Key to dirty cash lies at source

Legend has it that a portion of the 'missing millions' plundered by late Philippine dictator Ferdinand Marcos remains in Hong Kong bank accounts to this day. Hong Kong financial institutions were likewise chosen by Mr Nice author Howard Marks to move large sums of dirty cash around the globe in the 1980s before United States law enforcers cut short a 25-year career in drug smuggling. Anecdotal and biographical, these accounts of money laundering have tended to fill the gaps in what is an otherwise unspectacular official picture of illicit cash flows in and out of Hong Kong. Millions of dollars are seized and confiscated annually but the pervading theme since 1989 - when money laundering laws were enacted - is that these funds have largely resulted from drug offences, with 118 convictions for handling dirty cash over the past 15 years suggesting it is not a crime of endemic proportions. That was until earlier this year, when six people went on trial at the High Court for the largest money-laundering prosecution in Hong Kong, if not globally. Over a five-year period, a jury heard, couriers strapped notes to their bodies and crossed the mainland border into Hong Kong. They then handed the money over to money-changer Guardecade, which processed the cash through accounts at the Kimberley Road branch of Po Sang Bank, now part of the Bank of China (Hong Kong). Given the enormity of the five-year operation, prosecutors chose to select just 35 days to give an idea of the scheme involved. During that time, an average of $92.15 million was laundered each day. A former senior manager of the bank who turned a blind eye to the deeds was jailed for a year. Four others were acquitted and two defendants face a retrial after a jury was unable to return a verdict. The money allegedly came from three mainland syndicates, and was of illicit origin, or part of tax evasion. As a snapshot of dirty cash coming across the border, it put previous guesstimates to shame. The International Monetary Fund believes the problem of money laundering is about 2 to 5 per cent of gross domestic product globally - for Hong Kong, this would mean a figure of about $24.7 billion to $61.7 billion a year. At the lower end, that would mean $91.8 million is laundered each day, barely a million short of the Po Sang Bank figure. It was a case that did little to dispel a growing belief that most criminal funds laundered through Hong Kong today are more likely to be the proceeds of corruption, tax evasion and corporate fraud in China than drugs-related gains. Peter Gallo, director of risk management firm Pacific Risk, argues: 'Whenever there is a large financial scandal, the first place it comes is Hong Kong. The problem isn't just suspicious cash, it's deposits.' This summer, Professor Shao Shaping of the People's University of China in Beijing put the figure of cash being laundered from China at 600 billion yuan over the past three years, 500 billion yuan gained through corruption. Official estimates in China put the figure of lost revenue through tax evasion at 30 billion yuan a year. 'You can't deal with the domestic market in China without dealing with Hong Kong,' Mr Gallo notes. He argues that this has two consequences for Hong Kong: its reputation is lagging behind reality, a situation the city cannot afford as a member of the global anti-money-laundering body, the Financial Action Task Force (FATF). Secondly, the role of 'gatekeepers' in the financial services sector is more acute in Hong Kong than other jurisdictions. This in particular includes lawyers, accountants and company incorporation agents who until now escaped the same degree of regulatory attention as financial institutions. However, a law due next year is expected to change this. The 'know your customer' rule that pervades the opening of each bank account and large money transaction is to be enshrined in law, with criminal sanctions possible for non-compliance. This would involve professionals taking steps to glean adequate information about their clients, including beneficial ownership of corporate clients, and the source of an individual's wealth. Not only will it increase the compliance burden, explains Baker & McKenzie partner Steven Sieker, but 'people may find it unusual to be answering the kind of questions they typically answer when opening a bank account'. The proposed law is expected to be controversial when it goes to the Legislative Council, with the professions, particularly lawyers, anxious over client confidentiality. 'Clients' interests are affected. They don't know, going in to see their solicitor, what the scope of privilege is. How does a client have confidence in it?' Mr Sieker says. Enshrining 'know your customer' principles in law is ostensibly aimed at keeping Hong Kong in line with global requirements to curb money laundering and terrorist financing, one of FATF's 40 recommendations. However, some question the Hong Kong government's interpretation of these global rules. 'If there are client identification requirements in primary legislation, you are criminalising non-compliance. I just wonder if it's going too far,' says Clifford Chance partner Martin Rogers. He points to guidelines in place for solicitors by the Law Society regarding money laundering. 'My view is already having these ready guidelines is complying. 'We have a government that's not putting a huge amount of resources into the enforcement side of things ... trying to scare people to death by criminalising.' The reality is that there is 'next to no activity' by the government over prosecuting people for failing to make suspicious transaction reports, he argues. Only a handful of these reports are compiled by lawyers, accountants and other non-banking professionals each year. While thousands of these reports are made by financial institutions annually, they are often of dubious quality. Hong Kong's track record in prosecuting professionals for complacency in money-laundering matters is notably barren, albeit a reflection of the global situation of securing a conviction. For example, solicitors have been charged and convicted in other jurisdictions, but the numbers are sparse. 'Suspicion is a subjective thing,' Mr Sieker says. The expectation is that the proposed legislation would keep compliance departments busy with paperwork, and put in place a stronger deterrent effect, but in reality would glean little for law enforcers. The source of any real action on money laundering is more likely to come from across the border, but in a less obvious manner, argues Mr Gallo, as the mainland clamps down on corruption and tax evasion. 'The big push is going to come from China.'