Anti-money laundering

30 October 2012

COMINGCLEAN

A t first glance, HSBC and Stan-dard Chartered appear to have little in com-mon with Boma Amaso, an ille-gal immigrant

languishing in a Hong Kong prison. But the banking giants and the 35-year-old Nigerian man have all been embroiled in the same crime: money laundering.

In July, HSBC was forced to apologize to a Senate panel in the United States for inade-quate compliance with anti-money launder-ing rules. The panel alleged that the bank allowed about US$15 billion to be laundered by drug gangs, terrorists and rogue nations. The bank set aside US$700 million in antici-pation of fines.

A month later, Standard Chartered agreed to pay US$340 million to a New York state regulator to settle allegations that the bank laundered US$250 billion for Iranian

banks in violation of U.S. sanctions.In February, Amaso’s appeal against his

40-month prison sentence was denied. He had earlier been found guilty of laundering

more than HK$2.8 million through Hong Kong bank accounts. Prosecutors said he used forged Ghana and Lesotho passports to open multiple accounts at Public Bank, Citic Ka Wah Bank and Bank of China.

Although the amounts laundered were worlds apart, they highlight the same ques-tion: Are anti-money laundering regulations stringent enough and are financial institu-tions doing enough to comply?

Indeed, accountants say Hong Kong is vulnerable to money launderers. “Hong Kong is an international financial centre with a central geographical location in Asia that is attractive to criminals when they are looking to place, layer and integrate illegal funds,” says Gabriel Wong, specialist advi-sory services principal at BDO in Hong Kong and a member of the Hong Kong Institute of CPAs.

“The problem with Hong Kong basically is that it’s a large cash society,” adds Jim Wardell, executive chairman of Baker Tilly Hong Kong Restructuring and Recovery and an Institute member. “There’s always the possibility of that being utilized for money laundering purposes.”

“Hong Kong has relatively free money flow and no remittance restriction, thus is

Hong Kong has toughened its anti-money laundering legislation. George W. Russell finds out how financial institutions and accountants have reacted to the reformsIllustrations by Harry Harrison

“ Hong Kong has relatively free money flow and no remittance restriction, thus is a convenient place for money laundering activities.”

October 2012 31

a convenient place for money laundering activities,” says Patrick Lo, a partner at RSM Nelson Wheeler and an Institute member.

In the Basel Institute on Governance’s country risk ranking released earlier this year, Hong Kong ranks 86th of 144 coun-tries and territories with a score of 5.51 out of a scale of 10 – a rating of medium risk. (10 being highest risk and the country with the higest risk being ranked number one.) Only two countries are rated low risk: Norway and Estonia. Most developed nations, such as the U.S., are deemed medium risk.

Plugging the loopholesIn Hong Kong, recent scrutiny by the Finan-cial Action Task Force, a Paris-based inter-governmental body established in 1989 that has emerged as the international anti-mon-ey laundering standard-setter, has prompt-ed recent legislative changes.

The task force identified deficiencies in Hong Kong including the lack of several important factors conducive to tackling

money laundering: customer due diligence, statutory backing for record keeping re-quirements, supervisory and enforcement powers for regulatory authorities, super-visory sanctions for non-compliance and a regulatory regime for remittance agents and moneychangers.

As a result, Hong Kong’s Legislative Council passed the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, which came into ef-fect on 1 April.

The new legislation codifies customer due diligence and record keeping require-

ments; includes supervisory and criminal sanctions for contravention of the ordi-nance; empowers the Hong Kong Monetary Authority, Securities and Futures Commis-sion, Office of the Commissioner of Insur-ance and the Customs and Excise Depart-ment to supervise compliance with the ordinance; and puts in place a licensing re-gime requiring remittance agents to be reg-istered and overseen for the first time.

It also establishes an independent tri-bunal to review decisions related to money service operator licensing and decisions made by authorities to impose supervisory sanctions.

Rob Morris, the managing director of the Hong Kong office of global business con-sultancy AlixPartners and an Institute mem-ber, says the impact of the ordinance will be threefold.

First, he says, “Prior to its enactment, the front line for anti-money laundering controls largely rested with banks. The ordi-nance moves this front line slightly by forc-

Hong Kong ranks 86th of 144 countries and territories – a rating of medium risk.

32 October 2012

Anti-money laundering

ing moneychangers and remittance agents to be licensed entities.”

Second, Morris says the ordinance pro-vides some teeth to existing regulations en-abling criminal sanctions to be imposed on top of administrative penalties.

Third, it provides some additional clarifi-cation on steps regulated entities can take to ensure an adequate compliance programme. “This could include the use of a risk-based ap-proach to determine the level of due diligence needed around a customer,” Morris explains.

The Hong Kong ordinance is now closer to international anti-money laundering standards. “Although U.S. and [the previous] Hong Kong legislation were both enacted to combat terrorist financing, the U.S. legisla-tion was more comprehensive and far reach-ing,” says Sara Nelson, a Miami lawyer who has compared the two regimes. “This moves Hong Kong closer to global standards.”

Another significant change is termi-nology. “The amendment redefines terms

so that the law now relates to ‘property’ in-stead of ‘funds,’ which was an unnecessarily restrictive term,” says Nigel Morris-Cotter-ill, a Kuala Lumpur lawyer who heads the

Anti-Money Laundering Network, a non-profit consultancy that provides training to the financial sector.

