy Fong, Chairman of the SFC and Liu Mingkang, Chairman of the CBRC and has taken immediate effect.

“The MoU is conducive to further enhancement of the regulatory co-operation framework. It provides a solid foundation for the commencement of effective regulatory co-operation," stated Liu. "Through mutual assistance and information sharing, we can promptly identify risks, and take timely regulatory measures to protect the interests of investors.”

Fong added: “I am delighted that this MoU has established an information sharing and co-operation platform that will enable Hong Kong to play a more active role in Mainland’s development of the overseas wealth management business of Mainland commercial banks on behalf of their clients, further enhancing Hong Kong’s role as an international financial centre for the country.”

Still on the topic of relations between Hong Kong and Mainland Chine, in June 2007, the Chinese government was said to be examining the issue of offshore tax avoidance, after releasing figures showing that the bulk of investment by Chinese-based companies was flowing to low-tax financial centres.

According to a report by Caribbean Net News, a clampdown on the offshore activities of Chinese enterprises may come after data released by the Ministry of Commerce of China showed that between January and May 2007, Hong Kong topped the capital investment table, followed by the British Virgin Islands, Japan, South Korea, Singapore, the USA, the Cayman Islands, Samoa, Taiwan and Mauritius.

The report stated that the figures reflect the actual amount of foreign capital invested in the various jurisdictions, which accounts for 86.16% of China’s total foreign capital.

In November 2007, it emerged that Hong Kong and Luxembourg had signed a comprehensive agreement on the avoidance of double taxation, the fourth such agreement concluded by Hong Kong at that time.

The agreement was signed on November 2 by Secretary for Financial Services and the Treasury, Professor KC Chan and Luxembourg Economy and Foreign Trade Minister, Jeannot Krecke. It aimed eliminate double taxation instances encountered by Hong Kong and Luxembourg investors, and bring about tax savings and certainty in tax liabilities in connection with cross-border economic activities.

The agreement was also designed to foster closer economic and trade links between the two places, and provide added incentives for Luxembourg enterprises to do business or invest in Hong Kong.

"Both Hong Kong and Luxembourg are among the freest economies in the world, and both places have succeeded in surpassing our relatively small geographical size to become one of the most vibrant global economies," Professor Chan commented. "It is therefore no coincidence that we find ourselves natural partners in a taxation agreement."

The agreement was scheduled to come into force on April 1, 2008 in Hong Kong, and on January 1, 2008 in Luxembourg.

Developments in 2008-09

In early 2008, senior EU tax officials, including European Tax Commissioner Laszlo Kovacs, prepared to make a fresh approach to Asian financial centres, in a bid to have them included within the ambit of the European Savings Tax Directive.

Kovacs himself was scheduled to visit Hong Kong in February, while other senior officials prepared to launch a new charm offensive in the territory of Macau and the city-state of Singapore. Unsurprisingly, the EU' previous advances on this issue were greeted with a frosty response from the Asian jurisdictions in question. In the case of Hong Kong, signing up to the savings tax directive could mean altering the Basic Law which safeguards the future of its financial centre under Chinese rule.

Signing up to the EUSTD would mean Hong Kong exchanging information on the bank accounts of European residents with EU member states, or applying a withholding tax on their interest income in lieu of information exchange at a later date.

In February 2008, Hong Kong and mainland China signed the second protocol to the Arrangement for the Avoidance of Double Taxation & Prevention of Fiscal Evasion with respect to Taxes on Income.

Hong Kong's Secretary for Financial Services & the Treasury, Professor KC Chan signed the agreement with Deputy Taxation Commissioner Wang Li in Beijing, further clarifying which Hong Kong firms should pay Enterprise Income Tax on the Mainland.

The tax arrangement was formally signed on August 21, 2006, and launched on December 8 that year, but the two governments differed on the interpretation of certain parts of it.

After negotiations, they agreed on the amendments and initialled the second protocol last September.

In May 2008, Hong Kong and Japan signed an agreement on mutual legal assistance in criminal matters, the 24th that the city has signed with other jurisdictions.

The agreement covers:

• obtaining testimony, statements or items;
• examining, locating or identifying people, items or places;
• providing items in the possession of the requested party;
• presenting an invitation to a person whose appearance in the requesting party is sought;
• transfer of a person in custody for giving testimony or assisting in investigations, prosecutions or other proceedings;
• serving judicial documents;
• assisting in proceedings related to confiscation and immobilisation of proceeds or instrumentalities of criminal offences; and
• other assistance permitted under the laws of the requested party.

International anti-money laundering groups praised Hong Kong's regimes to counter crime and terrorist-financing in July 2008.

The comments were made in an evaluation report published by the Financial Action Task Force on Money Laundering, and the Asia-Pacific Group on Money Laundering.

The report commended Hong Kong for its good legal structure and conviction rate for money laundering offences, clear and broad obligations for reporting suspicious transactions and strong law enforcement.

