THE FIGHT AGAINST MONEY LAUNDERING

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THE FIGHT AGAINST MONEY LAUNDERING

• David CarseDeputy Chief Executive
• Hong Kong Monetary Authority
• 28 November 2001

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Outline

• The anti-money laundering framework
• The role of the HKMA
• Terrorist financing

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What is money laundering?

• The process to change the identity of illegally
  obtained money so that it appears to have
  originated from a legitimate source.
• Legal definition a person commits an offence
  if, knowing or having reasonable grounds to
  believe that any property in whole or in part
  directly or indirectly represents any persons
  proceeds of drug trafficking or an indictable
  offence, he deals with that property.

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Stages of money laundering

• 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 use of layered funds to purchase
  clean, legitimate assets thus placing the
  laundered proceeds back into the economy in such
  a way that they re-enter the financial system
  appearing to be normal business funds.

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Why is it important to fight money laundering?

• Reduce the incentive to commit crime and the
  means to finance further crime.
• Avoid reputational, legal and financial risks to
  banks and other intermediaries.

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HKs involvement in the fight against money
laundering

• Domestically Narcotics Division of the
  Security Bureau is the policy co-ordinator,
  supported by the Police, Customs Excise
  Department, Department of Justice, and the
  financial regulators.
• Internationally Hong Kong is a member of the
  Financial Action Task Force on Money Laundering.

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Financial Action Task Force on Money Laundering
(FATF)

• An inter-governmental body whose purpose is to
  develop international standards to combat money
  laundering.
• Standards are embodied in FATFs 40
  Recommendations.
• FATF tries to identify weaknesses in anti-money
  laundering systems around the world.
• Has begun to name and shame Non-Cooperative
  Countries or Territories that do not apply the
  FATF standards.
• Hong Kong is currently the President of the FATF
  (July 2001-June 2002).

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The legislative framework in HK

• Relevant pieces of legislation in HK are -
• Drug Trafficking (Recovery of Proceeds) Ordinance
• Organised and Serious Crimes Ordinance
• The effect of these is to -
• criminalise money laundering
• require reporting of suspicious transactions
• allow for freezing and confiscation of proceeds
  of drug trafficking or serious crime

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Joint Financial Intelligence Unit (JFIU)

• Jointly operated by the Police and Customs and
  Excise Department.
• Responsible for receiving suspicious transaction
  reports in relation to possible money laundering
  activities.
• Refers suspicious transaction reports to
  appropriate enforcement units for further
  investigation after preliminary assessment.
• Provides advice on tackling money laundering
  generally.

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The role of the HKMA

• As supervisor, our role is to verify that banks
  have in place adequate policies, procedures and
  controls to combat money laundering.
• This is consistent with our role to promote the
  stability of the system and protect depositors.

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How do we fulfil our role?

• Issuance of guidelines on effective controls
  against money laundering.
• On-site examinations of banks controls.
• Reviews of banks controls by external auditors.
• Off-site reviews and prudential meetings.
• Participation in the global effort, through the
  Basel Committee and FATF.

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Key requirement of effective controls Know Your
Customer

• Banks should establish and verify the identity of
  their customers, including the beneficial owner
  of an account.
• Banks should also have a good understanding of
  the customers background, business and source of
  wealth.
• This is necessary to identify transactions that
  fall outside the regular pattern of an accounts
  activity.
• However, also raises compliance costs and civil
  liberties issues.

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Latest HKMA initiative

• HKMA has recently issued further guidance to
  banks.
• Follows a recent case of cross-border money
  laundering involving a money changer in HK.
• Latest guidance relates to know your customer,
  ongoing monitoring of accounts, and role of the
  compliance officer and internal audit.

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Key lessons

• Dont assume that a transaction is not suspicious
  simply because the customer deals in money.
• Dont assume that money changers registered with
  the Police are regulated and therefore
  automatically OK.
• Dont focus simply on cash transactions.
• In relation to funds sourced from outside HK, ask
  two key questions -
• is it reasonable to assume that the funds came
  from legitimate sources?
• has the money been remitted through proper
  channels?
• Compliance officers should be more proactive.

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Terrorist financing (1)

• Definition - the wilful provision or collection
  of fundswith the intention that the funds should
  be used or in the knowledge that they are to be
  used, in order to carry out terrorist acts.
• Following 11 September there have been
  intensified efforts to track down and freeze
  terrorist funds.
• Aim is to starve terrorists of funds and to deny
  them access to the international financial system.

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Terrorist Financing (2)

• Various lists of terrorist suspects have been
  published.
• UN Security Council has passed a Resolution (No
  1373) on measures to combat terrorism.
• FATF has issued a set of Special Recommendations
  on Terrorist Financing.
• A number of jurisdictions have passed
  anti-terrorist legislation.

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FATF special recommendations (1)

• Ratify and implement relevant UN instruments
  (including Resolution 1373).
• Criminalise terrorist financing and associated
  money laundering.
• Freeze and confiscate terrorist assets.
• Report suspicious transactions linked to
  terrorism.
• Provide assistance to other countries law
  enforcement and regulatory authorities for
  relevant investigations.

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FATF special recommendations (2)

• Impose anti-money laundering requirements on
  alternative remittance systems.
• Strengthen customer identification measures in
  wire transfers.
• Ensure non-profit organisations cannot be misused
  to finance terrorism.
• Achieve compliance by end-June 2002.
• Possible counter-measures against jurisdictions
  that do not comply.

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The situation in Hong Kong (1)

• Regulations are in place to implement previous UN
  Resolutions in relation to the Taliban and Usama
  bin Laden -
• prohibit the making of funds available to
  individuals or entities connected with the above
• require their funds to be frozen.
• Process to implement Resolution 1373 in HK is
  currently underway -
• this will enable terrorist funds in general to be
  frozen.

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The situation in Hong Kong (2)

• HKMA has circulated the various lists of
  terrorist suspects to banks -
• other regulators have done the same for their
  institutions.
• We have asked them to check their records and
  report any suspicious accounts and transactions
  to the JFIU and the HKMA.

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Practical difficulties

• Multiplicity of lists of suspects
• Commonality of names and multiplicity of aliases
• Terrorist money may derive from non-criminal
  sources
• may not be caught by existing money laundering
  legislation
• need to shift focus from source of funds to use
  of funds
• How to apply measures against terrorism in
  general that are not linked to specified
  individuals or places.
• How to deal with underground money transfers.
• How to pick up relatively small sums that may be
  linked to terrorism but are not intrinsically
  suspicious.

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Conclusions

• Despite the practical difficulties, banks around
  the world have no option but to take the fight
  against money laundering very seriously.
• It is the right thing to do.
• In addition, given the current mood, there is a
  risk that non-compliant banks, and the financial
  centres within which they operate, could be
  ostracised from the world financial system.