“That increases the scope of property that can be frozen, seized and confiscated and the persons whom orders can be made,” he adds. “Basically, the amended ordinance brings Hong Kong into line with the United

Nations standard of phraseology.”Morris-Cotterill adds that the effect of

the changes go beyond mere wording. “Un-derneath, it has an impact on the financial institutions…and puts lending on exactly the same risk management footing as de-posit taking. It’s not just simple lending: it’s leasing, trade finance and all other business areas that might have previously appeared relatively low risk in relation to money laundering.”

Burden of complianceOne significant issue for Hong Kong finan-cial institutions looking to beef up controls is the costs involved. “We see banks having to spend more on anti-money laundering sanctions compliance,” says Paul McShe-affrey, a partner at KPMG and an Institute member, who added that compliance with the U.S. Foreign Account Tax Compliance Act and the Wall Street Reform and Consumer Protection (Dodd-Frank) Act were already

“ The amended ordinance brings Hong Kong into line with the United Nations standard of phraseology.”

October 2012 33

O ne of the reasons why the anti-money laundering spotlight sheds on Hong Kong is the large cross boundary currency flows to and from the mainland.

In 2007, the Financial Action Task Force examined the People’s Bank of China’s anti-money laundering programmes and considered China fully or largely compliant with almost all its recommendations.

However, Institute members say the realities of the mainland financial system tell a different story. “Given exchange controls in the mainland, the amount of funds coming out of China into the Hong Kong economy should be readily identifiable,” says Rob Morris, managing director of AlixPartners and an Institute member. “Practically, however, this is not the case.”

Morris worked as an expert witness on a case in 2008 in which a jury in Las Vegas convicted Xu Chaofan and Xu Guojun of defrauding the Bank of China of US$485 million over 10 years. The two men were sentenced to more than 20 years in prison for laundering the proceeds of their fraud through the United States, Macau, Australia and other countries.

Much of the cash flow between China and Hong Kong occurs

through remittance agents that will now come under greater scrutiny since the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance came into effect on 1 April.

“There are probably more than 1,000 agents now who are actually registered and quite a few of them are quite large organizations,” says Jim Wardell, executive chairman of Baker Tilly Hong Kong Restructuring and Recovery and an Institute member.

But the largest hole in the fence is Macau, given its status as a popular destination for Hong Kong and mainland visitors. “If you look at Europe, if you go into a casino you have to be a member, which means they have details about you, your identity, your photograph,” says Wardell. “In Macau you take your cash and walk in and gamble. There is no effective monitoring.”

The Financial Action Task Force is keen that Macau controls this in a more effective way. Wardell says political will is the main obstacle. “The Macau population is happy with the status quo,” he says. “There’s hardly any unemployment, there’s hardly any taxation. They can build what they need.”

The China connection

affecting bottom lines. A recent KPMG survey noted that Hong

Kong financial institutions have already seen their margins squeezed due to global economic malaise, a cautious investment market and lower trade flows.

“The new legislation imposes a heavy compliance burden on financial institu-tions,” says Barry Tong, a partner at Grant Thornton and an Institute member. “Finan-cial institutions have to ensure that they have enough manpower, resources and systems to meet the anti-money laun-dering requirements of the relevant legislation.”

With their financial acumen, ac-countants have an important role to play. “We have already seen an increase in requests from compa-nies for us to submit proposals to conduct independent reviews of their existing anti-money launder-ing programmes,” says Wong at BDO.

“Professional firms can assist in helping clients un-derstand the requirements under the legislations and the impact to their busi-nesses, advising them on the adequacy of their com-pliance functions and pro-

viding training to the relevant staff,” says Lo at RSM. “As part of our induction train-ing for new staff, we have the Independent Commission Against Corruption to talk about matters including identifying and

reporting on money laundering cases.”

Institute members say it is important for the senior management within companies to understand the latest legislation and regula-tory requirements and make these system-atically work for them. “They can do so by

setting up formal policies and pro-cedures,” says Annie Chan,

managing director of corporate re-

covery and forensics at

October 2012 35

Mazars and an Institute member.Chan says several authorities – the Se-

curities and Futures Commission, the Hong Kong Monetary Authority and the Office of the Commissioner of Insurance – are eager to help companies conform to statutory require-ments and have all issued guidelines.

Wardell at Baker Tilly advises clients to establish strict know-your-customer policies. “We are able to employ the experience gained in carrying out such work to assess the effec-tiveness of businesses’ anti-money launder-ing controls,” he says, adding that his com-pany has been involved in the investigation of financial institutions where anti-money laundering controls were lax.

He says particular scrutiny is applied to parties involved in selling high value items, including financial institutions, jewellers, real estate agents and lawyers handling con-veyancing.

For their part, criminal organizations will continue to find weaknesses in the system.

One emerging trend is the use of Hong Kong bank accounts for collecting and disbursing the proceeds of lottery, advance-fee and other financial fraud, notes Chan.

Cross border transactions remain a vul-

nerability to territories seeking to control money laundering and Hong Kong is no ex-ception. “Without stricter border controls, there is the channel that allows the mainland currency [to flow] into the Hong Kong bank-ing system,” Wardell says, citing it as a signifi-cant inflow of laundered money into the city.

In the Amaso case, it remains unclear who ultimately received the funds sent through the illegal accounts, but international anti-terror-ism agencies were concerned that the transac-tions involved Algeria and Mauritania, two countries in which Islamic militants operate.

Frank Stock, vice president of the Court of Appeal, who presided over Boma Amaso’s unsuccessful bid to reduce his sentence, re-marked that the defendant could consider himself fortunate not to have received a stiffer penalty in his original trial. HSBC and Standard Chartered might well be thinking along similar lines.

“ Without stricter border controls, there is the channel that allows the mainland currency [to flow] into the Hong Kong banking system.”