It said the city's supervisory regime over the banking, securities and insurance sectors is effective with comprehensive obligations and a broad range of sanctions, along with proactive and effective outreach to the private sector and international co-operation.

Hong Kong's formation of the Central Co-ordinating Committee on Anti-Money Laundering & Counter Financing of Terrorism chaired by the Financial Secretary was also a welcome development, it said.

On the report's suggestions for further improvements, the Security Bureau said it would formulate legislative proposals, enhance law enforcement in regulating remittance agents and moneychangers, and consult the industry.

As a taskforce member, Hong Kong is obliged to adopt the 40 recommendations for fighting money laundering and the nine special recommendations for combating financing of terrorism.

In March 2009 it emerged that the major Asian financial centres, Hong Kong included, had agreed to strengthen information exchange provisions for tax purposes, no doubt under pressure from the major western governments ahead of April's G20 meeting in London.

“Ending the abuse of banking secrecy arrangements that facilitate tax evasion is part of a broader drive to clean up one of the more controversial sides of a globalized economy,” said OECD Secretary General Angel Gurria. “The support of the G-20 for efforts to improve transparency and exchange of information has underscored their relevance for both developed and developing countries," he added.

Hong Kong's Financial Secretary John Tsang announced in his budget speech in February that the territory would seek to both extend its double tax treaty network and put in place measures that would allow more information to be exchanged with treaty partners.

"In recent years, our major trading partners have raised the requirements on the exchange of tax information under such agreements. Our existing legislation has not kept pace with this development," Tsang said.

"To further extend our network of such agreements, we consulted the industry in mid-2008 on liberalising the arrangements for the exchange of tax information. I believe that the business and professional community generally agrees that Hong Kong should align its arrangements for the exchange of tax information with international standards so that we can enter into such agreements with more economies," he added.

Hong Kong is due to present new legislative proposals by the middle of 2009.

Hong Kong's Financial Services and the Treasury Bureau welcomed an article by the Organization for Economic Co-operation and Development (OECD) in May commending Hong Kong's transparent tax system and its efforts to comply with international standards on the exchange of tax information.

The article was written by the director of the organization's Centre for Tax Policy & Administration in Paris, Jeffrey Owens.

"Hong Kong has built its position as an international financial centre on the basis of free markets, low tax rates and a transparent tax system. Under the OECD criteria, Hong Kong is not considered a tax haven," Mr Owens said in his article.

On the Financial Secretary's announcement in the 2009-10 Budget to align Hong Kong's exchange of tax information arrangement with international standards, Mr Owens said that Hong Kong was the first major financial centre in the region to make such a move and other Asian countries have since followed its lead.

In February, 2010, the Hong Kong government submitted the Inland Revenue (Disclosure of Information) Rules to the Legislative Council (Legco), that would enable Hong Kong to adopt the internationally-agreed Organization for Economic Cooperation and Development standard for the exchange of information (EoI) for tax purposes in double taxation agreements (DTAs).

The government has been able to produce the EoI rules following the passing by Legco of the Inland Revenue (Amendment) (No 3) Bill 2009.

"The rules put in place domestic safeguards in addition to those provided by individual DTAs to protect privacy and confidentiality of the information exchanged,” a government spokesman said. “The government has taken into account the suggestions of Legco members and the business and professional sectors when finalizing the rules.”

The rules require that, unless exceptional circumstances exist, the Inland Revenue Department (IRD) must notify a subject person before any information relating to that person is disclosed. The person may request a copy of the information and request the IRD to amend any information that the person considers factually incorrect.

The rules also stipulate that an EoI request can only apply to income taxes, has to be approved by a directorate officer of IRD, and must set out the information that a DTA partner has to provide to ensure that the requests are justified, specific and relevant. The rules also prevent the IRD from disclosing any information that relates to a period before the effective date of the relevant DTA.

In May, following a question in the Legislative Council concerning the risk of Hong Kong being placed on the Organisation for Economic Cooperation and Development’s (OECD's) list of tax havens, the Secretary for Financial Services and the Treasury, Professor K C Chan, explained why the government believed that such a risk did not exist.

The questioner pointed out that tax jurisdictions were required by the OECD to sign agreements with twelve other jurisdictions that enable the exchange of taxpayers' information. However, as the deadline was March and Hong Kong had not yet met such a requirement, he believed there might be the risk of sanctions being placed on Hong Kong, which would seriously affect Hong Kong's economic development and reputation.

Professor Chan replied that, in an article published in May 2009, the Director of the OECD's Centre for Tax Policy and Administration commended Hong Kong's efforts to comply with the international standards on tax transparency and exchange of information. Subsequently, in September 2009, the OECD confirmed that Hong Kong is not a tax haven and recognized its commitments to the OECD standards.

In fact, he said, since 1998, the government had been seeking to conclude comprehensive agreements for the avoidance of double taxation (DTAs) with Hong Kong’s major trading partners. In the past, a major obstacle to their conclusion was that Hong Kong could not adopt the OECD’s agreed standard for the exchange of information, due to the legal constraint on the information gathering powers of the Inland Revenue Department (IRD).

However, after the Inland Revenue (Amendment) Ordinance 2010 took effect in March 2010, allowing the IRD to collect and disclose a taxpayer's information in response to requests made by Hong Kong’s treaty partners even when the information is not required for domestic tax purposes, the government had been actively conducting further DTA negotiations.

In March, Hong Kong had signed DTAs with Brunei Darussalam, the Netherlands and Indonesia respectively. Moreover, it had reached agreement on DTAs with seven further countries (including Austria, France, Hungary, Ireland, Japan, Switzerland and Liechtenstein).

At the same time, Hong Kong was also conducting DTA negotiations with a number of other countries, and discussing with existing treaty partners (including Mainland China, Vietnam, Belgium and Luxembourg) to upgrade the exchange of tax information clauses to the OECD standard.

As pointed out in the 2009-10 budget, Professor Chan continued, DTAs with major economies would help reduce tax burdens on individuals and enterprises and eliminate uncertainties over tax liabilities. This would improve the business environment and facilitate flows of trade, investment and talent between Hong Kong and the rest of the world, thereby enhancing Hong Kong's position as an international business and financial centre.

He repeated that Hong Kong had never been a tax haven and said that the government would continue to expand Hong Kong’s DTA network.

In June, Hong Kong’s Inland Revenue Department (IRD) issued practice notes for the exchange of tax information upon requests received from double taxation treaty partners, and the domestic safeguards that exist following enactment of the Inland Revenue (Disclosure of Information) Rules.

The standards adopted by the OECD require: the existence of mechanisms for exchange of information upon request and the exchange of information for purposes of domestic tax law in both criminal and civil matters; strict confidentiality rules for information exchanged; and the availability of reliable information (in particular bank, ownership, identity and accounting information) and powers to obtain and provide such information in response to a specific request.

Hong Kong maintains a policy of negotiating comprehensive agreements for avoidance of double taxation (DTAs) and pursuing the effective exchange of tax information only within the ambit of a DTA. It will not enter into standalone agreements on the exchange of information on tax matters, also know as TIEAs. The statute under the Inland Revenue Ordinance (IRO) does not cater for such TIEAs.

The Inland Revenue (Amendment) Ordinance 2010 (IRAO) was crafted in such a way that it is only applicable to “arrangements … made with the government of any territory outside Hong Kong with a view to affording relief from double taxation in relation to income tax.”

The whole purpose of the IRAO is to enable the IRD to collect and disclose a taxpayer’s information in response to valid requests made by treaty partners for their own tax purposes. However, the IRO also provides that an officer of the IRD shall preserve secrecy with regard to all matters relating to the affairs of any taxpayer coming to his knowledge, except where disclosure is made to treaty partners.

The disclosure rules are intended to provide taxpayers with a set of fair procedures to protect their confidentiality and privacy rights. In particular, Hong Kong’s policy on the exchange of information is restricted to exchange upon request, and it will not agree to engage in automatic or spontaneous exchanges. It will only supply information, including bank information, upon specific and bona-fide requests received from the competent authority of a treaty partner in justifiable cases.

In addition, the disclosure rules also provide for a variety of procedural rights and safeguards for persons affected by the information exchange. Such rights and safeguards include not only a mere right to be informed about the information exchange, but also a right to correct both the information to be exchanged and the review of the IRD’s decision by the Financial Secretary.

In June, Hong Kong signed comprehensive agreements for the avoidance of double taxation (DTAs) with the United Kingdom and Ireland.

The comprehensive DTAs with the UK and Ireland, signed by Hong Kong’s Secretary for Financial Services and the Treasury, Professor K C Chan, together with the UK’s Exchequer Secretary to the Treasury, David Gauke, and the Irish Minister of Finance, Brian Lenihan, were the 12th and 13th such agreements Hong Kong has signed with its trading partners.

The DTAs generally follow the Organisation for Economic Co-operation and Development (OECD) Model Double Taxation Convention, and set out clearly the allocation of taxing rights between the jurisdictions and the relief on tax rates on different types of passive income, including capital gains.

The Hong Kong/UK DTA incorporates the latest OECD standard on exchange of information, limited to taxes covered by the agreement. Such taxes are those imposed on total income, or on elements of income, including taxes on gains from the alienation of movable or immovable property and taxes on capital appreciation.

The existing taxes to which the agreement will apply are, therefore, profits tax, salaries tax and property tax in Hong Kong; income tax, corporation tax and capital gains tax in the UK; and income tax, income levy, corporation tax and capital gains tax in Ireland.

Hong Kong is actively seeking to establish a network of comprehensive DTAs. Where comprehensive DTA discussions with some jurisdictions cannot be started for the time being, Hong Kong will seek to conclude limited double taxation avoidance arrangements for airline and shipping income with relevant partners. So far, 27 such agreements on airline income, six agreements on shipping income, and two agreements on airline and shipping income have been reached.

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